While Developers & Units Will Now Have To Claim Refund after Paying Tax, They Are Demanding Ab-Initio Exemption

Developers of special economic zones (SEZ) and units inside such zones can from now on claim refunds of taxes paid on all input services, regardless of whether the services are used inside or outside the tax-free zones, according to a change in rules notified by the government.

The new rules means that developers and units inside SEZs will now have to first pay a tax on the services consumed and then claim a refund firm the tax authorities. The refund can be claimed within six months from the date of payment of taxes.

Until now, the government had exempted developers from paying a tax on services used inside the zones while services used outside them attracted taxes, notably a 10% service tax on items such as courier and transport services.

The move could help the finances of SEZ developers and companies operating inside SEZs, although exporters said it could increase paperwork and been lobbying for a blanket exemption from paying taxes.

Exporters said while the SEZ Act provided for an exemption from service tax, the changed rules still wanted taxes to be paid first and reclaimed later. They said the government had complicated matters by bringing services used inside the zones under the ambit of the tax and-refund scheme. Until now, services consumed inside zones did not attract service taxes.

“It will result in unnecessary blockage of funds, paperwork and transaction cost. Hence, it would be appropriate if ab-initio exemption could be provided,” Export Promotion Council For Export-Oriented Units & SEZs director general LB Singhal said.

Tax experts concur. “By allowing the exemption by way of a refund, the government has not only increased the transaction cost, but also increased the cash outflow of SEZ units,” Ernst & Young associate director Bipin Sapra said.

The move on refunds comes in the wake of a decision by the empowered group of ministers on SEZs headed by finance and external affairs minister Pranab Mukherjee. SEZ developers and unit owners have long argued that they should not have to pay tax on services consumed outside the export zone if the services were related to production within the zones.

The finance ministry’s notification clears the ambiguity on the tax exemptions, particularly since the industry’s views on the issue had been contested by the tax authorities.

The notification, which will over-ride the tax exemption provided in the SEZ Act, will come into effect on or after the date of publication of the notification in the Official Gazette.

Courtesy:- ET dtd:- 05-03-09