Gaurav Arya

Gaurav AryaHeavy pendency of service tax refund / rebate claims of exporters with service tax department raises a serious question on government’s promise of ease of doing business in India. Where on one side Indian Industry is facing huge demands in Income Tax by Transfer Pricing adjustments, on other side delay in indirect taxes refunds is a hit of double edge sword. Not only it affects the liquidity of the exporters, but their productivity and morale also goes down. Also it raises the doubt on integrity and competency of service tax department. Moreover it will also impact on the successful implementation of most awaited fiscal reform of India Goods and Service Tax Act (GST).

On the principle of taxes cannot be on export, government of India grant rebate / refund of service tax paid on input taxable services which are used for providing any taxable services. Idea behind the law is to incentivised exporter by return back the money paid on input taxes on input services/inputs for exporting services. But the ground reality is too much differing from the promises and intention of the government.

Extract of CAG report on pendency of Service Tax Refund reflects the actual position as under: –

Age-wise pendency of Service Tax refund cases

(Rs. in crore)

Year Outstanding Balance plus claims received Total number of refund claims pending as on 31 March Refunds Claim Pending for
Less than one year Over One Year
Number Amount Number Amount Number Amount
FY 12 24,412 6,104 60,757 4,276 46,191 1,828 14,566
FY 13 23,803 7,906 41,874 5,824 30,018 2,082 11,856
FY 14 23,145 8,154 4,487 6,391 3,582 1,763 905

(Source: Figures furnished by the Ministry)

CAG Comments – It is observed that though total number of refund claims pending have been increased by 248 in FY 14 over FY 13 but the amount involved have reduced drastically by Rs. 37,387 crore which needs to be examined.

Source:-http://saiindia.gov.in/English/home/Our_Products/Audit_Report/Government_Wise/union_audit/recent_reports/union_compliance/2015/INDT/Report_4/Chap_1.pdf

Let us understand the provisions for refund / rebate of service tax, relevant notifications, time limits and case laws.

Governing Rule

Rule 6A of Service Tax Rules, 1994 is the governing rule to determine whether a particular service is export or not. Rule 6A stipulates six conditions, all the six conditions to be fulfilled cumulatively for service provided or agreed to be provided shall be treated as an export of service –

Conditions of Rule 6A of Service Tax Rules,1994 Description
the provider of service is located in the taxable territory, To determine the location of service provider / receiver, place where it is registered under service tax laws is treated as its location. If he is not registered, than location of its business establishment, fixed establishment, place of residence (whichever is available) is treated as its location.
the recipient of service is located outside India,
the service is not a service specified in the section 66D of the Act, Service must not be listed in negative list of services.

 

the place of provision of the service is outside India, There are 14 rules in Place of Provision Rules, 2012 to determine the place of provision of any service. There are specific rules to determine place of provision of services in relation to immovable property, transportation, value addition service on board of conveyance, events/conferences/seminars, performance based services, specified services etc. Also there is default rule to determine the place of provision of residuary services. ( Services for which there is no specific rule is known as ‘residuary services’)

 

 the payment for such service has been received by the provider of service in convertible foreign exchange; and Payment for services has been received in convertible foreign exchange. There may be the case where the foreign customer has paid the consideration in Indian Rupees instead of foreign currency and bank has issued Foreign Inward Remittance Certificate. Than in that case also export condition is deemed to be fulfilled as held by honourable CESTAT Mumbai in the case of Sun-Area Real Estate Private Limited Vs. Commissioner of Service Tax, Mumbai-I   [2015-TIOL-956-CESTAT-MUM]. Reliance has been placed on FEMA Notifications 9/2000-RB and FEMA 14/2000-RB dated May 3, 2000 issued by RBI under Foreign Exchange Management (Realisation, Repatriation and surrender of Foreign Exchange) Regulations, 2000.
The provider of service and recipient of service are not merely establishments of a distinct person in accordance with the Explanation 3(b) to Section 65B(44) of the Act. Last condition for export of services is that service transaction between establishments of same person doesn’t qualify export. It should be between the establishments of separate person.

