Exporters seek service tax waiver

NEW DELHI: Exporters, hit hard by the global economic slowdown, have sought exemption from payment of service tax in the forthcoming Union Budget.

In a meeting with the revenue department, exporters pointed out that while the government allows refund of taxes on a number of services, very little refund has actually taken place because of the cumbersome process involved.

According to Delhi Exporters' Association (DEA) president SP Agarwal, who led a delegation to meet revenue secretary PV Bhide earlier this week, the problem with refund of service tax is a long-pending issue for exporters.

"We are hardly getting any refunds. If the government wants us not to pay service tax, then we should get an exemption," Mr Agarwal said.

According to DEA, exporters are working on just 4-5% profit margins as demands have shrunk due to the global slowdown and it is very difficult for most to pay a 10.5% service tax.

He added that the revenue secretary has assured exporters that the government would take steps to solve the problem. "We are hopeful that the Budget would sort out the issue," he said.

The delegation also asked the government to exempt exporters from paying value-added tax (VAT) at the state level. DEA pointed out that while as per law the refund of VAT is to be made to exporters in one month, very little is being refunded within the given period. "There is also a provision for 8% interest on delayed refund, but not a single paisa has been paid so far," Mr Agarwal said.

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Department Commerce backs tax exemption for SEZ services

NEW DELHI: The finance ministry should exempt companies in special economic zones (SEZ) from paying tax on the services they consume instead of making them seek refunds, according to the commerce department. Earlier this month, the finance ministry had notified that instead of being exempt, companies within SEZs would have to claim refunds for the tax they pay on services.

“We have written to the revenue department asking it to allow SEZs exemption on service tax within the zone as was being done earlier. For services outside the zone, developers and units could be given reimbursements on the taxes paid,” said a commerce department official.

The industry prefers exemptions over reimbursements as the latter takes time, besides locking up funds with the government for a considerable period. A 10% tax is imposed by the government on 100 services.

Initially, the government exempted companies from tax on services consumed within SEZs. SEZs then demanded that exemption should be extended to authorised services consumed outside the zones such as port-handling, in-land transportation, courier and banking.

Following months of discussions between the commerce and revenue departments, a notification was issued allowing refunds on services availed both outside and inside the zones. But the exemption was short-lived. It was laid down that SEZ developers and units will have to claim reimbursements.

“We have pointed out to the revenue department that this change is unfair especially at a time when the industry is already starved of funds,” the official said. The revenue department has, however, not yet responded to the commerce department’s request.

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Revision of customs duties on certain items and procedural simplification in Service Tax refund to exporters

In the wake of the recent fall in the international prices of commodities and with a view to safeguard the interests of domestic producers, Government have carried out certain changes in the customs duty rates. The details of these changes are as under:

(i) Withdrawal of the full exemption from customs duty granted earlier on specified iron and steel items such as Pig iron, spiegeleisen, semi-finished products, flat products and long products. Consequently, they will be subject to a basic customs duty of 5% ad valorem.

(ii) Withdrawal of full exemption from customs duty granted earlier on crude soyabean. Consequently, crude soyabean oil will be subject to a basic customs duty of 20% ad valorem. There is no change in the import duty on refined soyabean oil.

These changes come into effect on the 18th of November, 2008. Notification No.122/2008-Customs dated 18.11.2008 has been issued in this regard.

With a view to simplify the refund based service tax exemption scheme on taxable services attributable to exports, the time limit for filing refund claims has been extended from 60 days to six months. In respect of technical testing and analysis service, the documentation required for claiming refund has been simplified. Notification No.32/2008-Service Tax dated 18.11.2008, amending notification No. 41/2007-Service Tax has been issued in this regard.

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India, Singapore set to sign agreement in services

NEW DELHI: India and Singapore are set to sign an agreement on services shortly under a comprehensive economic treaty between the two, enabling architects, nurses, dentists and chartered accountants to practice in each other's country, government sources said.

"This will be the first services agreement that India signs with any country. It would cover movement of personnel from professions like dental, architecture, nursing, medical and chartered accountancy," a senior official said here.

Once the agreement comes through, professionals from India and Singapore would not be required to write a separate examination or meet any other criteria to be able to start practise in the other country.

The government is also asking councils of various bodies like dental and medical to discuss with their counterparts in Singapore and work out an enabling provision to recognise qualifications of professionals from the two countries.

"We are asking the councils to expedite the process," he said.

The Comprehensive Economic Cooperation Agreement signed between India and Singapore in 2005 has four components -- a Free Trade Agreement in goods, an arrangement to boost trade in services and package to promote investment flows and avoidance of double taxation treaty.

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Goods & services cannot be treated on par under Foreign Trade act, feels MoF

NEW DELHI: The trade in services is set to acquire a new meaning with the government planning to define the term services. The new definition is expected to be in tune with the taxation laws. Services would be defined by amending the Foreign Trade (Development & Regulation) Act, 1992, an official source said. The aim is to bring clarity in the trade of services, it added.

The proposal, mooted by the commerce ministry, has been vetted by the finance ministry. The finance ministry is, however, not in complete agreement with the commerce ministry’s proposal and has suggested to keep the new definition in line with the provisions laid down in the tax laws as all services are not taxed in the country, sources said.

The Foreign Trade (Development & Regulation) Act covers trade in goods but does not have a provision for trade in services. The commerce ministry has proposed to extend coverage of the Act to facilitate trade in services, sources said. It has proposed to replace ‘trade in goods’ with ‘trade in goods and services’ in the Act.

