Fast refunds woo BPOs to service tax counters

PUNE: For a change, BPOs are not complaining. Several BPOs are rushing to obtain service tax registrations even though they are exempt from paying the levy on services rendered to their foreign clients.

The speed and ease of getting cash refunds on taxes paid on inputs such as leased circuit services, banking services and temporary man-power services has led to a spurt in the registration over the last few months.

ITes-BPO exports stood at around $6.3bn in FY06 and is expected to touch $8-8.5bn in FY07, according to Nasscom.
The revenue department has received a feed-back from zones such as Bangalore, Hyderabad and Pune on the surge in registrations in business auxiliary services — of which BPOs account for a big chunk.

According to Udayan D Choksi of Deloitte Haskins and Sells, registrations would have risen because credit provisions have been modified to enable service providers to claim refunds on exported services. The rebate mechanism introduced in ’05 was much more complex.

Quite a few BPOs are registered in Software Technology Parks (STP). This could be a rough proxy for service tax registrations. For instance, around 515 companies were registered in STPI Pune till FY06. The number is expected to increase by another 100-112 this fiscal. STPI, Mumbai, could also see a similar rise in registrations. STPI, Bangalore, has the highest number of registrations.

Medical transcription centres and call centres were, in fact, out of the service tax net till last year. The exemption was withdrawn this fiscal. Under the export of services rules, services rendered to offshore clients would continue to be exempt from the levy. Service tax would be charged only if the service is rendered within the country or if these centres are servicing their Indian clients.

Under the tax credit provisions, these companies would also be entitled to claim a credit on the tax paid on inputs that go into providing the service. The other option is to claim cash refunds. Typically, these companies use inputs such as leased circuit services, telephone services, banking and financial services, and temporary man-power services.

The providers of these services — telephone companies, banks, manpower recruitment agencies — in turn charge service tax. Credit or refund will be given only if the company has a service tax registration.

For the government, cash refunds is a notional loss in revenue because it is follows the principle that exports should be completely free of taxes. This means exporters of both services and goods should be relieved of incidence of any taxes. Otherwise, exports will not be competitive.

To plug revenue leakage, the revenue department has made it mandatory for service tax assessees to give a declaration on the inputs and input services used to provide the exported services.Right now, 99 services are under the tax net. There are around 3.5 lakh service tax assesses filing returns. The government has budgeted garnering Rs 34,500 crore from service tax this fiscal.