Refund

Refund in case of export of service.ground realities

A recent headline in the leading daily read Service exporters yet to receive Rs.1000 cr. Refund. This amply makes it clear that a claim for refund in case of export of service is not an easy task and needs utmost attention of the administration and the department. A glimpse of the process to claim refund in case of export of services is being discussed hereunder. Background:

Cenvat Credit Rules, 2004 were notified with effect from 10.09.2004 substituing the Service Tax Credit Rules,2002. According to these Rules, the provider of taxable services shall not only be entitled to take credit of service tax paid on all the services received and used in relation to provision of output taxable services, but also be entitled to take credit of excise duty paid on inputs and capital goods used in providing taxable services. Hence to provide benefit of the same to exporter of service clause (g) and (h) were inserted under Section 94(2) of the Finance Act, 1994 vide the Finance (no.2) Act, 2004 with effect from. 10.9.2004. Consequently, to make effective the same the Government came out with Export of Service Rules, 2005 vide Notification No.9/2005 dated 03.03.2005 applicable with effect from 15.03.2005. Prior to 19.04.2005 the exporter of taxable service did not have the benefit to claim rebate of service tax paid on taxable input services or the duty paid on excisable inputs. Service tax was not leviable on taxable input services used by the exporter of service in view of the Circular No.56/5/2003-ST dated 25.04.2003. In the said circular it was stated that since the secondary services ultimately gets consumed/merged with the services that are being exported, no service tax would be leviable on such secondary services. Further, both primary and secondary service providers were required to maintain the records deemed fit by them to identify the secondary services with services that are being exported.

Options Available To Exporter of Service : According to Rule 4 of Export of Services Rules, 2005, a service which is taxable under any sub-clause of section 65(105) of the Finance Act 1994, may be exported without payment of service tax, whereas as per Rule 5 of said rules, where any taxable service is exported, the Central Government may, by Notification, grant rebate of service tax paid on such taxable service exported or grant rebate of service tax paid on input services and excise duty paid on inputs, as the case may be, used in providing such taxable service and the rebate shall be subject to such conditions or limitations, if any, and fulfillment of such procedure, as may be specified in the Notification.

In exercise of powers conferred by above mentioned Rule 5, the Central Government notified Notifications No. 11/2005 and 12/2005 both dated 19.04.2005. Notification No.11/2005 grants rebate of the whole of service tax and cess paid on output taxable service exported in terms of Rule 3 of the said rules. Whereas, Notification No.12/2005 provides rebate of the whole of the duty paid on excisable inputs or the whole of service tax and cess paid on all taxable input services, used in providing taxable services exported in terms of Rule 3 of the said rules.

The amount which can be claimed back by the assessee as per Notification No.11/2005 is the tax charged from the service recipient located outside India and subsequently deposited with the department. The tax which is not charged but deposited on account of treating the gross amount received as cum service tax can also be claimed back as rebate under Notification No.11/2005.Whereas the amount of duty paid on excisable inputs or the whole of service tax and cess paid on all taxable input services by the assessee is to be claimed back from the department under Notification No.12/2005.

