Service Tax relief for SEZ in Budget 2014

IN terms of Notification No.12/2013-ST from 1st July 2013 SEZ's were provided exemption, whether upfront or by way of refund of service tax paid on Specified Input Services meant for use in Authorized Operations (AO). This has done away with the requirement of submission of original invoices as well as the Certificate from the Statutory Auditor. There were other minor changes on the positive side as well.

However the mandatory Authorisation in Form A-2 to be issued by Central Excise (CE) Authorities even after the Development Commissioner (DC) of SEZ issued the Form A-1 became a sore point.

In the process, the intended benefit by way of upfront exemption was troublesome for Units/Developers owing to delays of the Tax Authorities in the issuance of Form A-2 besides others. While the Units/Developers had to put up with such hurdles in obtaining Form A-2, the effective date from which such Authorization was to take effect became a point of contention.

While the Units/Developers were left hovering in such a bizarre state, there is welcome relief under the New Government's maiden Budget. The question is, whether this has met all the expectation of the Units/Developers. It appears that, the changes brought into force simplify the procedures to a considerable extent.

The changes are tabulated on comparative basis for ease of comparison:-

Description	Current Position	New Position
Effective date	Since 1 July 2013	With Immediate effect - 11 July 2014
Time Limit	No time limit prescribed for issue of Form A-2	Time limit of 15 days set from the date of submission of Form A-1.
Effective Date of applicability	There was confusion regarding the date from which the Form A-2 was to take effect	Form A-2 shall be valid from the date of verification of Form A-1 by the Specified Officer (SO) of SEZ subject to conditions.
Relief in case of delay in furnishing Form A-2	Service providers shall provide the specified services to Unit/Developer without payment of service tax only upon receipt of Form A-2.	In case issuance of Form A-2 is pending, service provider may provide the specified services without payment of service tax based on Form A-1 subject to conditions.
"Exclusively used for AO" - Clarified	Not specifically defined or clarified.	Explanation inserted to cover Input service invoices in the name of SEZ Unit/Developer and where the service is used only for furtherance of AO in SEZ.
Service Tax Regst. No. Details	Sub-heading in Table to Form A1requires declaring registration no. of Self i.e.,Unit/Developer in case of reverse charge cases.	Sub-headings in Tables to Forms A1, A2, A3 requiring such declaration reads as "Not Applicable, if specified service is covered under full reverse charge".

++ The effective date from which Form A-2 shall be valid, should have been unambiguously made valid from the date on which Form A-1 is filed by the Unit/Developers with the SO of SEZ rather than from the date of its verification by the SO of SEZ, as there could be considerable time lag in such process and this could lead to disputes.

++ Relief granted by extending the exemption even in case of delay in furnishing the Form A-2 to the service provider up to 3 months from the date when such services were deemed to have been provided in terms of the Point of Taxation Rules 2011. The Rules would be relevant to determine the date of provision of service for computing the delay.

In case of failure by the Unit/Developer to furnish the Form A-2 to the service provider beyond such 3 months, the service provider has to pay such service tax. Though the onus to pay service tax is on the service provider, the same would be recovered by service provider from such Unit/ Developer with interest in the normal course of business.

However, the Unit/Developer will be eligible to claim such service tax paid as refund under Notification No.12/2013-ST, but the interest and penalty, if any would remain a cost.

++ The question is - "What is furtherance of AO?" Is the Explanation on exclusive use of AO a welcome clarification? Time alone will tell.

While it can be said that such specified services covered in the List of Approved Services issued by the DC, SEZ based on approval of UAC should be considered as basis, it is essential to ensure that such services are actually used in the AO for obtaining Form A-2. In case of failure to substantiate the same or in case where such services are shared with DTA operations, the exemption shall be by way of refund route after proportionate reduction.

++ Service tax liability under Full/Partial Reverse Charge - There was inconsistency under the erstwhile Notification as Form A-1 reflects the option to declare registration no. of the Unit/Developer in case of reverse charge transactions and Form A-2 was silent about it. This enabled the Tax Authorities with yet another reason to reject requests for Form A-2.

From the current change in Form A-1, A-2 & A-3, the Unit/Developer would be eligible to claim outright exemption on transactions attracting full reverse charge liability.

Overall, the changes are indeed a breather for the SEZ to an extent.