Service Tax – exemption to air cargo – a boon to pharma and textile sector
A little, no rather a detailed, peep into history is required to appreciate the situation better. Service Tax was introduced on goods transport by aircraft with effect from 10.9.2004. By Notification No. 28/2004-S.T., dated 17-9-2004, taxable service in relation to transport of export cargo by aircraft was exempted.
However this notification was rescinded with effect from 15.3.2005 by Notification No. 10/2005-S.T., dated 3-3-2005, that is when the confusion started with the advent of the Export of Services Rules, 2005 coming into force. Under these rules also the air cargo falling under clause zzn, could be considered as export if part of the service was rendered abroad. So even if notification No. 28/2004 was withdrawn, exporters sending their goods by air were spared of the Service Tax burden as this would get covered under export of services and so no tax was payable.
This was too cosy a situation to last long and predictably the Government amended the export rules by notification No. 28/2005 dated 7.6.2005 ( effective from 16.6.2005) to stipulate that in respect of export cargo by air ( among many other services), the service would be treated as export only if the payment was received in convertible foreign exchange. As most of the exporters pay their airlines in Indian Rupees for freight, they became ineligible for the export benefit and so the cost of exports went up with an addition of 10.2% on freight. Sectors like high value and perishable goods like gems, fruits were badly affected. Naturally there was commotion and representation and to be fair to the Board, the lapse is rectified.
Notification No. 29/2005 dated 15.7.2005 exempts taxable service in relation to transport of export cargo by aircraft almost identical to the notification No. 28/2004. May be a major part of the Board’s time and energy goes in correcting the mistakes it created. Exporters seem to be happy as the news was well received in trade circles. But what about the tax collected during the period 16.6.2005 to 14.7.2005? Will it be refunded/ In any case can taxes be exported? – ANOTHER CLARIFICATION, ANOTHER AMENDMENT, AN ANOTHER DAY – LET THE SHOW GO ON!
Notification No. , Dated: July 15, 2005