It is an ideal feature of any good taxation system that in export transactions only goods or services should be exported and not the taxes embedded in it. Keeping with this principle, the government has been time and again providing incentives to exporters on their output and input. Due to constant evolution in the tax system, obviously, government needs to amend its policy in giving effect to the widely-accepted principle of not allowing taxes to be exported.
On Monday, one such step was taken by the government when it issued an exemption to four specified taxable services received by an exporter and used for export of goods. Let us see what are the implications of this exemption for exporters. Also, it may be worthwhile to see how the government could further better its export incentive policy by improvising on such exemptions and ensuring objectivity in implementation of existing incentives.
First, lets talk about the newly introduced exemption. It grants exemption to four specified services port services provided for export, other port services provide for export, services of transport of goods by road from ICD to port of export provided by goods transport agency and services of transport of export goods in containers by rail from ICD to port of export.
How will this exemption operate? First, the exporter will be charged service tax from its service vendor. Even in cases where the exporter is himself liable to pay service tax, for example, as a recipient of service of transport of goods by road, he would first pay service tax and then claim refund by undergoing a separate refund exercise prescribed.
While the move to grant this exemption is certainly welcome, government could have considered granting upfront exemption instead of making service provider or recipient first pay the tax and then initiate a refund exercise, engaging precious time of the government machinery and of exporters. Presently, such upfront exemptions are already in place when services are procured by an SEZ or a unit in such SEZ.
Also, merchant exporters who consume whole host of input services and do not have the ability to claim Cenvat credit (not being manufacturers) will continue to be burdened by service tax cost on input services consumed by them except for these four specified services.
About practical implementation of the above incentive, while the notification prescribes time limit for filing of refund claim, it does not provide any time limit for the officer to grant the refund. It would be advisable to make the officer accountable to disburse the refund or dispose of the claim by issuing appropriate order in a prescribed time limit. Or better still would be to provide for provisional sanction of refund amount as being done in case of certain area-based exemptions.
The other practical impediment that may be faced by the industry is due to the requirement of producing the proof of service tax payment. Now, as a service recipient, the exporter claiming refund can at best produce the tax-invoice issued by the service provider (unless the exporter himself is liable to pay service tax as a recipient of service). Exporter claiming refund will not have access to actual service tax payment made by the service provider. Also, in most cases such services are arranged and paid for through CHAs or other agents.
It may be difficult to provide proof of service tax payment in such cases where the specified services are paid through such CHAs or agents and not directly by the exporters. Further, there may be instances where these services are shared with more than one exporter and the service provider issues common invoice. In such cases, it will be difficult for each individual exporter to produce relevant tax-payment proof along with his individual refund claim.
Maybe, all or most of the above problems could be avoided by providing outright exemption to the specified services and other relevant services on the lines of existing exemption provided to services provided to an SEZ or a unit in SEZ. While appreciating the revenues concern on possible mis-use of exemption, an undertaking from the exporters and periodical submission of records or returns could be considered as a way out. This would save a lot of precious time of the government machinery and of the exporters.
Last but not the least, for the existing incentives in place, the government should also make the officials accountable for expediting the refund claim already filed by various taxable service exporters. The service exporters who have filed refund claims worth crores of rupees and will continue to file such claims for increasing amounts as more and more services are brought under the service tax net, there is a need for a clear and objective refund sanctioning process.
Often it is found that due to sheer size of the refund amounts, officers reject the claims on flimsy grounds to pass the bug to higher authorities to take the onus of passing the refund. While the government has done its bit by issuing a circular directing grant of 80% of refund claimed within 15 days of filing of refund application across the country, this circular does not seem to have ever been implemented since its inception and hence the point is being made to enforce accountability.
To sum up the unfinished agenda on export incentives, government should consider outright exemption to all services consumed in export of goods (irrespective of whether they qualify as input service or not), incentive should be extended to exporters of non-taxable services and finally existing incentives granted to exporters of taxable services should be implemented in its true spirit.
Prasad Paranjape (The author is executive director, PricewaterhouseCoopers)