Service tax exemption to retain developers in SEZs

Service tax exemption to retain developers in SEZs
The Financial Express, March 5, 2009, Page 3

While many special economic zones’ (SEZs) developers are looking to exit the business due to a dip in demand coupled with lack of easy credit for SEZ construction, the government has brought relief for them by providing exemption from paying service tax for authorised operations within the zones. The only hitch — exemption will come in the form of a refund, so they will still have to pay service tax first.

“The developers of SEZ units shall claim the exemption by filing a claim for refund of service tax paid on specified services,” said a finance ministry notification. Now, not only services provided within the SEZ will be exempted but also a range of services provided outside these zones such as transport of raw materials and banking services will go out of the tax net.

While senior commerce ministry officials said the exemption was evaluated by the empowered group of ministers (EGoM) on SEZs headed by external affairs minister Pranab Mukherjee, tax experts and developers say the timing of the move is far from right as availing exemption through a refund will increase transaction costs.

“SEZ developers and units will now have to make provision of extra cash for payment of service tax. This will certainly increase their working capital requirement. The notification also comes in conflict with the SEZ Act, 2005 that provides for a blanket-tax exemption,” Rajeev Dimri, partner BMR Advisors said.

“The SEZ Act provides for ab initio exemption from service tax but the notification provides it through a refund. It would result into unnecessary blockage of funds, paper work and transaction cost. These refunds should be with retrospective effect from February 10, 2006 when the SEZ Act became operational,” said LB Singhal, director general Export Promotion Council for EOUs and SEZs.

The complicated refund procedure has posed as a big problem for domestic tariff areas. Since it was announced in October 2007, hardly any refund claims have been processed till now, the Federation of Indian Export Organisations (FIEO) pointed out.

“While this is a welcome move, all services whether inside or outside the SEZ should be exempted. The government should also simplify the refund procedure to ensure that it is faster,” Ajay Sahai, director general FIEO said.

Interestingly, the notification by the revenue department also jeopardises the single-window clearance mechanism, the SEZs were purported to have. Developers have to claim their refund from the assistant commissioner of central excise or deputy commissioner of central excise, rather than the SEZ development commissioner or the customs officer posted in the zone.

“SEZ units or developers must not be asked to go outside the SEZ for taking this refund. With this mechanism, single-window facility intended in the SEZ has been dealt a severe blow,” said Singhal.

Singhal also points to another problem: “The notification gives no timeframe for refund of service tax claims. In case, there is a delay in refunds, then a provision of payment of interest should be incorporated in the notification as has been done in the case of refund of duty drawback and central sales tax.”