The finance ministry, in its comments on the proposed move, has made it clear goods and services cannot be treated on par under the Act. This is especially because all cross-border services are not treated as imports or exports like goods. The practice is also followed internationally. Considering the complexities involved in determining the place of supply of service provision and its evolving nature, like classification of goods for Customs purposes, classification and determination of place of supply of services for international trade in services would have to done as per the provisions laid down by revenue department.

Moreover, there are also no uniform practices in deciding whether a cross-border transaction of service is import or export. This is especially in the case of services like telecom, broadcasting and electronic commerce, the ministry has pointed out. Sources said the proposed changes will have to be carried out keeping in mind that the provisions do no have an implication on taxation of services and service tax collections.

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Tax refund to exporters of 3 more services allowed

Couriers, goods transport agencies, container transportation by rail..The three services are not in the nature of `input services’ but could be linked to export goods and hence the decision to allow refund of service tax.

New Delhi, Feb. 19 The Finance Ministry on Tuesday extended the service tax refund scheme for exporters to three more taxable services, taking the overall number of such services to 13.

The three services qualifying for service tax refund are courier services, goods transport agency services availed for transport of export goods from the ‘place of removal’ (mainly factory gate) to actual place of export i.e inland container depot (ICD)/airport/port and transportation services in containers by rail from the ‘place of removal’ to ICD/airport/port.

These three services are not in the nature of `input services’ but could be linked to export goods and hence the decision to allow refund of service tax.

Service tax paid by exporters on input services used for export goods is neutralised under various existing schemes like drawback scheme.

“This is a welcome move. Initially they (Finance Ministry) had given service tax refund on movement of goods on both rail and road from ICD to port of export. Now they have completed the chain and given it from factory gate to port of export on both rail and road. This would particularly benefit exporters in the hinterland who were paying huge service tax for movement from factory gate to ICD”, said the Director General of Federation of Indian Export Organisations (FIEO).

He, however, rued that the Finance Ministry was not looking to refund service tax on important services like commission paid by exporters to foreign agents, overseas travel for export promotion, fees to clearing house agents and fees paid to chartered accountants for export documentation. “Service tax on these services should also be rebated”, he said.

So far, the Finance Ministry has specified about ten taxable services, which are not in the nature of input service but could be attributable to exports, as services that would qualify for service tax refund.

These include port services provided for export, transport services on road and rail for movement of goods from ICD to port of export, general insurance services, technical testing and analysis agency services, storage and warehousing services and business exhibition services.

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Cestat rules service tax relief for exporters

New Delhi, Feb 19 The Customs, Excise Service Tax Appellate Tribunal (Cestat) on Tuesday ruled that service tax on commission paid by exporters to agents situated abroad could be levied only prospectively from the date when the relevant Section 66 (A) was introduced in Budget 2006.

The case relates to the revenue department’s appeal for a service tax claim of Rs 8.32 lakh on Bhandari Hosiery Exporters Ltd for the period from July 2004-February 2006. The company is a hosiery goods exporter and pays commission to such agents for getting orders from abroad.

The department contended that as per Rule 2 (1)(d)(iv) of Service Tax Rules 1994, the assessee is laible to pay tax. The Rule was made in 2002, but the Section regarding service tax on commission to foreign agents was introduced only in Budget 2006.

Rejecting the department’s appeal, Cestat held that service tax cannot be levied with retrospective effect on services rendered outside India before April 18, 2006, when Section 66A was introduced in the Finance Act. The department is expected to appeal before the high court shortly.

The company’s counsel J K Mittal said, “This landmark decision has major consequences as many similar cases are pending in other courts. More exporters can get similar relief now. Also, the revenue department will not be able to impose service tax just by bringing in Rules before a relevant Section is introduced in the Budget and passed by Parliament.”

Exporters in sectors like pharmaceuticals, textiles and leather pay a substantial commission to agents based abroad. The commission ranges from 5-25% of the freight on board (FoB) value of exports in pharma sector, and 5-10% in textiles & leather sectors. The commission is paid on around $6 billion worth exports of the total $20 billion worth annual exports from the three sectors. Back of the envelope calculations show that of this amount about $ 5.4 million is paid annually as service tax on commissions to foreign agents.

“This commission is the most effective marketing tool of exporters to promote their new products. The tax would harm their businesses, since exporters find it difficult to get major foreign buyers without the help of such agents,” Ajay Sahai, director general, Federation of Indian Export Organisations said.

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No tax relief for overseas services

The Union finance ministry will not exempt services rendered overseas for executing export orders from the purview of service tax. This is despite the commerce minister’s announcement of the relief while unveiling the export import policy. According to officials in the finance ministry, the 14.4% growth in exports in June 2007 did not justify sacrificing revenues by granting the exemptions. The June figure was lower than the 18% growth achieved in May 2007.

The officials said that though the commerce ministry may have announced the exemption of tax on services rendered overseas, the finance ministry had not found any firm evidence that granting such an exemption would in any way mitigate the impact of the appreciating rupee on exports.

In view of the unkept promises of the exim policy, exporters are having to bear the burden of 12.5% service tax on all payments remitted from the country for services like commission agents who book orders, haulage from port to customers’ premises and expenses incurred in participating in B2B events overseas.

Back of envelop calculations by export organisations show that such expenses constitute 10-15% of the billing amount and a 12.5% service tax translated into an additional payout of 2% of the total export turnover.

“International business does not offer margins of more than 2-4% and the additional liability of service tax wipes off export margins in big markets which are very competitive in any case,” said P K Shah of Nipha Exports and former chairman, Engineering Export Promotion Council (EEPC).

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