By TIOL Research Team
THOUGH the policy and procedures relating to export promotion are formulated by the Ministry of Commerce, when it comes to tax sops, the ultimate authority which is responsible to make the noble objectives a reality is only the Ministry of Finance. But, often the MOF looks at only revenue and nothing else and it is not uncommon that both the Ministries do not see eye to eye on several issues. Fearing that the intervention by the Department of Revenue will defeat the policy objectives, initially the MOC wanted exclusive control over the SEZs but the Department of Revenue could successfully prevent it. But the worst fears of the MOC seems to have come true in the case of providing exemption to SEZ units from payment of service tax for the services availed by them because of the narrow minded approach in drafting the exemption notification.
MOF has issued Notification No 4/2004 ST dated 31.3.2004 exempting the services provided to a developer of SEZ or a Unit in SEZ from payment of service tax. The relevant part of the Notification reads:
the Central Government being satisfied that it is necessary in the public interest so to do, hereby exempts taxable service of any description as defined in clause (105) of sub-section (1) of section 65 of the said Act provided to a developer of Special Economic Zone or a unit (including a unit under construction) of Special Economic Zone by any service provider for consumption of the services within such Special Economic Zone, from the whole of service tax leviable thereon under section 66 of the said Act.
In view of the exemption being available only for consumption of the services within the SEZ, Department of Revenue started denying the exemption to various services on the ground that they are not "consumed within the SEZ". Except some few services like construction service, almost all the services though availed by the SEZ units in relation to the operations of their units, they are not always consumed within the SEZ, but the fact remains that the end benefit of services goes to the SEZ units. The service providers, having been denied the exemption by the revenue authorities charging services tax and the SEZs units are under utter confusion as they always believed that SEZ is a 100% tax free zone.
Interestingly the SEZ Act never contained any condition that the services should be consumed within the SEZ units to be eligible for exemption. The relevant provisions of the Act are
Section 2 (m) of the SEZ Act,
(m) "export" means -
(i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or
(ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or
(iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;
As per Chapter II, Section 7,
Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by, -
(i) a Unit in a Special Economic Zone; or
(ii) a Developer;
shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule.
As per Chapter 6, Section 26 (1) (e),
Every Developer and the entrepreneur shall be entitled to the following exemptions, drawbacks and concessions, namely:
(e) exemption from service tax under Chapter-V of the Finance Act, 1994 on taxable services provided to a Developer or Unit to carry on the authorised operations in a Special Economic Zone;
From the above provisions of the SEZ Act, it is very clear that the services are considered as export if they are "PROVIDED" from DTA and there is no stipulation that these services are to be consumed within the SEZ. After all the MOC officials seem to have better understanding of the concept of services than the very MOF counterparts who administer the tax, they never used the word consumed in the Act. Unlike goods, since the services are not tangible, the condition that the exemption is available only if they are consumed within SEZ beats logic.
When the issue was taken up by the SEZ units, the MOC seemed to be convinced that the "consumption within SEZ" is a ridiculous condition contrary to the provisions of the SEZ Act and pursued the matter with the DOR (Department of Revenue) in high level meetings in the last few months. Sources reveal that the DOR has justified the condition and informed the Additional Secretary, Department of Commerce, vide letter D.O.F.No.354/163/2006-TRU Dated : 23/10/2007 that the consumption condition is correct on the ground that:
Section 26(1)(e) of the SEZ Act, 2005 provides exemption from service tax on taxable services provided to a developer or a unit to carry on the authorized operations. This section clearly envisages services consumed for operations in a Special Economic Zone. (Where is this word CONSUMED in Section 26 Sir?) Section 28 enables the Government to prescribe the period during which services could be provided in a unit or Special Economic Zone without payment of service tax. Section 55(2)(h) provides rule-making power to prescribe terms and conditions subject to which services from DTA to SEZ be exempted from service tax. Rules 31 of SEZ Rules exempt from payment of service tax only on taxable services provided for operations in a SEZ. From the foregoing provisions of the Act and the Rules, it is evident that the scheme recognizes the intangible nature of the services and also envisages exemptions only for those services which are consumed within a SEZ. Department of Revenue would not be in a position to verify the consumption of service since the consumer is an SEZ. The SEZ authority will also not be in a position verify the condition since consumption takes place outside SEZ. Therefore, such an exemption is difficult to administer and prone to misuse.
