The term special economic zone (SEZ) sounds as music to the ears, as it appears that those running their units in the SEZ are at an advantage, compared to their counterparts in the domestic tariff area (DTA). Special Economic Zones have been on top of the agenda of ministry of commerce and it has always been persuading finance ministry to provide unconditional exemptions to SEZs. Special provisions and acts were formulated to give the concept an edge over their competitors.
Taxable services received by SEZ units and SEZ developers for consumption within the SEZ were exempted from service tax vide Notification No. 4/2004 - ST dated 31-03-2004. This exemption also included all those SEZ units, which were under construction. The basic conditions comprise that the developer has been approved by the Board of Approvals (BoA) to develop, operate and maintain the special economic zone and the unit of the special economic zone has been approved by the development commissioner or BoA, as the case may be, to establish the unit in the special economic zone.
Thus, there was unconditional exemption, but it was only for services consumption within the SEZ. The ministry of commerce had drafted the SEZ Act 2005, keeping into account all possible ambiguities and litigations and had given it an overriding effect. The provisions of Section 51 of the SEZ Act 2005 reads that "The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act".
Further, section 26 (e) of the SEZ Act 2005 states that there is exemption from service tax under Chapter V of the Finance Act, 1994 (32 of 1994) on taxable services provided to a developer or unit to carry on the authorised operations in a special economic zone. From the above, it is evident that the interpretation of the earlier Notification No. 4/2004 - ST the said services should be consumed within the special economic zone is highly misplaced. The essential ingredient for an exemption to be claimed is that the said services should be provided "to the SEZ".
Thus, though the service tax notification uses the term "within such SEZ " the overriding effect of the SEZ Act will prevail over such ambiguities and all taxable services provided to the SEZ will be exempted. But that is more of a wishful thinking when it comes to the interpretative skills of the department, which is too good when it comes to deny any benefit.
For almost five years, this confusion prevailed till the time government issued a notification in superseding Notification No. 4/2004 – ST exempting taxable services provided in relation to the authorized operations in a SEZ and received by a developer or units of a SEZ with certain conditions. The earlier exemption notification was restricted in the sense that exemption was available only to services provided by service providers for consumption within the SEZ, whereas the new notification expanded the scope for exemption whether or not the taxable services are provided inside the SEZ.
However the Notification 9/2009-ST dated 03.03.2009 rescinded Notification No. 4/2004 - ST and introduced a new method of exemption for SEZ units/developers. But interestingly, instead of solving the long pending issue, the said notification dated 3.3.2009 stated that they first pay the service tax and then claim refund.
It goes without saying that claiming refunds are an uphill task. The procedure is cumbersome as one has to go through a lot of paper work before filing the said claim. It leaves an unpleasant experience behind when one receives a show cause notice for rejecting such legitimate claims on trivial issues.
Further the above notification doesn't specify any time period for sanctioning of the refund. This is where board tried to help the SEZs by issuing Circular No. 114/08/2009 S.T dated 20.05.2009 wherein it was stated that 80% of the due refund amount is to be sanctioned as adhoc interim refund to developer or unit of SEZ, within 15 days of filing of a refund claim, subject to the condition that refund claim is complete and contains the requisite documents. Further, the circular directed that refund of service tax, paid on taxable services used in relation to the authorised operations in the SEZ should be disposed of expeditiously. The refund claims should be finalised within a maximum period of 30 days from the date of filing of refund claim and in any case not beyond 45 days from the date of filing of the refund claim. The said instructions and circulars are only on books, as practically, the departmental officers conveniently ignores the same and proceeds with issuing rejection orders. The long drawn paper war of submitting replies and moving appeals in case of service tax refunds in special economic zones makes one wonder, what's so special about these zones.
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