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Service tax clarity profit booster for SEZs
May, 23rd 2009

The government has provided the much-needed relief sought by developers or units inside special economic zones (SEZ).

Through a notification on May 20, the government has allowed developers or units to get the list of services specified in clause (105) of Section 65 of the SEZ Finance Act approved following which they shall be exempted from service tax.

Services consumed outside an SEZ will have to pay tax but these can be refunded later.
The developer or units of SEZ can claim such exemption provided no Cenvat credit of service tax paid has been already taken under the Cenvat Credit Rules, 2004.

Essentially, the effect of the May 20 notification is that developers or units will not have to pay service tax on services within the SEZ but will have to pay tax on services consumed outside the SEZ. This, however, can be claimed as refund later.

Developer and units benefit since their working capital will not be blocked.

For services consumed outside the SEZ the refund will mean no added cost for the developer or units and in that respect their profitability can be higher by 10.3% as the service tax component will not be an expenditure for them.

Earlier the government had, in a notification on May 31, 2004, exempted developers and units located in an SEZ from service tax for approved services within an SEZ.
Later, on March 3, 2009, the government made the developer as well as the units located in an SEZ first pay tax on services consumed both within an SEZ and outside and seek refund on the following conditions:

(a) the developer or units of SEZ shall get the list of services approved from the approval committee

(b) the developer or units claiming exemption actually uses the specified services in relation to the authorised operations in the SEZ;

(c) the exemption claimed by the developer or units shall be provided by way of refund of service tax paid on the specified services used in relation to the authorised operations;

(d) the developer or units claiming exemption have actually paid the service tax on the specified services;

(e) no Cenvat credit of service tax paid on the specified services used in relation to the authorised operations has been taken under the Cenvat Credit Rules, 2004;

(f) exemption or refund of service tax paid shall not be claimed except under this notification.

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