Services provided to SEZ developers/units by Small Scale Service providers – Value to be included or excluded
FOR the benefit of small scale service providers, Notification No. 6/2005-ST dated March 1, 2005 as amended was introduced wherein the turnover aggregating ten lakh rupees in a financial year was exempted from levy of service tax subject to conditions. For computation of this aggregate value, Explanation (B) to the Notification provides as follows:
(B) “aggregate value not exceeding ten lakh rupees” means the sum total of first consecutive payments received during a financial year towards the gross amount, as prescribed under section 67 of the said Finance Act, charged by the service provider towards taxable services till the aggregate amount of such payments is equal to ten lakh rupees but does not include payments received towards such gross amount which are exempt from whole of service tax leviable thereon under section 66 of the said Finance Act under any other notification.
As per this explanation, the aggregate value of ten lakh rupees does not include payments received towards such gross amount which are exempt from whole of service tax leviable. Earlier vide Notification No. 4/2004-ST dated March 31, 2004 services provided to developers/units of SEZs were exempted from the whole of service tax leviable on such services. This exemption notification was without any conditions. So far so good.
But this notification was superseded by Notification No. 9/2009-ST dated March 3, 2009 which provides for exemption to service tax leviable on services provided to SEZ developers/units whether provided within the SEZ or not. However, this exemption is effective for the SEZ developers/units by way of refund of the service tax paid by the service providers.
That is, for the taxable services provided to SEZ developers/units, the service providers will have to pay service tax and the exemption to SEZ developers/units will be available in the form of refund of such tax paid by service providers. And there is no exception to small scale service providers. Please also see -dated March 4, 2009 for more confusion and complexities on this issue.
However, is this applicable to small scale service providers who provide services to SEZ developers/units? As per the Explanation (B) to the Notification No. 6/2005-ST as amended, the aggregate value of ten lakh rupees does not include payments received towards such gross amount which are exempt from whole of service tax leviable. Can the services provided by small scale service providers to SEZs be regarded as exempted from levy of service tax when Notification 9/2009-ST provides for an exemption mechanism by way of refund to SEZ developers/units?
Since, the services provided to SEZ developers/units by even small scale service providers is subject to service tax levy by virtue of Notification 9/2009-ST, this Explanation (B) which provides for exclusion of payments received for exempted services may not be applicable to such small scale service providers. That is the value of taxable services provided by small scale service providers to SEZ developers/units cannot be excluded while computing the aggregate value of ten lakh rupees. Is it appropriate to hold this view or is there an alternate view possible?
After all the exemption is provided for the services rendered to SEZ developers/units by the service providers. However, the mechanism of availing this exemption is provided in the form of refund of service tax paid to the buyers i.e. SEZ developers/units. Just because this exemption is available to the buyers by way of refund, does this take away the character of exemption to the service providers who pay the service tax?
A close look at the Notification No. 9/2009-ST provides food for thought on this view. The preamble of this notification is extracted below for ready reference:
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), and in supersession of the notification of the Government of India, Ministry of Finance (Department of Revenue), No. 4/2004- ServiceTax , dated the 31st March, 2004, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) dated the 31st March, 2004, vide, G.S.R.248 (E), dated the 31st March, 2004, except as respects things done or omitted to be done before such supersession, the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services specified in clause (105) of section 65 of the said Finance Act, which are provided in relation to the authorised operations in a Special Economic Zone, and received by a developer or units of a Special Economic Zone, whether or not the said taxable services are provided inside the Special Economic Zone, from the whole of the service tax leviable thereon under section 66 of the said Finance Act.
The Notification exempts the taxable services which are provided in relation to authorized operations in a SEZ and received by developer/unit of the SEZ whether or not the services are provided in the SEZ from the whole of service tax leviable thereon under s. 66 of the Finance Act, 1994. While the notification provides for exemption from levy of service tax on services provided to SEZ developers/units by the service providers, the exemption is made effective by way of a condition that the SEZ developers/units shall claim refund of the service tax paid by the service providers. This means though the exemption is available to the service providers, the burden/right of claiming the exemption is shifted to the buyers by way of refund claims.
Principally, the exemption is still operative for the service providers even if they pay service tax on the services provided to SEZ developers/units because such service tax is available as refund to those SEZ developers/units. Therefore, the character of the exemption available to service providers does not get altered by virtue of shifting the availability of exemption to the buyers i.e. SEZ developers/units. Hence, the value of taxable services provided by small scale service providers to SEZ developer/units may be excluded while computing the aggregate value of taxable services in terms of Explanation (B) to Notification No. 6/2005-ST as amended.
Since two alternate views are possible, one against and the other in favour of the small scale service provider as highlighted above, the CBEC may quickly consider issuing a suitable clarification in this regard to safeguard small scale service providers from unnecessary complications and legal hassles.
Maybe this lacuna is a blessing in disguise – suddenly SEZ units have a better incentive in buying their services from Small Service Providers. Earlier it made no difference whether they bought the services from small or big service providers as they were anyway exempted. Now if they buy the services from a big service provider they have to pay the tax first and then claim the refund which involves costs, delay and glorious uncertainties. Now if they buy from the small service providers, they need not pay tax and need not run around excise offices to claim refund.
And can a small service provider within the ten lakhs exemption pay tax for the services provided to SEZ units and continue with the exemption in case of other clients.
Let us hope CBEC will clarify the position before it enlarges into a giant storm.