The matter of the reimbursement of input taxes to exporters of goods and services has been the subject matter of much discussion and debate in the recent past. While the intent has always been to free exports from domestic taxes of any kind, it has been a challenge to operationalise this intent. The matter has assumed increased urgency in view of the appreciating rupee. With particular reference to the reimbursements of input excise and service taxes, various provisions currently exist to either exempt or refund these taxes to both exporters of goods and services. In so far as reimbursements of input excise taxes are concerned, there is a relatively well understood and implemented scheme to ensure that export goods/services are not loaded with these taxes. However, the issue is much less clear in relation to reimbursement of input service taxes.
The reason for the lack of clarity in the matter is the manner in which the relevant provisions have been framed, interpreted and operationalised at the field level. The principal challenge has been to establish an appropriate nexus between the input services, in relation to which the service taxes are paid, and the export goods/services, in which such input services are consumed. As a result, there has been tardy progress in terms of actual receipt of refunds/reimbursements of input service taxes by the exporting community. One recent initiative to address this problem has been the issuance of notifications to refund services taxes pertaining to certain specified services if used for the purpose of export of goods. The first such Notification No. 40-ST was issued in September 2007 and this was subsequently superseded by another Notification No. 41-ST issued in early October 2007.
The notification extends to specified services which are supposedly those whose use is arguably not compliant with the nexus test. The point is that, if the nexus were to be established between the input services and the export goods, the existing provisions relating to rebate/refunds would apply anyhow and there would have been no need to issue these independent notifications. The services which are covered are those relating to general insurance, technical testing and analysis, inspection and certification, transportation of goods by rail from inland container depots to the port of export and, finally, the use of ports, both major and minor.
The feature of the notification is that the benefit of the refund is available to both manufacturer exporters and merchant exporters. Hitherto, such refunds, if at all, were available only to manufacturer exporters and the drawback scheme was also largely limited to manufacturer exporters. The notification authorises the exporters of goods to file the claims for refunds of the input service taxes paid on the aforementioned services. Thus, the service taxes are first required to be paid on such services by the providers of the services and it is for the exporters of goods to subsequently file claims for refund of such taxes.
The notification lays down the procedure to be followed for claiming the refund of the input service taxes. It envisages the claims to be filed on a quarterly basis. The quarterly claims need to be supported by documents evidencing the physical exportation of the goods and the payment of services taxes on the specified services by the exporters. Wherever applicable, copies of the agreements entered into between the exporter and the overseas buyer are also required to be filed. The notification further provides, that if the exporter fails to demonstrate the realisation of sales proceeds in relation to the export goods, as per the Foreign Exchange Management Act (FEMA), the input service taxes already refunded would be recovered from the exporter.
An interesting condition in the notification is that the relevant authority would grant the refund after satisfying himself that the said services have been actually used for export of goods. Given that the existing provisions already grant the benefit of refunds to all input services which have the nexus with the export goods and that the purpose of the notification was to therefore extend the benefit of refund to these other services which arguably do not comply with this condition, it is intriguing to note that the authorities are nevertheless required to satisfy themselves that the services are actually used for export goods. The only reasonable interpretation of this condition would be that such services should be in relation to the export goods and not in relation to domestically sold goods, even though they do not comply with the nexus test. This point needs to be urgently clarified so as to preclude needless litigation on the matter.
It is to be noted that the benefit of the refund is limited to the few services noted above and other relevant services such as those of foreign agents, overseas travel, participation in trade fairs, banking services, fees paid to professionals etc. do not yet qualify for refunds. This means that the exporters of goods are still not able to offset a significant amount of input service taxes relating to export goods.
Based on the past experience of the assessees in the context of refund or rebate claims filed with the service tax authorities, there is apprehension regarding the time required to actually realise the refunds. In any case, the notification envisages only quarterly filings. There is a clear need for the Government to ensure that the refunds are granted to the exporters within a prescribed time period, especially since the notification does not lay down any such period.
Author is leader, Indirect Tax Practice, PricewaterhouseCoopers. Views expressed are his own