The government has sought the Election Commissions permission to announce service tax exemption to units in special economic zones (SEZs) for services availed within these zones.

Since providing tax exemption to units and developers, instead of refunding taxes, amounts to a direct benefit, it could violate the model code of conduct in place ahead of the forthcoming general elections, said a government official. Therefore, the proposal would need clearance from the Election Commission before it can be announced, he said, requesting anonymity.

The service tax exemption, fixed at 10% of the value of the service, will improve the cash flow of units, as there will be no cash outgo. In case of refunds, they pay the entire service tax and get it refunded after several months.

SEZ developers and units, till recently, were allowed exemption on taxes on services enjoyed within the zones. No exemption was given for services availed outside the zone. Following demands made by the SEZs and the commerce department, the finance ministry decided to give refunds on taxes paid by SEZ units and developers on services such as port-handling, in-land transportation, courier and banking availed outside the zone. It issued a notification stating that SEZ units and developers would get refunds for taxes paid on services availed both inside and outside the zones.

While SEZs welcomed the decision to grant tax refunds on services availed outside the zone, they were unhappy about the replacement of exemption facility on services availed within the zone with refund facility.

After some rounds of discussions with the commerce department, the revenue department agreed to restore the exemption benefit for services availed inside the zone.

Service tax exemption on services availed inside the zone will be restored as soon as the proposal is cleared by the Election Commission, the official said.