A tax tribunal has delivered a ruling that could force the government to amend the Finance Act of 1994 to try and solve a vexed problem that has resulted in disputed service tax claims of thousands of crores.

The Custom Excise & Service Tax Appellate Tribunal said in a recent ruling that the wording of the Act is such that exporters of services such as software and business process outsourcing companies cannot claim credit for taxes paid on inputs used by them.

The government has amended the rules governing the export of services and issued a number of circulars to clarify the issue but the tribunal said that only a change to 1994 enactment will meet the case.

The rules and notifications issued under the enabling power under the Act cannot expand the mandate given under the enactment and cannot make provision for allowing credit in excess of what is stipulated under the law, the tribunal wrote while deciding on an appeal by Kbace Tech.

Input tax refunds on services has been a contentious issue for a while, with the main point of dispute being the proof of linkage between the input services used and the output services exported.

The latest attempt to untangle the problem was in January, when the Central Board of Excise and Customs (CBEC) issued a circular to make it easier for companies to get refund for accumulated input credit after intense lobbying by the software industry body Nasscom.

It cleared the ambiguity over the definition of services used as inputs by technology and BPO companies. Service tax paid on inputs such as transportation of staff, telecom facilities, software maintenance and upgrades, hiring of recruitment agencies and other related services was made eligible for refund. It also directed its field officials to make pending service tax refunds within 30 days.

Industry will take this up. I am sure the CBEC, which had only clarified the interpretation of the law, will itself take care, Nasscom president Som Mittal said.

Prasad Paranjpe, a partner at PDS Legal, was of the view that the tribunals decision unsettles the principle of allowing Cenvat credit by challenging the existence of the rule which allows the credit and which has been tested and held to be favourable by the Supreme Court and the high courts.