For freelance developers/contractors/consultants,
If you work as an Information Technology Professional and offer your Services to an Indian Company then it is subject to 12.36% Service Tax [as per Section 65(105)(zzzze) of the Finance Act, 1994]. On the other hand if you offer your Services to a Foreign Company then you are exempt from paying Service Tax. Normally service tax is claimed on the bill (collected from the Client) and then submitted to the Central Excise Department on a regular quarterly basis. You can collect Service Tax only after obtaining a valid Service Tax ID.
If your annual income exceeds INR 9 lacs then you need to register for Service Tax ID. If your annual income exceeds 10 lacs then you should start paying 12.36% service tax for every since Rupee collected after the initial 10 lacs. Definition for Export Services pertaining to Information Technology (rendered to a foreign company) states that:
(1) The Client that is recipient of your Service should reside in an address other than India
(2) Invoice raised with the Client should be in foreign currency and the payment from Client should also be in foreign currency. It doesn’t matter if that payment had been converted to equivalent Indian Rupees after Foreign Exchange.
Personally, the only reason that I sense is, the Indian Government sort of encourages foreign currency reserve (particularly USD, EURO, GBP, AUD, YEN) and hence offers a service tax exemption for Export Services [falling under the above mentioned points (1) and (2)]. The Reserve Bank of India might make profit out of for-ex conversion as well.
Disclaimer: I am _not_ a tax expert. I am sharing information based on my interaction with Auditor.