Procedures for refund unsatisfactory

Theoretically, service tax is supposed to operate as a pure value added tax, in that input taxes are fully creditable against service output taxes. As a result of this netting-off method, the value addition alone will be chargeable to the tax. The input taxes which qualify for this offset or credit are the CENVAT tax paid on goods used in rendering services and the service tax relating to procurement of services, again for rendering the output services. In a situation of export of services, where such exports are typically free of taxes (zero rated in the VAT parlance), the principle is that such input taxes are to be repaid to the exporters of such services. This article addresses the issues that are currently being faced by the exporters of services in recouping these taxes.

By way of brief background, exports of services were not defined or categorised under service tax law for almost a full decade after the introduction of tax in 1994. A departmental circular of 2003 stated, for the first time, that service tax was inapplicable on exports of services and, consequently, envisaged a benefit to such exporters with regard to the service taxes applicable on "secondary services which get consumed/merged with services exported outside India." The circular envisaged an exemption from tax with regard to such secondary services and did not envisage a refund of the taxes so paid. Also, the circular was limited to input services and did not extend to input goods.

The Export of Services Rules were first notified in March 2005, detailing the various criteria for determining the export of services, based on the underlying nature and hence the categorisation of the services. These Rules, in addition, empowered the government to grant a rebate/refund of the service tax/excise tax paid on input services or goods used for provision of the export services. Alternately, the government was also authorised to grant a refund/rebate of the service tax paid on the exported services, whether through utilisation of the input tax credits or by payment of the output service taxes in cash. Accordingly, Notifications 11 and 12 were issued in April 2005 to prescribe procedures for grant of these refunds/rebates.

However, the point to be noted, which is a startling one, is that notwithstanding these provisions which have now been in the statute book for 21 months, there is, as yet, not a single instance of payment of such rebates/refunds to any service exporter. This is a staggering fact and epitomises the abysmal situation that exists on the ground in this regard. The problems are to do both with the unsatisfactory procedures that have been laid out for the purpose of claim of rebate/refund as also with the approach and mindset of the departmental authorities in handling these refund/rebate claims.

One of the procedural requirements to claim rebate under Notification No. 12/2005, which is typically the one in use, is for the exporter to file a declaration, prior to the export of services, estimating the quantum of input services or goods intended to be used for effecting such exports. But the exporters have not been able to claim the benefit in the absence of such a declaration, the filing of which has been quite a problem, given the inability to anticipate or predict consumption of services/goods. This procedure has therefore been very cumbersome to comply with.

Yet another problem, which has been the real reason for the complete absence of grant of rebates till date, has been the problem of determination of whether or not an input service, or for that matter an input good, has been used in the rendition of export services. The definitions of 'inputs' and 'input services' both use the expression 'used for providing services' whereas the particular notification grants the rebate for such 'input services used in the provision of export services'. As a result, despite the requirement to broadly interpret these beneficial provisions in order to grant the envisaged benefits to the exporters of services, the departmental authorities have taken an extremely narrow view and have spent an inordinate amount of time in identifying the nexus and the degree thereof between exports of services and their constituent input services. It is this very elaborate exercise, which is quite needless in law, which has been the real reason for a complete lack of success on the ground in the orm of grant of rebates.

Yet another reason for this unhappy situation is related to the approach and the mindset. Wholly arbitrary and flimsy grounds are taken by the authorities to hold that the inputs are ineligible or that the underlying documentation is erroneous or inadequate. To summarise the point, hyper technical grounds are being taken to somehow deny or delay the rebate/refund process.

Indeed, the problem became so acute that the government constituted a high powered working party to go into the matter and recommend solutions. Apparently, as a result of its recommendations, substantive amendments were made to the CENVAT Rules in March 2006 in order to enable exporters to file rebate/refund claims of input CENVAT credits/service taxes, in case such input taxes were accumulating for want of utilisation, in the form of payment of output taxes for whatever reason, including because of zero rating of exports. Further, a circular was issued in April 2006, to ostensibly accelerate the process of grant of refund whereby the authorities were empowered to sanction 80 per cent of the refund amount in question upon a preliminary and prima facie scrutiny of the refund claim. This amount was to be granted within 15 days of filing of the claim and the balance was to be refunded within 45 days of the claim. Here again, it is correct to suggest that there is today not a single instance of grant of refund under these provisions and the circular in question. This is the situation even in terms of these alternate provisions, where the requirement to establish the nexus between inputs or input services and the export service is wholly absent.

The service exporting community has been therefore subject to this completely unacceptable situation for the past two years and a huge quantum of refund claims is now outstanding. It is imperative that the government addresses the problem without delay, if India wishes to remain competitive in this very vital area of economic activity.

The writer is leader, indirect tax practice, PricewaterhouseCoopers