Thus, if Indian Branch of a foreign company provides services to the foreign company, then it cannot be regarded as export (although such branch and head office are regarded as deemed separate persons).

However it is pertinent to note that if the service provider located outside India and Service receiver is in taxable territory and these are the establishment of same person, than it is treated as import of service and service tax is to be paid on it. However in vice versa situation, the said transaction is not an export of services.

Notification for refund / rebate of service tax paid on input services used in export of services.

Once it is determined that the particular service is exported in terms of Rule 6A of Service Tax Rules,1994, next is to get the rebate / refund of Service Tax taken on input services used in export of services.

In terms of Rule 6A(2) of Service Tax Rules,1994, to give benefit of rebate of service tax paid on input services, government of India has issued Notification 39/2012 – ST dated 20th June, 2012 and in terms of Rule 5 of CENVAT credit rules, 2004 to refund unutilised Cenvat Credit availed in export of service government of India has issued Notification 27/2012 – CE (N.T.) dated 18th June, 2012.

Detailed comparison of two notifications is as given below: –

 

Points of Comparison

Provisions of Notification Comparison Points
Notification 27/2012 – CE (N.T.) dated 18th June, 2012

 

Notification 39/2012 – ST dated 20th June, 2012

 

Notification 27/2012 – CE (N.T.) dated 18th June, 2012

 

Notification 39/2012 – ST dated 20th June, 2012

 

Governing Provision Rule 5 of Cenvat Credit Rules, 2005.

 

Rule 6A (2) of Service Tax Rules, 1994. (Powers conferred by Section 93 A of the Finance Act,1994)

 

It’s for refund of unutilized Cenvat Credit in relation to export of services It grants rebate of service tax paid on input services used in export of services
Rebate V/S Refund Refund means paying back money which is excess paid or not required to paid Rebate means incentive or discount. Refund is natural right and returned to that person who had paid it. Rebate is a not a natural right. It pays back in form of incentive or discount.
Declaration No Prior Declaration required to be filed

 

Prior Declaration regarding value, description and quantity of Input services & output service have to be filed before the date of export of services. (Procedural Requirement)

 

It is less procedural in nature and more practical in nature. Filing of prior declaration is merely a procedural requirement, but its impact is very hard. Non filing / delay filing can lead to rejection of claim.
Form of Rebate / Refund Claim Refund claim to filed in Form A within the time limits defined in Section 11B of Central Excise Act,1944

 

Rebate claim is to be filed in Form ASTR -2 within the time limits defined in Section 11B of Central Excise Act,1944 Form A is elaborative one and almost covers every aspect to be examined for sanctioning of refund claim. ASTR-2 form is simpler one but cannot depict the whole picture.
Cenvat Credit Refund of Cenvat Credit availed on Input Services used for providing Output Services exported. (Refund allowed only if it is shown as Cenvat Credit in Service Tax Return.) No Cenvat Credit has been availed on Input and Input services on which rebate claim has been claimed (Means No refund is allowed if Cenvat Credit is shown in Service Tax Return)

 

More Alertness Required. Merely missing an entry creates hurdles in sanctioning of refund. Heavy Record maintenance and reconciliations required to establish the input services are used in export of services
Debit the Refund Amount Amount that is claimed as refund under rule 5 of the said rules is require be debited by the claimant from his CENVAT credit account at the time of making the claim

 

No any amount need to be debited in books of accounts or Service Tax Return. Claim amount should be debited on or before in books of accounts from Cenvat Credit Account and should also be reflected in respective period service tax return. For good accounting practice it is advisable to transfer the debited amount in a separate account head named as “Service Tax Refund Account” It requires strong accounting procedures and strong documentation
Auditor’s Certificate Auditor’s Certificate is required in the Annexure A-I Auditor’s Certificate is not required

 

Extra Cost to be incurred to get the certificate Self certification of documents will suffice the purpose.
Periodicity of Rebate Claims Quarterly Not defined in the notification. No Choice Filing can be Monthly, Quarterly etc.
Correlation of input services to export of services is required. Not Required Required There is specified formula. Rare chances of rejection. More Chances of rejection because of one to One correlation   of Input Services with Export of Services
Refund Formula There is simpler formula to calculate the refund amount. There is no such formula in the said notification. Refund amount is easy to calculate.

