The government is likely to exempt the services provided inside the Special Economic Zones from service tax, a move for which it is expected to seek approval from the Election Commission.

Hitherto, service providers were paying taxes first and than claiming refunds, an issue on which the Commerce Ministry has written to the Ministry of Finance suggesting exemption from taxes.

The Finance Ministry, however, has declined to accept another proposal by the Commerce Ministry for exempting services provided outside an SEZ unit.

"We have finalised that for services provided to SEZ units outside the boundary will have to pay tax and then claim refund while for services provided inside the unit would be completely exempt from service tax. In this regard we are seeking the approval of the Election Commission," a Finance Ministry official said today.

Recently, the government had allowed Special Economic Zones (SEZs) units to claim service tax refund for services availed outside the tax-free export zones along with services provided inside the unit.

Although, exporters and SEZ developers had objected to the move as they would have to claim refund after paying the service tax, a process, they claimed, would be very lengthy and complex.