Budget 2007 is likely to deliver a mixed package for exporters with regard to service tax. While the finance ministry is in no mood to remove the 12% service tax on exporters for services availed within the country, it is seriously considering scrapping service tax on services enjoyed overseas.

The pressure on the finance ministry to do away with tax on overseas services is growing with a number of exporters all over the country legally contesting its imposition. The major beneficiaries of the removal of the tax would be the pharmaceuticals, textiles, chemicals and engineering goods sector as they have to utilise services of foreign agents much more than other sectors.

The official sources said that the finmin was looking at ways in which tax on overseas services could be excluded from the services tax net. “The finance ministry has realised that it might not be legally tenable to continue with the tax as it has been challenged by exporters in courts throughout the country,” the official said. The main arguement of exporters opposing the tax is that the government cannot impose a tax when the destination of services is outside India.

The incidence of service tax on overseas services which includes commission to foreign agents, participation in trade fairs and service maintenance contract for overseas services is as high as 18.2% of total export value of the pharmaceuticals sector. For the textiles sector, tax on overseas services amounts to 11% of the export value while for engineering and chemicals it is 8.3% and 7% respectively. “The figures reveal the extent to which the comeptitveness of the identified sectors is eroded due to the imposition of the unwarrented tax,” the official said.

The finance ministry has, however, outright rejected the commerce department’s demand of totally exempting exporters from paying service tax. Its arguement for continuing with it is that the service tax paid on input services is neutralised under various schemes such as refund, rebate and duty drawback. The commerce department, however, claims that rebate or refund involves a cost and consumes time which exporters can ill-afford. Officials further point out that there is no provision to refund service tax on services in connection with export of non-excisable goods.