 

One to One correlation is to be established
Payment Proof Bank Realisation Certificate (BRC) FIRC / BRC / Foreign Cheques / NEFT Payments One of the procedures of the notification to produce BRC as proof of export proceeds. No Such requirement. Any document evidencing the convertible the payment has been received in convertible foreign exchange suffices the purpose.

Issues

1. Whether Point of Taxation Rules applies to Notification 39/2012?

Notification 39/2012 is silent about Point of Taxation Rules, 2011.

2. Filing of Prior declaration in Notification 39/2012 – Filing of prior declaration is a procedural requirement.

Features of prior declaration

  • Its format is nowhere prescribed in the act, rules, circulars, notifications etc.
  • It is to be filed on estimates of actually services to be provided / received and used along with description and quantity of Input Services and Output Services.
  • It is practically difficult to decide in advance all actually services to be used or provided because there is no set pattern of input-output ratio in service sector as like in manufacturing sector. Also in service sector invoices used to come after availing services and it vary and depends on service used.
  • Service tax department is following poor practice by asking the justification of prior declaration of services with actual claim filed. It rejects claims on the grounds of variation of amounts, non-matching of input-output services list etc.
  • Filing of prior declaration is a procedural requirement of the notification. It should be filed before export of services. In numerous court cases it has been decided that “substantial benefit cannot be denied because of procedural lapses”. Some of the cases are
    • Wipro Limited Vs. Union of India [2013] 32 Taxmann.com 113 (Delhi High Court)
    • Kothari Infotech Ltd V/S Commissioner of Central Excise, Surat – [2013] 38 taxmann.com 298 (Ahmadabad – CESTAT)
    • Mannubhai & Co. Vs. Commissioner of Service Tax (2011)(21)STR(65)- CESTAT (Ahmadabad),
    • M/S Mangalore Fertilizers & Chemicals Vs Deputy Commissioner 1991 (55) ELT 437,
    • CST Delhi vs. Convergys India Private Limited 2009 –TIOL -888-CESTAT –DEL-2009 (16) STR 198 (TRI. – DEL),
    • CST Delhi vs. Keane Worldzen India Pvt. Ltd. 2008 – TIOL -496 –CESTAT –DEL: 2008 (10) STR 471 (Tri. – Del).

3. What can be the payment of proof of export remittance? – Foreign Inward Remittance Certificate (FIRC) or Bank Realization Certificate (BRC)?

Notification 27/2012-CE (N.T.) asked for produce BRC as a proof of realization of export proceeds. However in the judgment of Apotex Research Pvt Ltd & Ors. (2014-TIOL-1836-CESTAT-BANG), it has been pronounced that exporter have to established that consideration in foreign currency has been received in respect of invoices raised by him. Its undue obligation on exporter to produce BRC, however FIRC can suffice the purpose.

4. Refund of Capital Goods, Inputs used in provision of service is not available to Service Provider.

5. Interpretation of word ‘used in’ in the notification 39/2012-ST dated 20.06.2012. There is no test / formula to calculate rebate in said notification. Strict interpretation of the word ‘used in’ leads to one to one correlation between input services and output services is a big worry for exporter.

Time-Limit to Claim Refunds

As per Section 83 of the Finance Act, 1994, some provisions of Central Excise Act, 1944 applies mutatis mutandis in service tax.

Section 11B of the Central Excise Act, 1944 stipulates the time limit for claiming refund claims. As per the section time-limit for claiming rebate / refund is one year from date of export.

CESTAT Bengaluru in the case of Apotex Research Private Limited & Ors (2014-TIOL-1836-CESTAT-BANG) pronounced that the relevant date should be the date on which the consideration has been received where the claimant is service provider and consideration paid where the claimant is service receiver.

Following are the view points, court decisions and interpretations for considering relevant date / filing claim: –

  • Claim is to be filed within one year from the date of export invoice
  • Claim is to be filed within one year from the date of provision of services
  • Claim is to be filed within one year from the date of consideration received for export of service

It is advisable to file the claim within nine from the end of the quarter in which the export remittances received. Let us understand with an example that the January to March quarter refund claim to be filed on or before 31st December (from beginning of quarter) to avoid complications and technicalities.

