Fear of abuse of Service tax exemption for SEZs
Delhi: The recent decision made by the finance ministry to allow an upfront service tax exemption for all Special Economic Zone (SEZ) units and developers would translate into an additional savings of Rs 1,500 crore annually for such units, as they would no longer be required to wait for refunds.
The service tax incidence or the tax paid on input services for SEZ units and developers is above Rs 8,000 crore annually. Although the input service taxes are to be nullified in reference to these enclaves covered under the SEZ policy, the turbid refund system has practically led to about twenty per cent of the claims getting indeterminately stuck with the authorities at any given time. Those having their operations based either inside or outside of SEZs can avail the benefits extended by the new rule.
Howbeit, officials are now fearing misappropriation of the new rules as they might be subjected to misuse. The department’s field officers, suspect that in the absence of ‘place of provision’ rules to make sure that the services were consumed for exports, the SEZ unit might be used as a front for availing tax exemption for services which are actually being used within operations outside of SEZs.
In accordance with field officers, some IT companies would have had genuinely had grievances pertaining to the delay in receiving the refunds. But with the upfront exemption being permitted across the board, the possibilities of abuse is also raised.
The investigating wings of the tax administration now desires access to the premises of SEZs, in order to validate the genuineness of the invoices, something which has been steadfastly denied by the commerce ministry since a long time to avoid what it believes is interference in export production. According to the notification served by the Central Board of Excise and Customs (CBEC), ‘place of provision’ rules have been nullified to services to SEZ units and developers having their operations based outside the duty free zone.
Instead, the upfront exemption of service tax would be available to all “authorized operations” of such units. The department’s field officers expressed that even operations such as the segregation of scrap is considered as an authorised operation in SEZs, and can legally claim the tax benefit. Cenvat credit facility was also permitted by CBEC to all SEZ developers and units, which had been restricted so far to input services and manufacturing activities. Field officers are concerned about this leading to false claims of credit by using fabricated invoices.
As per officials, in the absence of preventive checks a floodgate of tax evasion by way of fabricated invoices could easily be opened by the upfront exemption being allowed across the board.
Presently, officials of the Directorate General of Central Excise Intelligence (DGCEI) cannot enter the premises of SEZs to verify and validate invoices without obtaining prior permission from the Development Commissioner of an SEZ appointed by the commerce ministry.