Meaning of the word REBATE:Before discussing the issue further, it is pertinent to note that under both the notifications, the term used is rebate. In normal parlance, rebate is understood to mean discount or concession and the same has been causing confusion among practioners, assessees and trade organizations. However, the dictionary meaning of the word rebate clarifies that rebate is a claim which is due on account of excess payment. Collins CoBuild dictionary defines rebate as A rebate is an amount of money which is paid to you when you have paid more tax, rent, or rates than you needed to. Further, the word rebate is to be understood in terms of provisions of Rule 5 of the Export of Service Rules. A combined understanding of Rule 5 and the meaning of the word Rebate implies that the rebate is basically the amount which is paid back to the assessee on account of export of taxable service. This is the rebate or concession awarded to assessee on account of export of service. In other words the rebate is allowed by the department to claim refund of tax paid to the department or to the input service provider or the manufacturer of excisable inputs. Hence, rebate is to be understood in terms of getting permission from the department to get back the refund.In simpler words, the word rebate in the context of Notification No.12/2005 is to be understood to mean to give back to the assessee service tax already paid by the exporter of taxable service to service provider and duty already paid to supplier of input and, claim of which is made from the department.To further grant relief to exporters of taxable service Central Government amended Rule 5 of CENVAT Credit Rules, 2004 vide Notification No. 4/2006-C.E. dated 14.03.2006 to allow the refund of CENVAT credit in respect of excise duty paid on inputs and service tax and cess paid on input services used for providing services which are to be exported. Consequently, Central Government has issued Notification No. 5/2006-C.E. dated 14.03.2006 for prescribing the procedure, conditions, and limitation subject to which, refund under Rule 5 of CENVAT Credit Rules, 2004 may be claimed. In view of above discussion, following options are available with the exporter of taxable services to claim either the rebate or the refund:(i) Notification no. 11/2005-ST dated 19.04.2005 -Rebate of service tax & cess paid on export of taxable services As per this notification, the exporter of taxable service firstly pays service tax on taxable services and then claims the rebate of the same under Notification no.11/2005. While making payment of service tax on output services, it may utilise the CENVAT credit available in respect of inputs/input services used in providing taxable services which are exported. To illustrate Mr. A who is an exporter of a taxable service, export such service for Rs. 100/- and charge Service Tax @ 12.36%. Thus, raising an invoice of Rs. 112.36 to his client outside India. He also pays a sum of Rs. 2 as Service Tax on input services used for the export of above said services. Mr. A also pays a sum of Rs. 3 as Excise Duty on inputs used for the provision of export of such service. Mr. A will collect Rs. 12.36 from its customer and after availing Cenvat of Rs. 5 (Rs. 2 of service tax on input services + Rs. 3 of Excise Duty on inputs), he makes payment of Rs. 7.36 to the department i.e. (Service Tax Rs. 12.36-Cenvat of Rs. 5).Mr. A can file rebate of Rs. 12.36 to the department in terms of Notification No. 11/2005-ST dated 19.04.2005.

As Mr. A has paid Rs.12.36 as service tax on the value of taxable service exported.(Rs. 5 by utilizing Cenvat Credit and Rs.7.36 through cash)(ii) Notification no. 12/2005-ST dated 19.04.2005 - This notification states that for claiming rebate, the excise duty and service tax must have been paid in respect of the inputs and input services which are used in providing taxable service which is exported. To illustrate Mr. A who is an exporter of a taxable service, export such service for Rs. 100/- and do not charge Service Tax from his foreign client. Thus, raising an invoice of Rs. 100/- to his client outside India. He pays a sum of Rs. 2 as Service Tax on input services used for the export of above said services. Mr. A also pays a sum of Rs. 3 as Excise Duty on inputs used for the provision of export of such service. Mr. A can file rebate of Rs. 5/- to the department in terms of Notification No. 12/2005-ST dated 19.04.2005.As regards this notification, another important condition to be noted is that the exporter of service should not have availed CENVAT credit on inputs and input services on which rebate is claimed.

(iii) Notification no. 5/2006-C.E. dated 14.03.2006 As per this notification, service provider can claim refund of CENVAT credit of excise duty paid on inputs and service tax & cess paid on input services (not on capital goods) used for providing output services which are exported. The refund which can be claimed back is restricted to the amount of CENVAT credit not utilized for payment of service tax for services provided in India or excise duty payable on goods cleared for local consumption. There is an additional restriction which limits the amount of refund to the extent of the ratio of export turnover to the total turnover for the given period to which the refund relates.Illustration: If total credit taken on input services for a quarter = Rs. 100

Export turnover during the quarter = Rs 250

Total Turnover during the quarter = Rs 500

Refund of input service credit under Rule 5 of the CENVAT Credit Rule, during the quarter will be 100*250/500 i.e. Rs 50 Selection Of The BEST OPTION :Now the question arises whether service provider should pay the service tax and claim rebate of the same under Notification no. 11/2005 or it should make claim of service tax in form of rebate of service tax paid on input services and/or credit of excise duty paid on inputs used for providing taxable exported services under Notification no.12/2005 or refund of service tax paid on input services and/or credit of excise duty paid on inputs used for providing taxable services or manufacture of final product which is exported under Notification no. 5/2006.

It is advised not to firstly pay service tax on export of services and then claim rebate under Notification no.11/2005. However, if the exporter of taxable service has paid service tax on the taxable service exported to the Government then the only option available would be to claim rebate under Notification no.11/2005.