Whether registration with Service Tax Department is require to claim rebate / refund of Service Tax?

Section 69 of the Finance Act, 1994 stipulates when a person is liable to take registration.

Every person liable to pay the service tax under

  • Chapter V of the Finance Act, 1994
  • Chapter VA of the Finance Act, 2003
  • Rules made thereunder shall

Within such time and in such manner and in such form as may be prescribed, make an application for registration.

Rule 4(1) of the Service Tax Rules, 1994 prescribe the time limit of 30 days from the date on which the service tax under section 66 of the Finance Act, 1994 for make an application to the concerned Superintendent of Service Tax for registration.

In case of export of services, there is no requirement to pay the service tax and hence the law does not mandate to take registration compulsorily.

In numerous court cases, it has been decided registration is not a bar to avail the export benefits. Karnataka High Court held in the case of mPortal India Wireless Solutions (P.) Ltd vs. Commissioner of Service Tax [2011] 16 taxmann.com 353 that there is no statutory provision which prescribed that registration is mandatory and that if such a registration is not made the assessee is not entitled to the benefit of refund

In below cases, courts have pronounced that registration is not the criteria for claiming   refund / rebate other Favourable Cases

  1. Textech International (P.) Ltd. Commissioner of Service Tax, Chennai [2011] 14 taxmann.com 32 (Chennai – CESTAT)
  2. Delhi CESTAT in Wipro BPO Solutions Ltd. vs. Commissioner of Service Tax [2012] 17 taxmann.com 4
  3. Commissioner of Service Tax, Chennai vs. Varizon Data Services (I) (P.) Ltd. [2012] 28 taxmann.com 136 (Chennai – CESTAT)
  4. Metric Solution (P.) Ltd. vs Commissioner of Central Excise, Ahmadabad [2013] 31 taxmann.com 344 (Ahmadabad – CESTAT)

Interest on delayed issuance of service tax refund

As per Section 11BB of the Central Excise Act (applicable to Service Tax by section 83 of the Finance Act 1994 (as amended)), an interest at rate band between 5% to 30% is to be paid in case the refund is not issued within three months of filing of refund application from the date of filing refund application till the date of refund of service tax.

It is advisable to apply for interest on delayed refunds to make the officer’s accountable for it.

Ground Realities of Refunds / Rebates under Service Tax

  • Poor track record of Service Tax Department in granting refunds / rebates the Service Tax.
  • Ambiguities, Complexities and Technicalities in Service Tax law.
  • Shortage of staff in the service tax department leads to inordinate delay.
  • Internal Revenue targets of the taxation departments are one of the major causes of rejection and delay in granting refund/ rebate claims.
  • Strict Audit of Service Tax department by Comptroller Auditor General (CAG) is one of the reasons for delay and rejection. Nobody wants to burn his/her hands in fire.
  • Export nexus theory of the department is major hurdle in granting refund. Service Tax department take plea of no nexus to reject refund.
  • Shortage of consultants and experts in the market.
  • Competency of Service Tax Officers is major concern. Many of the officers have orthodox excise mindset and have same working style.
  • Corruption is also the biggest drawback.

Ambiguity in Service Tax on Exports

  • Rule 6(8) of Cenvat Credit Rules, 2004, prescribes to treat export of services as exempted services if payment is not received within one year after the expiry of time or extended time limit prescribed by Reserve Bank of India.
  • In effect of this rule, after the expiry of prescribed time-limit Cenvat credit in relation to export of services is to be reversed because the services will be treated as exempted services and as per Rule 6 of Cenvat Credit Rules, 2004, Cenvat credit related to exempted services is to be reversed. The said rule is not clear about the treatment of export of services if the amount received later on because export is complete on receipt of export remittance.
  • It seems to be contrary with the principle of taxes cannot be export, because once all the export conditions are fulfilled, person is entitled to get the export benefits in the form of refund / rebates which is not the case here because the Cenvat credit already reversed on account of delay in receipts of export proceeds.

