A Note on the Service Tax Refund mechanism under New Service Tax Regime SEZ - Cover Story
In the year 2012, service tax law in our country is attaining the age of 'majority' and coinciding with this age of majority, the legislation governing service tax is all set to get a makeover from July 1, 2012 by a broadening of the tax base to bring in all the 'services' and by statutorily declaring certain activities as 'taxable services'. The new tax regime also provides for certain specific exemptions/abatements to a few services and introduces the concept of negative list of services.
To achieve this object, certain key amendments are made in Chapter V of the Finance Act, 1994 ('FA 1994') by virtue of s.143 of the Finance Act, 2012 ('FA 2012') whereby the existing provisions of sections 65, 65A, 66, 66A of FA 1994 will fade into oblivion with effect from July 1, 2012 and in their place sections 65B, 66B, 66C, 66D, 66E and 66F will come into vogue. The most significant amongst all the changes is the Parliament's endeavour to define the word 'service' in the new service tax regime for the first time, which was never attempted before in the last eighteen years of this legislation's existence.
Briefly adverting to the new provisions of service tax legislation, it may be noted that hitherto s. 65 provided for 'definitions' of certain words/phrases while the new s. 65B provides for 'interpretation' of certain words/phrases. While s. 65A provided for provisions dealing with 'classification' of taxable services, the new s. 66F provides for principles of interpretation of specified descriptions of services or bundled services.
And s. 66 was hitherto the charging section and now this is replaced by the new s. 66B. Lastly, while s. 66A hitherto provided for levy of service tax by way of reverse charge mechanism, in the new regime s. 66C is introduced which provides for a complex mechanism to determine the place of provision of services with a set of specific rules to be put in place with effect from July 1, 2012 [Notification No. 28/2012-ST dated June 20, 2012 issued to notify the Place of Provision of Services Rules, 2012 ('POP Rules')].
In addition to the above changes, the Central Government has also brought in the concept of negative list of services through the new s. 66D and identified a set of 'declared' services through the new s. 66E. The Finance Minister released a Guidance Paper explaining the various concepts introduced in the new service tax regime which is going to be effective from July 1, 2012.
Having outlined the broad contours of the new service tax regime, I shall now advert to the crux of this article which is the concept of 'refund of service tax' paid on taxable services availed by a Unit in a Special Economic Zone ('SEZ') or a Developer of SEZ.
It may be noted that s. 26(e) of the Special Economic Zones Act, 2005 ('SEZ Act') provides for exemption from service tax under Chapter V of FA 1994 on taxable services provided to a Developer of SEZ or Unit in a SEZ to carry on the authorised operations in a SEZ. Further, Rule 31 of the Special Economic Zone Rules, 2006 ('SEZ Rules') provides for exemption from payment of service tax on taxable services under s. 65 of FA 1994 rendered to a Developer of SEZ or a Unit in a SEZ (including a Unit under construction) by any service provider for their authorized operations in the SEZ.
At the outset, I would like to bring to the kind attention of the authorities concerned in the Ministry of Commerce, Government of India that, with effect from July 1, 2012, s. 65 of FA 1994 will no more be available on the statute and in its place a host of other provisions are being put in place (as briefly narrated in the foregoing paragraphs) and therefore, Rule 31 of the SEZ Rules requires an immediate amendment to align with the new service tax regime put in place by the Finance Ministry.
As stated above, s. 26(e) of the SEZ Act read with Rule 31 of the SEZ Rules clearly provides for an exemption from levy of service tax on taxable services rendered to a Unit or a Developer of SEZ by any service provider for their authorized operations in the SEZ. This exemption from levy of service tax is granted by the Ministry of Finance, Government of India by way of a new Notification No. 40/2012-ST dated June 20, 2012 which will be effective from July 1, 2012 (till June 30, 2012 the current exemption Notification No. 17/2011-ST dated March 1, 2011 applies). Notification No. 40/2012-ST dated June 20, 2012 shall supersede the existing Notification No. 17/2011-ST dated March 1, 2011.
Notification No. 40/2012-ST dated June 20, 2012 exempts the services on which service tax is leviable under s. 66B of FA 1994 and received by a Unit located in a SEZ or a Developer of SEZ and used for their authorized operations, from the levy of service tax, education cess and secondary and higher education cess. This exemption shall be provided by way of refund subject to the fulfilment of conditions and procedure prescribed in the said Notification.
