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How onerous is service tax to exporters?
April, 25th 2007

The annual supplement to the foreign trade policy 2004-09 announced by the commerce ministry last week comprised two provisions regarding service tax. One of which (para 2.48.1) said: For all goods and services which are exported from units in DTA and units in EOU/EHTP/STP/BTP, exemption/remission of service tax levied and related to exports shall be allowed...

Considering that exported services are exempt from tax and that in the case of export of excisable goods, credit for input service tax can be taken against output excise liability, the above provision might seem redundant at the first glance. But the new FTP provision, which the finance ministry is yet to endorse through a notification, is a bid by the commerce ministry to get exporters the benefit of tax exemption/refund which they are unable to avail of in a host of situations. This, the ministry believes, is in keeping with the principle that taxes and levies are not meant to be exported.

For instance, if your output is a service and that is exported, you get exemption as export of services is exempt. Needles to say, this exemption will be valid even if the relevant service is otherwise taxable, that is, when the service is rendered in domestic market. In cases where the relevant output service is taxable, the exporter has the option to pay the tax and take a cash rebate for input service tax he suffered.

In fact, a section of exporters whose input service tax is substantial resort to paying tax for the output service in order to adjust it against the input service taxes built into the value of the service, resulting in what could be called partial refund of that input tax. However, if the output service is not taxable, this option is not available. FTP, according to commerce ministry officials, intends to extend the option to exporters of services which are not taxable at present as per the service tax laws in the country such as IT services.

The government should allow input tax credit on non-taxable services which are exported, says Sachin Menon, partner, RSM Advisory Services.

In addition, FTPs Para 2.48.1, with its wide compass, also seeks to address problems in this connection faced by exporters who are not registered with the excise department, including merchant exporters, manufacturers of non-excisable goods like handicrafts and carpets, or goods on which the manufacturers have the option to pay or not pay excise like cotton textiles. As for these exporters, they dont pay excise and therefore no refund/remission is required of that tax. But they might incur tax on some of the services they use, and so, even though their output is good, many a time a taxable one, they end up not getting credit for the input service tax, points out Subhash Mittal of Payal International, a garment exporting firm. It is pertinent to note that textiles, apparel, handicrafts and carpets are major export items of the country.

It may be noted that any final excise incidence on goods exported are fully refunded/remitted through the tool of export promotion schemes like duty drawback and customs duty suffered on inputs are neutralised through DEPB and advance authorisation schemes. Any final incidence of service tax on the exported good/service cannot be neutralised through extant tools.

FTPs Para 2.48.1 also aims to extend the input tax credit facility available till the production stage for output goods further to offset taxes suffered post-production in the export process. Exporters avail of taxable services like transportation, warehosuing and port services after the goods are cleared from factory when he adjusts input tax credit against output excise liability. At present, the tax suffered on these services used by the exporter (which could be called post-production services) is on exporters, especially merchant exporters, whose function is largely to perform export service to which warehousing, port services etc, go as inputs.

The second provision pertaining to service tax in last weeks FTP review is spelt out in para 2.48.3, which said: For all goods and services exported from India, services received/rendered abroad, wherever possible, shall be exempted from service tax. Mr Menon finds the provision vague.

According to the commerce ministry, this provision is aimed at giving exporters a virtual waiver from a June 2005 revenue notification which said regardless of whether the service is rendered in India or abroad, tax is leviable if the recipient is in India. An example is use of commission agency or warehousing services in the foreign country which arguably go as inputs in the export good/service. Huge remittances are being made from India by exporters to avail of such services abroad, the taxes on which are not offset despite their being export inputs, says Ajay Sahai, director-general, Federation of Indian Export Organisations.

The revenue departments rationale for imposing service tax on commission agents abroad is that they are deemed to provide services in India. So the service was not treated as an input service. The department has now said that they could consider granting a refund only if the exporter can give a proof of the link. It would be very difficult to establish that the service rendered by the commission agent is an input for export, said a revenue department official. However, some tax experts said that they were already getting this refund.

Irrespective of whether the revenue department will endorse the two new service tax related provisions in the FTP review, exporters would still have a few issues to grapple with in this context. One is with regard to the definition of export of services. While the revenue definition is that service must be delivered and used outside India for it to be export, the commerce ministry apparently wants to go by the common sense definition that any legitimised activity that earns revenue from a foreign entity is exports. The current definition of export of services is narrow, says Satya Poddar, partner (indirect tax), Ernst & Young.

A case in point is foreign retail giant Wal-Mart as they engage procurement agents in India, in which case even though the service providers get forex from the foreign user of the services, the activity is not reckoned as exports. Similarly, telecom companies in India provide many services to non-resident customers like roaming services to a non-resident while he is in India which fall out of the present definition of services.

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