New Delhi: Keeping the current global scenario in mind, the Finance Minister’s Budget proposals on indirect taxes focused primarily on providing a stable framework to the industry at large, with a specific emphasis on the export sector which has been greatly impacted in recent times due to the decrease in global demand.
Apart from providing certain specific reliefs to export oriented sectors like leather, textile and footwear, etc, one announcement that would have many hopes pinned on it is that of revamping the scheme of service tax refund for exporters.
The scheme of service tax refund for exporters was first introduced in September 2007 by the Government in keeping with the international practice of zero rating exports.
The Scheme allowed for the refund of service tax paid by merchant exporters with respect to thirteen services including port services, customs house agent services, insurance services, etc even where such services are not in the nature of ‘input service’ but were relatable to the export of goods subject to certain prescribed conditions.
In the wake of economic recession, the Government had in the recent past expanded the scope of the scheme and introduced several procedural simplifications with a view of providing impetus to the slowing export industry.
In fact, the second stimulus package announced earlier this year had provided for the constitution of a Committee under the chairmanship of the Finance Secretary for the resolution of practical issues being faced by exporters on a fast-track basis.
Despite the various efforts of the Government to facilitate speedier service tax refunds, this has remained a sour point with the exporting community. The challenges faced by the exporters at the ground level were more on account of an inbuilt resistance to release refunds by the revenue authorities and not so much because of the non eligibility or illegitimacy of the claims.
In yet another attempt to rectify the situation and ensure speedier refunds, the Budget proposes to revamp the existing scheme. The modifications are two fold. Exporters have been exempted from payment of service tax on two services, namely, ‘transport of goods by road’ and ‘commission paid to foreign agents’. Exporters were paying service tax on reverse charge basis on such services. Hence there were first paying the service tax and thereafter claiming refunds. This exemption does away with the circuitous route and would definitely improve the credit flow situation for exporters. It is however pertinent to note that the present cap of 10 per cent on commission agency charges has been retained.
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Thus, exporters will have to pay service tax on the amount of commissions paid in excess of 10 per cent.
The second change has been the modification of the refund scheme itself.
The refund scheme has been extended to include 16 taxable services.
The new notification takes into account the procedural shortcomings faced by the Department by way of prescribing mandatory registration with the authorities. Further, there is no longer a requirement to ascertain whether the services have actually been utilized in the course of exports.
The role of the Revenue authorities would be restricted to determining that the documentation is complete, the certifications where required are present and the claim is arithmetically accurate. This marks a sea change from the erstwhile requirement- of a mandatory pre-audit under the earlier scheme.
On the procedural front as well, apart from providing a simplified format, the time period for filing the refund is proposed to be increased to one year from the date of export. Further, the condition for filing the refund claim once in a quarter is being dispensed with and the exporter would be allowed to claim refund any time after each export shipment.
The refund claims are to be processed within a period of one month as against the earlier time frame of three months. Interestingly the Tax Research Unit has in its explanatory memorandum also spelt out the need for strict adherence to the modified scheme in letter and spirit by meeting the specified timelines.
Status reports have been requisitioned in specified formats for all zones to enable the Central Board of Excise and Customs to monitor the effectiveness of the revamped scheme.
The new scheme marks a significant improvement over its predecessor in terms of accountability and transparency.
Unfortunately though, the revised mechanism is restricted only to the refunds which were due to merchant exporters. The fate of exporters of services who apply for refunds under the Export of Services Rules or under the Cenvat Credit Rules continues to hang in the balance.
The proposals for improvement in the delivery mechanisms needs re-examination to ensure all exporters benefit equitably.
The authors for this article are Ms Mekhla Anand and Ms Aparna Paul, Senior Associates, Tax Practice Group, Amarchand & Mangaldas & Suresh A Shroff & Co.
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