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Total Number of Subscribers: 1626 |
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Date: 28th April 2010 |
Compiled by: M Sathya Kumar |
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The issue of exemption from service taxes on supplies of
services from the Domestic Tariff Area (DTA) to developers of Special
Economic Zones/units located in Special Economic Zones (SEZs) has been the
subject of much controversy and debate. As is, by now, well known, SEZs have
been set up with the fundamental objectives of promoting exports from Before alluding to the recent developments with regard to the
above exemption, it is important to appreciate the overriding provisions of
the Special Economic Zones Act 2005 (Act). Section 51 of the Act states that
the provisions thereof shall have effect notwithstanding anything
inconsistent therewith contained in any other law. Accordingly, Section 26 of
the Act, which holds that the SEZs are entitled to exemptions from customs
duties, excise duties, service taxes and sales taxes will have effect
regardless of any provisions to the contrary in any other enactment. Of course, Section 26 also authorizes the Central Government to
prescribe the manner in which the exemption would accrue. Further, Rule 31 of
the Special Economic Zones Rules 2006 (Rules) states that the exemption from
payment of service tax on taxable services rendered to SEZs by any service
provider shall be available for authorized operations. The Act and Rules were
effectively brought into force from 10/2/2006. With regard to the services provided to SEZs by a service
provider, there exists Notification No. 4/2004 dated 31/3/04, which states
that the exemption from service tax would apply for consumption of services
within the SEZs. The only other condition is that both the developer and the
unit ought to have obtained the necessary approvals to carry on activities as
such. It may be noticed that this Notification predates the coming
into force of the Act/Rules by almost two years. Upon the coming into force
of the Act/ Rules therefore, the issue of harmonizing the provisions of
Notification No. 4/2004, which limits the benefit of exemption only to
services consumed within the zone, with the provisions of the Act/Rules,
which exempt the payment of service tax on taxable services rendered to a SEZ
developer/unit for the authorised operations, arose. Given the overriding nature of the Act/Rules, it was clearly the
position that the DTA supplies of services to the developer/unit would be
exempt from service tax, as long as they were for the authorized operations,
regardless of whether the services were consumed within the zone or outside
of it. Indeed, it could have been argued that the Notification would
apply even if services were rendered outside the zone, as they were
necessarily to be construed as having been consumed within the Zone, since
the developer/unit was physically located within the Zone. Notwithstanding
this, the service tax authorities continued to hold that the Notification was
in force, even though contrary to the relevant provisions of the Act/Rules. This led to an ongoing tussle between the SEZ developers/units
and the DTA suppliers of services on the one side and the service tax
authorities on the other, as to whether the services rendered by the DTA
service providers were eligible for the exemption from the tax. The
Ministries of Commerce and Finance were in constant discussion as to how to
resolve the problem. As a result, the Government of India has recently, superseding
the earlier Notification No. 4/2004 , issued Notification No. 9/2009 on the
exemption from service tax on taxable services provided in relation to
authorized operations in a SEZ and received by a developer or a unit, whether
inside the Zone or outside. The Notification however provides that the
exemption will apply by way of refund of the service taxes paid on the above
services. Accordingly,
the erstwhile complete exemption from the tax that was available to supplies
of services to SEZs has been replaced with a modified scheme of exemption by
way of a refund. The refund would operate in a manner, as laid down in the
above Notification, whereby the taxes would be paid by the DTA service
providers and the refunds would be granted to the SEZ developers or units who
would file claims accordingly, having reimbursed the taxes to the service
providers. It is thus the position today that the exemption from the
service tax that is available to developers or units under the Act/Rules has
apparently been operationalised through the above Notification, by way of a
refund. It seems that the Government has not been able to implement a
complete exemption from the tax to services supplied to a Zone, unlike the
situation regarding supplies of goods to a Zone wherein the exemption
operates simpliciter and not by way of a refund. However, the Notification has laid down this refund procedure
even with regard to services provided and received within the Zone, including
on services provided from abroad, in regard to which the ‘reverse
charge’ mechanism of payment of the service tax operates. In other
words, not only has the Government not granted the benefit of exemption from
the service tax to DTA services provided to developers or units for their
authorized operations but has also imposed the refund mechanism on imports of
services from abroad into the Zone. Thus, developers or units will now need to first discharge the
service taxes, either by way of reimbursing these taxes to DTA service
providers or by way of the reverse charge on imports of services etc and then
file claims to recover these taxes from the authorities, by way of refunds.
The Notification thus makes no distinction in procedure between services
received in the Zone or outside of it. This bring us to the issue of whether Notification No. 9/2009 is
in consonance with the SEZ Act and Rules, especially when the operative provisions
therein extend the benefit of exemption to the payment of the service taxes.
The moot question is whether an exemption by way of a refund is an exemption
simpliciter or an exemption from payment of the tax. It can be argued that it
is not. The refund mechanism is not favored by anyone who has any
experience of dealing with the Government in regard to obtaining refunds of
any taxes. The process is cumbersome, the intention is to delay, if not deny
altogether, the refund and the amounts of cash flows locked up a result put a
real strain in business. It is a wholly unhappy experience. The point is
brought to sharp focus as the above Notification does not specify any
timeframe for grant of the refund. It is strongly urged that the Government reconsider the matter
afresh. The Notification, as is presently worded, is sure to significantly
and negatively impact the SEZ developers and units, in terms of cash flows
and costs of compliance. To be fair, one clear benefit of the new procedure
is that the DTA suppliers will no longer need to reverse input tax credits on
their supplies to the SEZs. This benefit is however outweighed by the above
disadvantages in relation to the refund procedure. The Government should
intervene immediately to remedy matters. Article
was earlier published in Business Standard, a reputed financial daily. |
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