The clear intention of the Indian government is to not tax the export of services, thereby granting the benefit of input tax credits, either as an offset against other output taxes or as refunds.
However, exporters of services have been facing serious problems in ensuring that their services qualify as zero-rated services, as well as with regard to obtaining the benefit of refunds of input taxes.
In the Export of Services Rules, 2005, there are three categories of services that lay down conditions that are to be met to qualify as exports.
The first category relates to services treated as exports from India if the immoveable property to which these services relate are situated outside India.
The second category pertains to those that require physical performance and are treated as exports if the services are either wholly or partly performed outside India.
The third category is services that are not in the first two categories. In this, the service provider must be located in India and the service recipient located abroad.
A common condition in all three categories, which has caused the most difficulty, is that for the services to qualify as exports, they must be provided from and used outside India.
It is not always clear whether the services can be demonstrated in all instances to be provided from India and/or used outside India.
The Central Board of Excise and Customs has attempted to resolve the matter by issuing a circular that seeks to clarify this matter.
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The circular states that the law has to be read harmoniously and the expression “used outside India” has to be understood in that context. The expression is to be interpreted to only require that the benefit of the services should accrue outside India.
Notwithstanding this circular, there continue to be several situations where service tax authorities continue to question the zero rating of services as exports.
Further, there is doubt as to whether the circular will at all apply to the erstwhile period where the relevant condition was that the services should be “delivered and used outside India”.
Clearly, there is an urgent need to incorporate the contents of the circular in the statute itself, with further elaboration of the intent to grant the benefit of zero rating and its operationalization.
The other significant problem is with regard to getting refund of all input taxes on such exported services.
The process of filing of refund claims, together with related documents, as also the procedural requirements pertaining to their scrutiny before refunds are granted, are extremely cumbersome.
As a result, no refunds of real significance have been granted to the service exporting community.
Also, it appears that the Indian government has not favourably considered a request to exempt input services from the tax.
Taxes must necessarily be paid on input services used in export activities and subsequent refunds are to be granted after that.
Indeed, the recent developments in relation to a similar situation regarding refund of service taxes to the developers or special economic zones and units operating out of them reinforce this understanding.
It is, therefore, imperative that the input taxes are refunded to exporters based on a quick and efficacious validation process.
In these days of credit crunch, it is essential that the refunds be granted without delay.
Indeed, if India is to remain competitive as a provider of services at a global level, it is important that the twin benefits of zero rating of exports of services and refunds of input taxes are actually obtained by the services exporting community.
S. Madhavan is executive director at PricewaterhouseCoopers.