Service tax refund for services availed outside the zones.

Meeting a long-pending demand, the government has allowed companies located in Special Economic Zones (SEZs) to claim service tax refund for services availed outside the tax-free export zones. SEZ developers are also permitted to do the same.

For example, under the earlier norms, if a unit was transporting raw material from a port located outside the SEZ, service tax would have to be paid. Now the unit will be able to apply for refund.

The refund will be allowed only for services that are related to authorised operations (permitted activities within SEZs).

Another change pertains to services provided between units located within an SEZ. Earlier, this was exempted but now firms have to claim refund instead of a blanket exemption.

The commerce ministry had been maintaining that the zones were exempt form all indirect taxes related to authorised operations, whether they were subscribed inside or outside the zone.

The issue had come up for discussion in an Empowered Group of Ministers meeting in August 2008 chaired by External Affairs Minister and Finance Minister Pranab Mukherjee. The panel of ministers had agreed to the commerce ministry viewpoint.

The latest move will benefit service providers more than the SEZs. Developers and units will have to pay service tax before claiming refund. Moreover, some services subscribed may not be in relation to the authorised operations, so the refund granted could be lesser than the amount applied for.

But service providers can now charge service tax for the services subscribed by SEZs, said Rajeev Dimri, Leader, Indirect Tax Practice, BMR Advisors.

Welcoming the decision, L B Singhal, director general of Export Promotion Council for Export Oriented Units (EoUs) and SEZs, pointed out towards certain operational issues. Service tax has to be paid first and then refund has to be claimed. It would result in unnecessary blockage of funds, paper work and transaction costs. Hence it would be appropriate if exemption could be provided, he said.

Singhal also said that the new notification mandates that the refund has to be collected from the respective assistant commissioner or deputy commissioner of the central excise department. The SEZ Act intends to provide a single-window mechanism. Hence, refund should be provided either from the office of the development commissioner or Customs officer posted in the zone. SEZ units or developers must not be asked to go outside the SEZ for taking this refund, he added.