The exemption to service tax on services provided to Special Economic Zone (SEZ) developers/units has always posed some difficulty or the other. The Central Board of Excise and Customs (CBEC) has now come out with a fresh set of clarifications but whether SEZ units and developers will get refunds quickly is a matter of doubt.
To give some background, the finance ministry issued notification no. 17/2002-ST dated 21.11.2002, granting exemption from service tax on services provided to SEZ units/developers but it did not work out satisfactorily, as it prescribed that a committee headed by a chief commissioner should authorise the services to be provided. A fresh notification no. 4/2004-ST dated the 31.03.2004 also did not work well, because it implied evidence had to be presented of consumption of services in the SEZ. The next notification no. 9/2009-ST dated 3-3-2009 prescribing that SEZ developers/units must first pay the tax and then claim refund was amended on May 20, 2009, to provide unconditional exemption to services consumed within the SEZ without following the refund route. It limited exemption by way of refund to situations when only the taxable services provided to SEZs were consumed, partially or wholly outside it.
The current notification no. 17/2001-ST dated March 1, 2011, lays down the criteria for determination of ‘wholly consumed’ services, borrowing concepts from the Export of Services Rules, 2005. It also provides that all services received by an entity in a SEZ which does not have any other Domestic Tariff Area (DTA) operations will constitute “wholly consumed” services. And, that refund of tax on services not “wholly consumed” shall be available on a pro rata basis i.e. ratio of SEZ turnover to total turnover.
The latest Circular no. 142/11/2011-ST dated May 18, 2011, mainly reiterates and clarifies the important points that flow from the notification. It does give a useful clarification that the proportionate amount of service tax paid on shared services i.e. services shared between the SEZ entity and a DTA unit that is not refunded after applying the prescribed formula shall be available to the latter as Cenvat credit.
The CBEC’s clarifications are useful but the main problem with refunds is the mindset of operating staff at the ground. Whenever any refund is claimed, the field formations try to find some way or other to delay or deny the refund. Exporters have a great problem trying to get refund of unutilised credit on account of exports under bond or UT1 undertaking under notification no. 5/2006-CE(NT) dated March 14, 2006, or refund of tax on export-related services through notification no. 17/2009-ST dated July 7, 2009. Importers find it very difficult to get refund of four per cent additional duty under notification no. 102/2007-Cus dated September 14, 2007. Several CBEC clarifications have not helped much.
At the operating levels, the officials are worried that denial of refunds will not be questioned but grant of refunds will be subject to all kinds of audit and scrutiny. CBEC must address this mindset issue and find a way to monitor cases where lawful refund claims are not delayed or denied.
Email : tncr@sify.com
