Software exporters, BPOs, consultants and other service exporters have been hit by a sudden halt in service tax refunds in the past few months. Service tax commissionerates across the country have been rejecting tax refund claims of these companies, which also include knowledge processing outsourcing firms and financial advisors, in the absence of clarity on aspects relating to input-cost credits.

As per service tax rules, input cost credits are chargeable on 'input services' used by companies (i.e. service exporters) for offering the service. The rule allows exporters to recover service tax paid on indirect costs to the company. Input services include expenses on installation of new office computers, catering services to employees, auditor or advisory services , couriers, event management, employee transportation, office rentals, manpower supply commission, leased communication lines, security, computer maintenance and annual office maintenance cost.

"Our refunds were coming till about four months ago. But our recent service tax refund submissions are not being entertained by commissioners. They are asking us frivolous questions with regards to our input-cost credits ," said a senior official of a leading BPO. As a concept, indirect taxes are levied on goods and services and recovered from consumers . However, if such a service is not consumed within the same country from where it originates, laws exempt exporters from taxes and also enable them to obtain refunds on procuring input goods and services that are used in such exported goods and services.

Service tax refunds have become very important to these companies as they are witnessing a downtrend in revenues due to the financial crisis in the West. "We are being asked to produce proof of nexus between input services and output services, despite producing the auditor's certificate certifying the nexus," said a senior auditor with a large IT firm. "Some times we are even asked to produce proof of export -- that the services are used and enjoyed outside India," the auditor said. Mumbai, Hyderabad, Pune and Bangalore are some of the commissionerates where service tax refunds have not been allowed, said tax consultants. "It is unfortunate that revenue authorities are coming out with frivolous grounds to reject the rightful claim of exporters at a time when exporters are reeling under the financial crisis in the western markets," said Sachin Menon, partner & national head - indirect tax, KPMG. "It is surprising to see that there is no logical approach in rejecting claims.