Tax relief for services done outside SEZs too

Tax relief for services done outside SEZs too
Hindu Business Line, March 5, 2009, Page 1

Exemption window replaced by refund mechanism.
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Norm change
Refund mechanism will add to transaction costs as it would impact cash flows besides increasing paper work for the SEZ developers/units.
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K.R. Srivats

Services rendered from outside special economic zones (SEZs) to developers/units in such zones will now be entitled for service tax relief. The benefit would flow in the form of “refund of service tax” and not through an exemption.

Until now, only services rendered within the SEZ were eligible for the service tax relief – they were “exempted” from service tax, implying that they did not attract service tax.

The Finance Ministry on Tuesday also put in place a new mechanism whereby SEZ developers and SEZ units would have to initially pay the tax on the services rendered to them (from inside and outside the zone) and then claim refund of the taxes paid.

Thus while the scope of the relief has been expanded, the procedure has been changed to provide for only refund of service tax rather than an exemption, say tax and trade experts.

Welcoming the Finance Ministry move, Dr L.B. Singhal, Director-General of Export Promotion Council for EOUs and SEZs (EPCES), however, said that the introduction of refund mechanism would add to transaction costs as it would impact cash flows besides increasing paper work for the SEZ developers/units.

How it works

Explaining the new regime, a tax expert said that if a chartered accountant was rendering auditing/accounting service to a SEZ developer/SEZ unit from outside the zone, the developer/unit was hitherto not getting any exemption or relief on the service tax component of the billing of the auditor. With the latest changes, the developer/unit could claim refund of the service tax.

The Finance Ministry has now implemented the Empowered Group of Ministers on SEZs’ decisions of August and October 2008 on the issues of service tax on taxable services rendered to SEZ developers/units.

Some tax experts, however, contend that the refund mechanism overrides the SEZ Act that only provides for service tax exemption.

“The Finance Ministry move has effectively moved the regime from exemption into refund mechanism. There appears to be an apparent conflict (with the SEZ Act). The Act provides for exemption. What the Finance Ministry has done is good for service providers, but the refund mechanism will impact cash flow of SEZ developers/units,” Mr Rajeev Dimri, Leader, Indirect Tax Practice, BMR Advisors, told Business Line.