Services consumed within SEZs get tax excemption

The government today allowed exemption of service tax to Special Economic Zones (SEZs) for services consumed within the tax-free industrial enclave.

However, for services consumed outside the zones, companies (including the developer) operating within a SEZ will have to file for refund, a clarification issued by Central board of Excise and Customs (CBEC) this Wednesday said.

Essentially, the latest clarification restores a previous condition that exempted SEZs from paying service tax for services consumed inside the zones.

This exemption was changed into refund through a CBEC notification released on March 3 this year. The same notification also allowed refund of the indirect tax levied on services consumed outside the zones.

Both exemption and refund are related to activities that have been approved by the Board of Approval on SEZs. The commerce ministry and developers have been demanding blanket exemption of service tax.

Experts maintain that CBEC notification of March and the latest circular could lead to legal tussle between the government and SEZs. This is because the latest clarification is prospective in nature.

“SEZs would have paid service tax between March and May for services consumed within the zone. This was exempt till March. The latest clarification does not say if the service tax paid on services consumed within the SEZ between March and May will be exempted or refunded,” said Hitender Mehta, head, Vaish Associates, Gurgaon.

Experts also said there was no clarity on what constituted services consumed within or outside the zone. For example, the current norms do not specify if service tax paid on courier services or phone bills are on account of services subscribed within or outside the zone.

The clarification also specifies that 80 per cent of the refund amount will be sanctioned ad-hoc, provided that the application is complete. More over, CBEC also said it would process the applications within a maximum period of 45 days.

Experts said similar time bound targets issued by CBEC on other notifications did not lead to any benefit.

An empowered group of ministers, headed by former Finance Minister Pranab Mukherjee in August, 2008, had ruled that service tax should be exempted for SEZs for authorised services consumed outside the zones.