The Hindu Business Line : A debate on rebate

DURING the one decade of existence of service tax law, the lawmakers thought it prudent to retain the classic norm to recognise services export — receipt of money in convertible foreign exchange.

This norm appeared to be serving its purpose by bringing in the greenback into the country whilst providing tax breaks for the provider.

In 2004, the Government announced The Rules for Export of Services, which used a "destination based" norm to recognise export of services.

All the 71 taxable services at that point in time were categorised into a) property being located outside India, b) provision of service outside India, and c) recipient of service being outside India.

Notification Nos 11/2005 and 12/2005, both dated April 19, 2005, specify the nuts and bolts of the export rebate.

The Rules

The sine qua non to qualify as an export service are:

a) that the taxable service has been exported in terms of rule 3 of the said rules and payment for export of such taxable service has been received in India in convertible foreign exchange;

b) that the service tax and cess, rebate of which has been claimed, have been paid on the taxable service exported; and

c) the amount of rebate of service tax and cess admissible is not less than Rs 500.

There is the usual threatening statement that in case the service tax and cess, rebate of which has been claimed, have not been paid or the taxable service, rebate on which has been claimed, has not been exported, the rebate paid, if any, shall be recoverable with interest.

Form ASTR 1 has been devised by the Department, wherein the exporter needs to make some declarations and provide documentary evidence supporting the export.

Rebate on inputs

If one thought that that was enough, Notification No 12/2005 works on rebate on inputs service tax provided. Here, too, minimum norms have been prescribed: a) that the taxable service has been exported in terms of rule 3 of the said rules and payment for export of such taxable service has been received in India in convertible foreign exchange;

b) that the duty, rebate of which has been claimed, has been paid on the inputs;

c) that the service tax and cess, rebate of which has been claimed, have been paid on the input services;

d) the total amount of rebate of duty, service tax and cess admissible is not less than Rs 500.

Every alternate Notification under service tax law talks of a rebate or benefit provided Cenvat credit has not been utilised, giving the plain reader the impression that using Cenvat credit is a sin.

Notification 12/2005 does this, and in style, by promising to levy interest et al in case it has come to the notice of the Department that Cenvat credit has been taken. ASTR-2 is the nominated form along with the usual accompaniments.

Exempt it

Service providers would be a touch disappointed with the Rules, as they would have expected a straight exemption than paying the tax and claiming a rebate.

With a global footprint becoming a necessity to even survive in business, the services sector should witness a boom in business. With India signing the GATS agreement, two-way traffic in the services sector will become a reality.

The history of export incentives in India shows that there has been reliance on exemptions rather than rebates with mathematical formula to keep the exemption in check and sunset clauses being provided for some exemptions. Something similar needs to be done here too.

The forms, declarations and documentation would make one spend a lot of time in the Department working on getting the rebate.

Once over-reliance on the tax administration is built in, litigation follows. An exemption scheme would rule out this possibility.

(The author is a Hyderabad-based chartered accountant.)

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