The Indian Government has allowed special economic zones or SEZ units and developers to claim refund of service tax, irrespective of whether they are consumed inside or outside the zone. However, the benefit would flow in the form of refund of service tax and not through an exemption.

Until now, the government exempted developers from paying a tax on services that were consumed within the zone, while the services consumed outside the SEZ attracted taxes. The move to refund tax paid on services provided outside the zone comes following a decision in this regard by the empowered group of ministers on SEZs headed by Finance and External Affairs Minister Pranab Mukherjee.

The Government put in place a new mechanism whereby SEZ developers and SEZ units would have to initially pay the tax on the services rendered to them (from inside and outside the zone) and then get a refund from the tax authorities within 6 months from the date of payment of service tax.

The notification clears the ambiguity with regard to eligibility of the service tax exemption in case of input services consumed by SEZ units and developers that were being disputed by the tax officials. The notification will come into effect on or after the date of publication of this notification in the Official Gazette.

Service tax is levied at the rate of 10%. Some of the services used by the units and developers outside the zone include courier service, transport service among others.

While the industry has welcomed the move to refund tax on services consumed outsides the zone, it wants the Government to give a blanket exemption. On the other hand, tax and trade experts opine that though the scope of the relief has been expanded, the procedure has been changed to provide for only refund of service tax rather than an exemption,

Welcoming the Finance Ministry move, L.B. Singhal, Director-General of Export Promotion Council for Export Oriented Units and SEZs, said "SEZ Act provides ab-initio exemption from service tax, whereas the notification has provided exemption from service tax by way of refund of service tax. Hence, service tax has to be paid first and then refund has to be claimed. It would result into unnecessary blockage of funds, paper work and transaction cost. Hence it would be appropriate if ab-initio exemption could be provided".