Ministries spar over service tax on exports

Earlier, bulk of the inputs for exports attracted service tax since there was a clause that, to get an exemption, exporters need to make payments for such services in convertible foreign exchange.

The problem arose as most of the payments by exporters to the domestic service providers — like courier, air cargo, shipping lines, forwarding agents, warehousing, cargo handling, packaging and so on — were made in rupees. Thus, exporters were not being able to avail of the service tax exemption.

Seeing that this had started to make Indian exports uncompetitive vis-a-vis China, the Finance Ministry removed the anomaly by bringing in Export of Services Rules, 2005, which came in effect from March 15, 2005.

Under the above rules, the finance ministry clarified that as long as the ‘‘taxable service is partly performed outside India, it shall be considered to have been performed outside India’’ and hence will be kept out of the service tax net.

Another push factor for this clarification was the Exim Policy in August 31, 2004, which stated that the policy will ‘‘Neutralise incidence of all levies and duties on inputs used in export products, based on the fundamental principle that duties and levies should not be exported.’’

However, to the surprise of the exporters, on June 7, 2005, the Finance Ministry came out with an amendment to the Export of Services Rules, 2005, by which the earlier exemption — ‘‘payment for such services provided is received by the service provider in convertible foreign exchange’’ — was inserted again.

According to sources, faced with the problem, exporters approached the commerce ministry, which, in turn, has taken up the matter with the finance ministry. Exporters are of the view that an added burden of 10.2 per cent service tax (10 per cent service tax and 2 per cent education cess) is making Indian exports uncompetitive compared to Chinese exports.

The services that have come under the tax net due to the June amendment include courier agency, air cargo, customs house agent, shipping lines among others.