POSITION IN GOODS AND SERVICE TAX

In the first discussion paper on Goods and Service Tax issued by Empowered Committee of State Finance minister, Para 3.7 stipulates that exports would be the zero rated and similar benefits may be given to Special Economic Zones as well.

Proposed model of GST in India is dual model GST where both centre and state have power to levy taxes on goods and services. Presently only centre have power to levy service tax on services. But in GST regime, state government will also have the power to levy service tax on service tax. It means that there will be two taxes on services – Central taxes and State taxes.

It is pertinent to note that in GST era, exporter might have to file separate claims to central government for refund / rebate of taxes paid to central government and to state government for refund/rebate of taxes paid to state government.

Expectations from GST Regime

  1. Online filing of refund/rebate filing, follow-up and sanction mechanism.
  2. Strict provisions for department to adhere the time Limit to issue refund/rebate.
  3. Mandatory interest to be paid by department on delay in sanctioning refunds/ rebates.
  4. Clarity on issues of time-limit of filing claims, proof of export remittance, nexus theory etc.
  5. Impractical conditions like prior declaration should not be there.
  6. Helpdesk or special helpline number for exporters.
  7. Simpler formulas to calculate refund/rebates.

Source:

  1. Central Excise Act, 1944
  2. Service Tax Rules,1994
  3. Finance Act, 1994
  4. First Discussion paper on Goods and Service Tax issued by Empowered Committee of State Finance Ministers
  5. cbec.gov.in
  6. saiindia.gov.in
  7. Cenvat Credit Rules,1994

(About the Author– Gaurav Arya is Chartered Accountant of May,2011 attempt. He is having 4 years of post qualification  experience. His core area of expertise is service tax. Presently he is working with reputed CA firm of  Delhi. He is actively engaged in analysis & interpretation of provisions under the Service Tax statute,  Customs Act, CENVAT Credit Rules, provisions pertaining to VAT, Excise for various multinationals in Information Technology, BPO/KPO, Publishers, Service, Logistics, etc.)

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3 responses to “Service Tax Refund/ Rebate to Exporter of Services– Analysis and Insight”

  1. Tarun Jain says:

    Dear Sir,

    I have a small query.

    Supposing I have applied for a refund amount of Rs. 10 Lakhs.
    The Refund sanctioned by the department is only Rs. 8 lakhs owing to a few ineligible invoices.

    How do I treat the balance of Rs. 2 Lakhs (ineligible for refund) in the books of accounts?

  2. Thaneesh Kumar says:

    Very much useful…. Thank u Gaurav Arya

  3. PG says:

    Is it correct that I need FIRCs of all remittances for filing a return? Because when I asked those towards bank its costing me a lot, almost same as my return value, so any other option? Bank statement will do along with invoices? My CA dont have much idea so your experience might be helpful

  4. sbk says:

    I provide consultancy services to a US company and paid in USD. I pay the service tax on my invoice value. Please let me know if I can get a refund

  5. pramod says:

    Your article is informative and exhaustive. Whether refund of service tax also includes refund of cess including swachh cess

  6. Pavan Kumar says:

    Your article on service tax refund claim is really informative and got clarity on some of the doubts i had.

    I work in a software company in taxation department. While processing for the service tax refund claim for our company for Oct’14 to Dec’14 quarter, we have calculated the export turnover on the based on RBI Exchange rate as against the CBEC exchange rates, which was the practice earlier. The same is on account of Notification No. 19/2014 Service Tax as per which the exhange rate to be as per generally accepted accounting principles.

    My doubt is which is the most appropriate exchange rate to be considered out of the below:
    1. RBI Exchange rate
    2. As per BRC from bank or
    3. As considered in books of accounts – for us it is based on OANDA rates.

    There was lot of deliberation on this aspect. but finally we had to go be auditors requirement who is firm on using only RBI rate.

    But the department whether is it going to accept it or are there any consensues on this already.

    Please help me in getting more clarity on this aspect.
    Hope my query was clear and understandable.

    Thanks in advance

  7. Apoorv rao says:

    Sir it is a very good article

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