Is the view taken by the DOR justified? Do the foregoing provisions of the SEZ Act envisage "consumption" within the SEZ as understood by DOR? Is it difficult to verify the consumption of services by the SEZ Units by respective authorities? The Cenvat Credit of service tax is allowed for manufacturers on various services "used" in or in relation to the manufacture of final products/ output services. There is no condition in these rules that the input services are to be "consumed" within the factory of manufacturer. When crores of rupees of service tax credit is availed by the manufacturers, and the revenue department is in a position to verify these and check the misuse, where is the difficulty in verifying the consumption by the SEZ units? Or is it because the manufacturer pays revenue they can be trusted and the SEZ units do not bring revenue so they get step motherly treatment beacuse it is the baby of the MOC?
It seems that MOF is also referring to the Notification 41/2007 providing for refund of few services which are not in the nature of input services. But this will not solve the problem for SEZ units as they cannot avail the credit of service tax paid on the input services unlike the DTA manufacturers.
The narrow interpretation of the department of revenue is hitting the SEZ units hard and they are forced to pay service tax though the SEZ Act contains provisions to provide exemption.
Sources reveal that the MOC top brass in high level meetings with the revenue officials having failed to convince them to remove the "consumption" clause was prepared to issue their own circular form MOC and addressed a letter dated 22.10.2007 communicating the intention of the Ministry of Commerce (MOC) to issue a circular stating that the services consumed outside SEZ attributable to SEZs shall also be exempted from the levy of service tax under the existing provisions of SEZ Act and Rules made thereunder.
However the attempt was reportedly thwarted by the revenue officials by taking shelter on the recommendation of the Prime Minister's Economic Advisory Council (EAC) on end use based service tax exemptions that the first point tax exemption is a poor practice, leads to leakage and the circular by MOC would be inconsistent with the recommendations of the EAC. The same was communicated by the Revenue Secretary to the Commerce Secretary vide letter dated 23.10.2007. Subsequently the views were also communicated to the Director General of Service Tax and Director General of Export promotion vide letter dated 24.10.2007.
It is high time the DOR woke up to the reality and do something to give life to the provisions of the SEZ Act. There is no point in taking a view that the exemption will result in misuse. Though the TRU letter dated 23.10.2007 says that it was suggested and agreed in a meeting, wherein Secretary (Revenue), Adviser to FM, then Secretary (Commerce), then DGFT (presently Secretary (Commerce), DG (Export Promotion, ADG (EP) were present, to make provisions on place of supply of services similar to Export of Service Rules and Import of Service Rules adopted for the purpose of levy of service tax, nothing has really been materialized so far. With the result, today, we are now in a ridiculous state of affairs where if you engage a cab for your employee to go to Pakistan, the same is not taxed (Rent-a-cab service is
considered as export if partly performed in India and party performed abroad as per the export of services rules 2005) and the same is taxed if a SEZ unit in Gurgaon engages a cab to pick up its employee from Delhi as the service is not consumed within SEZ.
Tail Piece:
As per Section 51(1) of the SEZ Act 2005,
51. (1) The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.
Now that the exemption notification issued by the DOR is inconsistent with the provisions of the SEZ Act, it appears that the provisions of the SEZ Act will have overriding effect, an argument which may not be palatable to Revenue.
In the meantime, when a service provider is providing a service to a unit in the SEZ, how does he ensure that the service will be consumed within the SEZ? And what would happen to services partly used in SEZ and partly in DTA?
