Special Economic Zones (SEZ) units and developers will now be able to claim refund for tax paid on all input services, irrespective of whether they are consumed inside or outside the zone.

The government’s decision to refund taxes implies that all developers and units in SEZs will now have to first pay a tax on services consumed and then get a refund from the tax authorities.

Till now, the government exempted developers from paying a tax on services that were consumed within the zone. So while services used within the zone were exempted from taxes those consumed outside the SEZ attracted taxes.

Service tax is levied at the rate of 10%. Some of the serviced that units and developers use outisde the zone include courier service, transport service among others.

While the industry has welcomed the move to refund tax on services consumed outsides the zone, it wants the government to give a blanket exemption.

L B Singhal, director general, Export Promotion Council for Export oriented Units and SEZs says: “SEZ Act provides ab-initio exemption from service tax whereas the notification has provided exemption from service tax by way of refund of service tax.

Hence, service tax has to be paid first and then refund has to be claimed. It would result into unnecessary blockage of funds, paper work and transaction cost. Hence it would be appropriate if ab-initio exemption could be provided”.

Says Bipin Sapra, associate director, Ernst & Young: “This notification puts to rest the ambiguity which existed regarding whether the services were actually being consumed in a SEZ or not. However, by allowing the exemption by way of a refund the government has not only increased the transaction cost but also increased the cash outflow of SEZ units”.

The new finance ministry notification exempts services used for ‘authorised operations’ within SEZs, but, developers and units will have to first pay service tax and then claim it back as a refund through the specified mechanism.

Authorised operations are the government approved activities that can be undertaken within a zone. The refund can be claimed by SEZ unit or developer within 6 months from the date of payment of service tax.

The new provision also overrides the tax exemption provided in the SEZ Act. “The notification implies that service tax would now be reimbursed over 6 months for both services consumed within and outside the zone for authorized operations,” said Anita Arjundas, chief operating officer, Mahindra World City Developers.

The move to refund tax paid on services provided outside the zone comes following a decision in this regard by the empowered group of ministers on SEZs headed by finance and external affairs minister Pranab Mukherjee.

Refund of tax paid on services provided outside the zone has been a long-standing demand of SEZ unit owners and developers who had argued that they should not be made to pay tax on services consumed outside the export zone so long as the services were related to production within the SEZ.

The notification clears the ambiguity with regard to eligibility of the service tax exemption in case of input services consumed by SEZ units and developers, that were being disputed by the tax officials.

All the services required in relation to authorized operations of SEZ will have to be approved by approval committee of SEZ which would be called specified services.

Also, developers and unit holders would not be able to claim credit with regard to such input services. Developers and units would also have to give a declaration to claim the refund exemption, to the effect that such service is received by him in relation to authorised operations in SEZ.

The notification will come into effect on or after the date of publication of this notification in the Official Gazette.

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