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CBEC Draft Circular on Streamlining Sanctioning of Service Tax Refunds
In a move that should be welcomed by service exporters, the Central Board of Excise and Customs has issued a Draft Circular with respect to Refunds of Service Tax. The Draft Circular has been issued in the wake of several representations received from the industry as well as field formations regarding difficulties being faced in determining input services eligible for refund under Notification 5/ 2006 dated 14 March 2006. Taxand India assesses the draft circular and the eligibility criteria for tax refunds made under CBEC rules.
The Draft Circular aims to streamline the process of sanctioning Rule 5 refund claims pertaining to input services arising under the Refund Notification. While this issue was sought to be addressed in Circular No. 120/01/2010-ST dated 19 January 2010, the principle/ test laid down therein was found to be too conceptual and could not be easily applied in practical situations at the time of processing refund applications.
Eligibility criteria specified in the Draft Circular
The first test to be applied is whether the service on which refund is claimed satisfies the definition of "input service" defined under Rule 2(l) of the CENVAT Credit Rules, 2004 ("CENVAT Rules"). Once a service qualifies as "input service", refund of the same shall be eligible, wholly or in part depending on proportion of export turnover to total turnover, as specified in the Refund Notification. In the event it is determined, that a particular input service is used exclusively for domestic services, such service would not be eligible for refund purposes.
According to the Draft Circular, disqualification on this account would be an exception rather than a rule and should be done only when there is unmistakable indication that the benefit of the service has not gone into export business. Further, such determination would be at the level of the "input service invoice", without disaggregating the invoice to disallow certain elements pertaining to domestic business.
List of services identified as eligible
The Draft Circular has identified a list of 68 input services (listed in a separate Annexure) that should be eligible/ ineligible for refund. Apart from the above principles, the Annexure has further provided conditions in determining eligibility/ ineligibility of specific services for the purpose of refund. The Draft Circular specifically mentions that the list is illustrative and not exhaustive and eligibility ought to be determined depending on the facts of the case.
The Draft Circular is a commendable initiative made by the CBEC after persistent representations made by service exporters, especially the IT/ITES sector, which should welcome the Draft Circular as well as the principles laid down therein. The Draft Circular clarifies most of the issues that have been the stumbling blocks with regard to adjudication of refund claims under Rule 5 and the CBEC hopes that smooth and expeditious disposal of refund claims by exporters shall follow.
An important principle that the Draft Circular has laid out is that once a service qualifies as "input service", the same shall be eligible for refund and there shall not be any further filter applied on these services to determine eligibility. Therefore, the Annexure to the Draft Circular could also serve as a guide to determine eligibility of CENVAT credit for services, in light of the amended CENVAT Rules with effect from 1 April 2011.
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