The matter of non-availability of refunds of input taxes to service exporters has been the subject of prolonged discussion. It was in recognition of this underlying problem, which detracted from the cost competitiveness of service exporters, that the central government issued relevant notifications in the year 2006 to put in place a framework to enable grant of such refunds.
Subsequent to the issuance of these notifications, simplified procedures for sanction of refunds of unutilised credits were also put in place. While the experience pursuant to these changes has been mixed at best, certain recent developments in this regard appear to suggest that the government is unclear about or is rethinking the scope of these beneficial provisions. If true, these developments need to be viewed with concern and urgent remedial action would need to be taken, in order that the legitimate claims of the service exporters are not disallowed on incorrect and improper grounds.
To contextualise the matter, reference is made to Notifications No. 4/2006(NT) and 5/2006(NT), both dated 14.03.2006. These notifications attempted to place both the goods and the service exporters on par in regard to refunds of unutilised credits on input goods and input services. They laid down the detailed procedures to be followed in relation to the relevant claims.
The fundamental underlying premise was that the output services should have been exported in accordance with the procedures laid down under the Export of Service Rules 2005 (Rules). As indicated earlier, a simplified procedure for sanction of unutilised credits, pursuant to the above notifications, was prescribed vide Circular No.828/05/2006-CX dated April 20, 2006. The Circular stated that pursuant to the advice of the Economic Advisory Council to the Prime Minister of facilitating quick and regular refunds of service tax/excise duty to exporters, the Department of Revenue had drawn up a scheme to provide for granting ad hoc interim refunds, say 80 per cent of the amount due, based on the refund/ claims furnished by the exporters, within 15 days thereof, subject to a final settlement within a short time frame (45 days) from the date of filing such claims.
The simplified procedure was subject to the condition that the claims were complete and supported by the requisite documentation.
The initial challenge for the service exporting community was to demonstrate that they were indeed compliant with the Rules. Earlier articles in this column have elaborated on the problems that service exporters have faced because of the particular wordings incorporated in these Rules.
The renewed challenge in this regard has been that the department has confirmed demands or is in the process of doing so based on a finding that a whole range of services, which were commonly understood to comply with the conditions of the Rules, were held not to be ‘exports’, without any elaboration as to why the department was of this view. Consequently, valid claims of the exporters have been rejected or are in the process of being rejected on grounds which appears to be unsubstantiated and not in line with the decisions of the Service Tax Tribunal.
The more recent challenges have been based on even more tenuous and arbitrary grounds. For instance, an attempt has been made in certain jurisdictions to reclassify several output services from the third category of services, which typically require that the recipient of the services must be located abroad in order to enable the services to qualify as exports, to the second category of performance based exports and to therefore challenge such exports on the ground that they were not performed outside of India and hence did not qualify as exports.
This challenge is clearly erroneous and without any merit. In other jurisdictions, show cause notices have apparently been issued to deny the benefit of the refund claims altogether or to recover even the grant of the adhoc amount of 80 per cent of the refund claims. These notices have challenged the availment of credits on services on the ground that they did not qualify as ‘input services’ as they allegedly did not have any nexus with the output services.
This challenge has been mounted on several services which clearly qualify as ‘input services’ and which have been held to be so, as per decisions of the Tribunal. The Department appears to hold the view that until such time as an internal view is taken by them on a particular matter, regardless of the decisions of the Tribunal, routine show cause notices ought to be issued as a matter of ‘protecting’ Government revenues. This is the reason for the endemic litigation that characterises indirect tax law and administration in the country.
Yet another recent challenge is to allege that the Circular with regard to the simplified procedure referred to above is only applicable to exports of goods and is not applicable to exports of services! This astounding challenge flies in the face of the contents of the said Circular which unambiguously state that they are applicable to all exports, whether of goods or of services. The challenge appears to be based on a completely indefensible reading of one portion of the Circular to the detriment of other parts thereof which, read as a whole, would demonstrate the untenability of the challenge.
There are other frivolous grounds based on which these challenges have been mounted such as the underlying invoices evidencing payment of taxes on inputs not incorporating certain data points, the non submission of original copies of documents which would evidence receipts of foreign exchange in order for the services to qualify as exports, the alleged discrepancies between the declared figures of export turnover and CENVAT credits between the underlying refund claims and the periodic service tax returns and so on.
The important and sobering point is that despite the tardy and halting progress on grant of refund claims to service exports, in the two years that the underlying notifications and the simplified procedure have been in operation, not only has there been no real attempt within the department to remedy this situation but instead it appears that there is a rethink as to whether or not these refunds ought at all to be sanctioned to service exporters.
If India is serious about ensuring its continued competitiveness in regard to provision of services to the world at large, it needs to immediately address the problems highlighted herein so that the benefit of zero rating accrues to the service exporting community with the attendant ability to recoup all unutilised input taxes. Otherwise, it will be a case of exporting our taxes alongwith our exports! This would be inimical to our interests, especially in these very trying times. One hopes that the government would pay heed and rapidly remedy matters.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers
