The government has decided to review the tax incentives scheme extended to services exports after six months, worried as it is over a possibly large revenue outgo due to the widened scope of the sops under the new five-year foreign trade policy. The number of sectors and rate of rewards will be reviewed in October after studying the feasibility of the scheme and its fiscal implications, officials said

"In case the revenue outgo is within the expected levels, then it will not be an issue and we may even add a few sectors or increase reward rates. However, if it is beyond our expectations, there may be a need to readjust rates for some sectors overusing the scheme," said a government official, requesting not to be named.

The government is targeting a fiscal deficit of 3.9% of GDP in 2015-16. In an effort to give a push to services exports, the department of commerce launched Services Exports from India Scheme or SEIS on April 1 under the foreign trade policy for 2015-20, extending concessions in the form of fully transferable duty credit scrips ranging between 3% and 5% of exports. These scrips can be used to offset service tax, customs duty and excise duty.

Nearly 80 services sectors are covered under SEIS at present.

Officials said there are fears that the scheme will be overused by hotels and restaurants, a sector that deals in high volumes. Reward rates for the sector have fallen sharply from 10% to 3% under the new policy. Professional services such as legal, accounting, engineering, architectural, medical and educational have all been extended 5% reward rate. Environment related services such as sanitation and sewage disposal can also avail of 5% duty credit scrips.

Government to review tax incentives scheme on services exports

The services and rates of rewards notified against the services shall be applicable to services export made between April 1 and September 30 only, a Directorate General of Foreign Trade notification said, adding that the service and the rates will be subject to review with effect from October 1. The government replaced the earlier Served From India Scheme (SFIS) with SEIS to make it more usable. SFIS offered a flat 10% reward, which was extended on actual user basis and could be used to import capital goods and consumables. SEIS has a much wider scope than SFIS, with fully transferable duty scrips. Under the new scheme, the exporters who are unable to use benefits can monetise the scrips by selling them in market. SFIS was used to the optimum level by the hotels and restaurants, which used the scrips to pay duty on imported wines and other food items.

"The scheme earlier entailed a cumbersome process, which did not allow many to benefit from it. But now, since all conditions are gone, it might lead to a massive outgo, which we will need to watch closely," the official said. The incentives have been extended to special economic zones, which DGFT will notify separately.