The government's notification on Tuesday that allows SEZs and units operating in them to not pay service tax - instead of paying the tax and then claiming refunds - is expected to remove a major source of pain for IT companies and improve their cash flow.

By some estimates, nearly Rs 4,000 crore of service tax refund claims are pending with the government, of which about 30% are from SEZs. "It used to be a huge bother for the IT companies. Now, not only will IT SEZs benefit, it will also mean less work for those in the tax department who have to process these requests," Som Mittal, president of IT industry body Nasscom, said.

Pradeep Udhas, partner & head of IT/ITES in consulting firm KPMG India, said the idea of paying service tax and refunding it was wasting bureaucratic bandwidth. "The move comes as a succour to the IT companies, which don't have to lock their cash and then claim for a refund . SEZs have not taken off as expected, and with the minimum alternate tax imposed on them, the benefits have been further reduced. So the government is under pressure," he said.

With the STPI (Software Technology Parks of India) tax holiday ending, the SEZ scheme, with its tax advantages , have become important for the IT sector as a means to retain its competitive edge globally. In April this year, the government provided a big boost to IT SEZs when it withdrew the minimum land area requirement for them. Previously, an IT SEZ could be established only on land area of 10 hectares or more. This hugely restricted the ability of companies to claim SEZ benefits.

Nasscom said the upfront service tax exemptions would enable at least 80% of services used by SEZs to be exempt from imposition of service tax . These would include services like leased line, telecom, manpower supply, software licensing, and renting and maintenance.

The new notification also allows a consolidated filing for multiple SEZ units with a common service tax registration. "This will reduce the number of filings we have to do," Mittal said. Mittal hoped that the new notification would also speed up refunds of payments made in the past. "We have heard that the Central Board of Excise and Customs has instructed IT commissioners in different regions to do that. And we find that some refunds are already happening," he said.

Boost to IT

In April, government withdraws minimum land area requirement for IT SEZs. On June 30, government issues circular recognizing that all R&D centres cannot be painted with the same brush, thus bringing clarity on issues like transfer pricing which has led to lots of litigation by IT MNCs. On July 2, government issues notification that allows SEZs and units operating in them to not pay service tax. Earlier, the tax had to be paid and then companies had to claim refunds, which resulted in lots of paper work and funds being locked up. Government has said it will shortly issue `Safe Harbour' rules. These are international disclosure practices that will bring further certainty in assessment of R&D centres and check litigations in transfer pricing.