Relief to services exporters on cards

NEW DELHI: The government is examining a proposal to redefine exports of services in the service tax rules in the forthcoming Budget. The move is aimed at clearing confusion over the treatment of services exports in the tax structure, which has resulted in disputed tax claims of hundreds of crores of rupees.

The finance ministry is considering an amendment to service tax rules - the third such amendment if it goes through - in the expectation that the problem will be solved for good, a government official said.

The most recent attempt to come to grips with the problem was in February, when the agency which administers all indirect taxes issued a ���circular��� to try and explain in detail the eight words which had caused confusion over what actually constituted the export of a service.

The Central Board of Excise and Customs (CBEC) had tried to make it clear that if the benefit of any service is accrued outside India, it becomes an export, which does not require the payment of any service tax. Also, exporters of services can claim refund of duties that they may have paid on inputs.



The aim now, the official said, is to enshrine the intent of the circular in service tax rules to put them on a sound legal footing. The rules governing the export of services were introduced in 2005 and have been amended twice.

The rules notified in 2007 defined the export of a service as ���service provided from India and used outside India���.

The phrase ���used outside India��� had become a bone of contention, with service tax officials asking companies to provide proof that the service is being used overseas. This prompted CBEC to come up with the circular in February.

Those slapped with notices by the tax authorities, who claim the service was actually being used in India, include buying agents carrying out procurement for large foreign retailers and liaison offices of foreign companies undertaking facilitation and exploratory work in India for the parent firm.

Similarly, the Indian units of some leading foreign IT companies have been issued notices demanding payment of service tax for carrying out marketing activities for products sold directly by the parent.

Business process outsourcing (BPO) firms providing services to overseas clients have also been affected. A number of them, including Genpact, Convergys and Vertex had earlier received recovery notices claiming tax on the basis of a definition which existed prior to 2007. Those rules defined the export of service as that which was ���delivered outside India and used outside India���.