However, where the specified services received in the SEZ and used for the authorized operations are wholly consumed within the SEZ, the person liable to pay service tax has the option not to pay the service tax ab initio and spare the Unit in a SEZ or a Developer of SEZ from the hassles of claiming the exemption by way of a refund in terms of this notification.
The Notification stipulates that the meaning of the phrase 'wholly consumed' is governed by the POP Rules. If the specified services received by the Unit in a SEZ or a Developer of SEZ are not wholly consumed within SEZ, the maximum refund shall be subject to the formula prescribed in the said Notification. As per the formula, the maximum refund shall be to the extent of the ratio of export turnover of goods and services multiplied by the service tax paid on services (other than wholly consumed services) to the total turnover for the given period to which the claim relates.
The other important conditions stipulated in the said Notification are:
a) The Unit in a SEZ or a Developer of SEZ shall obtain a list of services that are liable to service tax as are required for the authorised operations ('specified services') approved by the Approval Committee of the SEZ concerned.
b) For claiming ab initio exemption, the Unit in a SEZ or a Developer of SEZ shall furnish a declaration in Form A-1 appended to this Notification and verified by the Specified Officer of the SEZ in addition to the list specified above. The Unit in a SEZ or a Developer of SEZ who does not own or carry on any business other than the operations in SEZ, shall declare to that effect in said Form A-1.
c) A Unit in a SEZ or a Developer of SEZ who is registered as an assessee under the Central Excise Act, 1944 ('CEA 1944') or the Rules made thereunder, or the FA 1994 or the Rules made thereunder, shall file the refund claim with the Assistant/Deputy Commissioner of Central Excise having jurisdiction over the SEZ or registered office or the head office of the SEZ Unit or SEZ Developer, in Form A-2 appended to this Notification.
d) The Unit in a SEZ or a Developer of SEZ who is not so registered under CEA 1994 or FA 1994 shall, before filing a refund claim under this notification, file a declaration with the Assistant/Deputy Commissioner of Central Excise having jurisdiction over the SEZ or registered office or the head office of the SEZ unit or Developer, in Form A-3 appended to this Notification.
e) The Assistant/Deputy Commissioner of Central Excise shall, after due verification, allot a service tax code number to the unregistered SEZ Unit or Developer of SEZ within seven days from the date of receipt of the said declaration in Form A-3.
f) The Unit in a SEZ or a Developer of SEZ claiming the exemption by way of refund, should have paid the amount indicated in the invoice, bill or challan, including the service tax payable, to the person liable to pay the said tax, or the amount of service tax payable under reverse charge in terms of the relevant provisions of FA 1994.
g) No CENVAT credit of service tax paid on the specified services used for the authorised operations in a SEZ is availed under the CENVAT Credit Rules, 2004.
The Notification further stipulates that the refund claim shall be filed within one year from the end of the month in which actual payment of service tax was made by such Developer or Unit to the registered service provider or within such extended period as the Assistant/Deputy Commissioner of Central Excise shall permit in this regard.
The refund claim shall be accompanied by the following documents:
a) A copy of the list of specified services required for the authorized operations in the SEZ, as approved by the Approval Committee (wherever applicable, a copy of the declaration made in Form A-1).
b) An invoice or a bill or a challan, issued in accordance with the provisions of FA 1994 or Rules made thereunder, in the name of the Unit of a SEZ or a Developer of SEZ, by the registered service provider, along with original documents showing proof of payment for such specified services used for the authorised operations and service tax paid thereon.
c) A declaration by the Unit in a SEZ or a Developer of SEZ to the effect that –
After proper verification of the refund claim supported by the prescribed documents and accounts submitted along with the claim, the Assistant/Deputy Commissioner of Central Excise shall grant the amount claimed as refund. While it may be noted that the Notification provides for recovery of erroneous refund and such recovery shall be made in terms of the relevant provisions of FA 1994 [i.e. in terms of s. 73(1) of FA 1994], it does not specify the time limit within which the Assistant/Deputy Commissioner of Central Excise is supposed to sanction the said refund. The authorities concerned in the Finance Ministry/CBEC are requested to suitably amend this Notification so as to provide that the refund mechanism shall be governed by the provisions of sections 11B and 11BB of CEA 1944 as is made applicable to service tax refunds by virtue of s. 83 of FA 1994.