A new scheme to refund service tax to exporters is in the works as the government seeks to neutralise all input taxes to enhance competitiveness of the country's export sector. The finance ministry has set up an expert panel to work out the modalities of the scheme.

"Refund of service tax has been a big irritant for exporters," a government official told ET. The new scheme is likely to be on the lines of the duty drawback scheme under which exporters are reimbursed taxes paid on inputs at a fixed rate decided by an expert panel every year depending on changes in the tax rates.

If the scheme is finalised well in time, an announcement could be made in the forthcoming budget on February 28, the official said.

The move follows recommendations by a committee appointed by the department of commerce to look into transaction costs faced by the exporters. A task force also monetized transaction costs worth $12-15 billion, which was 7-10% of exports valued at $160-165 billion.

The total merchandise exports from India stood at $178.66 billion in 2009-10 and the government proposes to raise it to $200 billion in the current fiscal.

Exporters in South East Asia and China face transaction costs as low as 3-3.5% making their goods more competitive in developed markets compared with Indian exports.

Currently, the finance ministry refunds tax paid on 17 services consumed in exports and two services are exempted. Services eligible for tax refund include banking and other financial services, port services, transport of goods by road and railways, general insurance, technical testing and analysis, storage and warehousing, business exhibition services and specialised cleaning services. Service tax on transport of goods by road and commission paid to foreign agents is exempted for exporters.

But experts say there is always a delay in getting refunds. "The procedure is cumbersome and causes delay in the grant of the refund," said Anita Rastogi, associate director at PwC. Though the finance ministry has made several attempts to simplify procedures related with refund of service tax paid on input services used in exports, administrative costs are high with tens of crores locked in refunds.

"For small exporters compliance cost is sometimes higher than the refund itself and there is huge pendency making matters worse," said Ajay Sahai, director general of the Federation of Indian Export Organisations ( FIEO )).

The idea now is not only to ensure that exporters' cash does not stay locked with the government for an indefinite period, but also to save them the hassle of going through paperwork every time they want to claim an exemption, the official added.