The next question arises is whether it should apply for rebate under Notification no. 12/2005 or refund under Notification no.5/2006. In case, the provider of output service is to discharge service tax liability then the better option would be to claim refund under Notification no. 5/2006 dated 14.03.2006. This is on account of the fact that as per Notification No. 5/2006 the provider of output service can firstly utilize the Cenvat cedit towards payment of output tax liability and subsequently claim the refund of the balance Cenvat credit available with him. Whereas under Notification No.12/2005 this facility has not been provided and there is a condition that the Cenvat credit in respect of inputs or input services should not have been availed . Besides this there are various procedural and other dissimilarities between these Notifications as illustrated hereunder. Comparison Between Different OPTIONS: TABULAR ILLUSTRATIONS.No.Basis of DistinctionNotification No.11/2005-ST dated 19.04.2005Notification No.12/2005-ST dated 19.04.2005Notification No.5/2006-CE(NT) dated 14.03.2006

1.Issuance UnderRule 5 of Export of Service Rules, 2005Rule 5 of Export of Service Rules, 2005Rule 5 of Cenvat Credit Rules, 2004

2.EligibilityExporter of Taxable ServiceExporter of Taxable ServiceExporter of Taxable Service and Manufacturer of final product

3.Basis of ClaimPayment of Service Tax on Export of Taxable ServicePayment of Duty on Excisable Inputs or Service Tax Paid On Taxable Input Services Unutilized Cenvat Credit

4.Prior IntimationNot RequiredRequires filing of declaration prior to date of exportNot Required

5.AdjustmentAllowed with Input/Input Service Credit AvailableNot AllowedRefund Allowed only if Adjustment Not Possible

6.Amount AllowedExcess of Rs.500/-Excess of Rs.500/-No Limitation

7.FormASTR-1ASTR-2Form A

8.Periodicity of Filing ClaimNot SpecifiedNot SpecifiedMonthly / Quarterly

9.ExclusionService Exported to Nepal and BhutanService Exported to Nepal and BhutanNo Exclusion

However, there is one similarity amongst the three i.e. the time limit for filling the application is governed by the provisions as prescribed in section 11B of Central Excise Act, 1944. In other words, the application in prescribed form under each Notification, along with the prescribed enclosures, is filed with the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, before the expiry of the period specified in section 11B of the Central Excise Act, 1944(1 of 1944) which is twelve months as on date.Alternative Available to Exporter of Goods: In terms of Finance Minister promise made to the Exporters at the time of presentation of Finance Bill, 2007 that a relief package will be announced for them to compensate the loss caused to them because of Rupee gaining strength in International money market, department issued Notification Nos. 40/2007 to 43/2007. In pursuance of the same, Notification Nos. 3/2008, 17/2008, 24/2008, 32/2008 and 33/2008 have further been issued. Department, through these notifications, has allowed the refund of service tax paid on specified taxable services used by the exporters of goods. Insipte of the fact that such services do not classify as input services as defined in Rule 2(l) of Cenvat Credit Rules, 2004. In other words, where the exporter of goods uses certain specified taxable services on which service tax is chargeable, for the purpose of exporting his goods, he would be entitled to a refund of the service tax charged to him by the provider of such taxable service, provided he has paid such tax to the provider of such service. It is highlighted that the benefit of claiming refund under Notification no.41/2007 is available also to merchant exporters who are unlikely to be registered under the Central excise law or under Service Tax. Further, it is to be noted that an exporter of services is not at all covered by this notification.

The first in the series is Notification no.40/2007 dated 17.09.2007 wherein the Government has allowed refund of service tax paid in respect of four of such specified input services received by an exporter and used for export of goods, subject to compliance of certain conditions. Subsequently, the said notification was superseded by Notification No 41/2007-ST dated 06-10-2007 with a view to extend the benefit of refund to seven services (including four services covered under said Notification No. 40/2007). Further, Notification No. 42/2007-ST dated 29-11-2007, Notification No. 3/2008-ST dated 19-02-2008, Notification No. 17/2008-ST dated 1-4-2008, Notification No. 24/2008-ST dated 10-05-2008 and Notification No. 33/2008-ST dated 07-12-2008 have been issued for the purpose of extending the scope of refund of service tax in respect of some more services. Presently, the benefit of refund of service tax is available in respect of following specified taxable services :-

Specified Taxable Services for Claim of Refund used in Export of GoodsS. No.Taxable ServicesClauses

of Section 65(105)Applicability w.e.f.Notification No.

