News

21st June, 2006

Tax exemptions in SEZs only for actual exports

A service consumed within SEZs will not be considered as export and will invite service tax: FinMin.

The finance ministry has told the commerce ministry that services provided by hotels, hospitals or schools located in special economic zones would not constitute export of service and would be liable to service tax.

It has been decided that the exemption from service tax for service exports will be restricted to actual export of services from the SEZ. Any service which is consumed within the SEZs will not be considered as export and therefore will be liable to service tax, a finance ministry official told Business Standard.

If an overseas company seeks a service from a unit located in a SEZ but the service is consumed within the SEZ then too the service would not be treated as an export.

The unit will be exempt from service tax if the service actually leaves the SEZ and is consumed outside, an official said.

The ministry has also clarified that all import of services to a SEZ would be liable to the tax unless the services are used as an input or for value-adding to a product which is exported.

In such cases, the firm would be allowed to claim the amount of tax as an input credit.

Officials said the finance ministry had also made it clear that transfer of any old machinery from the domestic tariff area to a SEZ would not be eligible for tax breaks.

Similarly, splitting of companies and moving one of the companies into a SEZ would also not allow companies to enjoy the tax breaks.

In order to prevent land scams, the ministry has insisted that the processing area be increased to 35 per cent for multi-product SEZs from the earlier 25 per cent.