The central government is considering a move to spare units in special economic zones (SEZ) from paying any tax on services inside the zones, rolling back an earlier decision to offer service tax refunds. The finance ministry may soon issue a notification in this regard soon, said a government official who did not wish to be named.

Early this month, the finance ministry had replaced blanket exemption on services within special zones with a refund mechanism, while extending tax benefit to services offered outside the zone too. Under this, a company first has to pay the tax and then claim refund.

While total exemption is being restored for input services, SEZ units will still need to claim tax refunds on services offered outside the zone. The finance ministry decision to take a relook at the policy follows strong opposition from the commerce department and exporters groups like the Export Promotion Council for EoUs and SEZs.

While refund for tax on services used outside the zone was a welcome change, extending refund mechanism to services used inside a zone drew a sharp reaction.

Exporters prefer blanket exemption as refund blocks their funds and increase paperwork and transaction costs. Refunds have to be claimed within six months from the date of payment.

Prior to the change in rules in March, developers did not have to pay tax on services used within the zone, though those used outside were taxable.

The change in service tax rules was announced following protracted discussions between the commerce and revenue departments and a decision in this regard by the empowered group of ministers on SEZs headed by finance and external affairs minister Pranab Mukherjee.

The SEZ Act provides for an exemption from service tax, which is levied at 10%, on over 100 services and exporters said they had to pay tax on services related to production within the zone but used outside the zone.