1.Port services (zn)17.09.200740/2007 dt. 17.09.07, superseded by 41/2007 dt. 06.10.07

2.Port services (Others)(zzl)17.09.200740/2007 dt. 17.09.07, superseded by 41/2007 dt. 06.10.07

3.Transport of goods by road (by a goods transport agency) (zzp)17.09.200740/2007 dt. 17.09.07, superseded by 41/2007 dt. 06.10.07

4.Transport of goods in containers by rail services (zzzp)17.09.200740/2007 dt. 17.09.07, superseded by 41/2007 dt. 06.10.07, amended by 3/2008 dated 19.02.08

5.General Insurance Business Services(d)06.10.200741/2007 dt. 06.10.07

6.Technical Testing & Analysis Services(zzh)06.10.200741/2007 dt. 06.10.07

7.Technical Inspection & Certification Services(zzi)06.10.200741/2007 dt. 06.10.07

8.Storage & Warehousing Services(zza)29.11.200742/2007 dt. 29.11.07

9.Cleaning Services (zzzd)29.11.200742/2007 dt. 29.11.07

10.Courier Services(f)19.02.20083/2008 dt. 19.02.08

11.Custom House Agents Services(h)01.04.200817/2008 dt. 01.04.08

12.Business Auxiliary Services (zzb)01.04.200817/2008 dt. 01.04.08

13.Banking and other Financial Services (zm)01.04.200817/2008 dt. 01.04.08, amended by 24/2008 dt. 10.05.08

14.Banking and other Financial Services (zzk)16.05.200824/2008 dt. 10.05.08

15.Supply of tangible goods for use in India(zzzzj)16.05.200824/2008 dt. 10.05.08

16.Clearing and forwarding agents services(j)07.12.200833/2008 dt. 07.12.08

The conditions which must be fulfilled to claim refund under Notification no. 41/2007-ST dated 06.10.2007 are as follows:(a) The exemption should be claimed by the exporter of the goods for the specified services received and used by the exporter for export of the said goods;

(b) Service tax in respect of which refund is claimed must have been paid and no CENVAT credit should have been availed on the same.

(c) Exporter should not have availed drawback of service tax paid on the specified services under the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995; (omitted vide Notification No. 33/2008-ST dated 07-12-2008)(d) Refund of service tax paid on the specified services used for export of said goods shall not be claimed under any other notification.Conclusion:

In order to expedite the refund process the Board notified Simplified Procedure for Refund, as prescribed vide Circular No. 828/5/2006-CX dated 20-04-2006 for sanction of refund/rebate of unutilized Cenvat Credit under rule 5 of the Cenvat Credit Rules 2004. Under this simplified procedure, 80% of the due refund amount is sanctioned as adhoc interim refund to following specified category of exporters( having good track record, within 15 days of filing of a refund claim, subject to the condition that refund claim is complete and contains the requisite documents):-

(i) All exporters having export turnover of more than Rs 5 crore in the current or preceding financial year;

(ii) PSUs including PSUs of State Governments;

(iiii) Star Export Houses;

(iv) Manufacturer-exporters registered with Central Excise who have been exporting during the previous two financial years and have minimum export of Rs. 1 crore or more during the preceding financial year;

(v) Exporters registered with Service Tax or Central Excise who have paid central excise duty and/or service tax amounting to Rs. 1 crore or more during the preceding financial year;(vi) All Export Oriented Units.

Further the Government issued trade notice F.No.341/15/2007-TRU dated 17-04-2008 so that the refund claims filed under Notification No. 41/2007 should be disposed of expeditiously. In the said circular it was clearly specified that any refund claim filed by an exporter which is not disposed of within the maximum period of 30 days, for any reason whatsoever, should be reported by the Commissioner to the Chief Commissioner concerned in the given proforma by the 10th of every month. If there is no such case, nil report should be sent.

The latest clarification has been issued vide Circular No.106/9/2008-ST dated 11-12-2008 whereby it has been stated that simplified procedure for refund, as prescribed by the Board vide Circular No. 828/5/2006-CX dated 20-4-2006 for sanction of refund/rebate of unutilized CENVAT credit under rule 5 of the CENVAT Credit Rules, 2004 would mutatis mutandis apply to refund claims under notification No. 41/2007-ST. Hence, the Government through various circulars and trade notices is making continuous effort to expedite the refund/rebate process.

The ground realities are, however, totally different as is evident from the first line of this article. Hence, the concerned authorities must expedite the refund process which will encourage the export of services in this tough recessionary climate.