New service export rules less taxing .

The concept of export has evolved over time. In relation to goods, the principles governing export have settled and, therefore, the process of determination of whether a transaction in goods is export or not is reasonably clear. This, however, has been ever-changing for services.

It is interesting to note that service tax regulations introduced in 1994 did not have specific provisions to determine export, unlike excise or central sales tax — where the concepts were embedded in the law since inception. The government has reiterated that trade and industry should export goods and services, and not taxes. Therefore, the concept that export of goods and services should be zero rated is well accepted.

In 1999, service tax regulations incorporated an exemption for services where consideration is received in foreign exchange. This was then referred to as export services. However, this was an exemption and not a definition of export. Also, exemption was not linked to whether the services were export in the classical sense.

Interestingly, in 2003, there was a restatement of the policy on exports. The government withdrew the foreign exchange-linked exemption in 2003, and issued a clarification to the effect that ‘exports would continue to remain taxfree’. This was a broad statement of policy, suggesting three things: export of services are not liable to tax, they were always so not liable, and the foreign exchange-linked exemption was not intended to be an export definition. However, no definition of exports was provided in this circular.

The government then notified Export Rules in 2005 to define when a particular service can be regard as an export. This left open the period prior to 2005 as to what is export, which is a separate debate. However, on a broad basis, the overall policy was now crystallised into a regulation for export.

One of the cannons of taxation policy is consistency and simplicity over a long period. Export Rules have been an exception. In its five years, the Rules have undergone several changes, three of which are substantive, and have the potential of altering export status of a service — facts remaining the same.

Starting with a single condition, to the addition of ‘delivered and used outside India’, to the change from delivered outside India to ‘provided from India’, and now the deletion of both provided from India and used outside India — an almost revert to the original rules of 2005. None of these phrases have been defined. At one level, it appears that the government thinking has evolved, on the other, one can argue that going back to the original conditions shows that the conditions added in the interim were not sufficiently planned.

A direct outcome of the ever-changing thinking was a confused implementation. With no definitions of phrases or guidelines, different tax authorities applied their own interpretations, which were typically conservative and revenue-minded. Thus, claims for export were denied, resulting in litigation. This had a more direct impact on exporters claiming refund of input taxes. Implementation of refund schemes significantly suffered limitations of the export characterisation. Also, inconsistency in the verbiage used in credit regulations and refund notifications led to refund denials even if export was accepted.

Source : The Economic Times