If India is considered a serious player in the export of something, without a doubt it is Services. But although we are ranked 6th in the world in Services exports, our exports in CY2013 were less than a quarter of that of the top exporter – US. Add to this the fact that even to achieve this very generous incentives were provided for over a decade to the main component within Services – Information Technology. But what about others? The government needs to focus on other services as well if it really wants India to become a true Services powerhouse.

The Dollar Business Bureau | @TheDollarBiz

Services account for over 50% of the Indian economy and is taxed at 12.36%. So, if a service provider offers a service worth Rs.100, the end-user ends up paying Rs.112.36 for it. The Rs.12.36 worth of tax is collected by the service provider and paid to the government. When it comes to exports, this 12.36% tax is exempted. But there is a catch. The tax has to be first paid to the government; the service provider has to then prove to the government that the service was actually exported and only then is it refunded. While even this sounds fairly doable, trouble arises in the definition of ‘exports’ – something that has seen a lot of changes over the years. 

Until February 2003, Service Tax was exempt on services for which consideration was received in foreign currency. A couple of months later, the CBEC issued a circular that Service Tax exemption is ‘destination based.’ Since this led to a lot of hue and cry due to lack of clarification, the earlier law was re-introduced as an interim measure in November 2003 and was continued till FY2005. Since then, laws that define ‘what is a service export’ have gone through several modifications and have been one of the primary areas of tax disputes.

A lot of medical services like blood tests, X-ray tests are now outsourced to India

The information technology (IT) industry in India benefitted from income tax exemptions for over a decade. This not only helped it earn a name for itself across the world, but also helped India maintain a slight Services trade surplus. But other Services haven’t at all benefited from such government largesse and have a reason to feel let down. Even the ‘Services only’ incentive scheme – Served From India Scheme (SFIS) – has more than its share of issues. Even though it’s a post-export scheme and the benefits arising out if it are available only after the export process is over (that too without any hand-holding from the government), the duty credit scrip is not transferable. This means in case a Service exporter has no need for imports, he/she doesn’t benefit at all from SFIS! Making it transferable will certainly help exporters of services like education, healthcare, consultancy and real estate that do not import much.

When it comes to merchandise exports, a lot of the inputs and capital goods are imported and that too duty free – thanks to schemes like Advance Authorisation and EPCG. But when it comes to Services, most of the inputs are procured domestically. Despite this, the Services sector isn’t provided with enough incentives and as discussed earlier, even getting service tax refunds for exports is a very cumbersome process.

Another issue that a lot of industry players feel should be addressed is that of Minimum Alternate Tax (MAT) in SEZs. The irony of MAT is that not only did it erode foreign investor confidence in India in a massive way, it actually acts as a disincentive for domestic companies based out of SEZs. For example, while MAT doesn’t really matter to a Facebook because it can, anyway, claim global country credit back in US, an Infy or TCS based out of the same SEZ, has not such options. So, one area where all eyes will be fixed at the time of the announcement of the FTP, is the government’s treatment of MAT and the overall strategy for SEZs and units based in them.

India, as a nation, has a rich history of exemplary hospitality. Still services exports from India is just about 50% of the country’s merchandise exports. So, while Indian government is using this attribute to build a strong “Brand India”, it should not be illiberal while incentivising its service providers. It’s high time government starts taking services exports seriously!

"DGFT should try and resolve transmission issues"

Kamal Jain, Director, Cargomen Logistics

Although the Directorate General of Foreign Trade’s (DGFT) e-BRC project won the 2013 eASIA Award at Ho Chi Minh City in Vietnam, Indian Services exporters have enough reasons to feel not too enthused by it! Firstly, despite a lot of automation in recent years, there’s a lot of paperwork involved in DGFT’s affairs. The documentation process at DGFT is still very cumbersome and can weigh down even the most tenacious. There’re also several transmission issues at DGFT that need to be taken care of if the real fruits of automation are to be realised.
There’s also the issue of Special Economic Zones (SEZs) that the government should really come clear about. SEZs were dealt a death blow and the very purpose of having them was defeated when the UPA government introduced the Minimum Alternate Tax (MAT). Not only did it erode the confidence of international investors but also put serious question marks over their future. The upcoming Foreign Trade Policy (FTP) should also have a clear vision about Free Trade & Warehousing Zones (FTWZs).
While SEZ units have a reason to feel aggrieved due to the introduction of MAT, the fact is that they are coming up, has actually been a curse for EOUs. EOUs are far better for the larger economy than SEZs. Firstly, EOUs can come up anywhere, but to rent a similar space in a SEZ is an extremely costly affair. Secondly, EOUs lead to more equitable growth while SEZs are favourable to only those with deep pockets.
The government should also come up with measures to simplify the process of tax refunds, particularly for the Services sector. I also feel that we should limit the use of pre-export incentives and try and push only post-export incentives. For, not only is monitoring pre-export incentives very difficult but they are also prone to misuse. I am sure, the Modi government will announce an FTP that is pro-business and will help our exporting community scale new highs.

"Service tax refund process should be simplified"

One of the basic reasons for Service exporters facing a lot of hardship while trying to get Service Tax refunds is the intangibility of their exports. Export of Services is a new concept for the Indian bureaucracy which is used to handling merchandise exports and hence, it finds it extremely difficult to fathom and value Services exports. Although things have improved in recent years, the fact that Services can’t be felt, weighed, seen or touched means that our tax department doesn’t take them as seriously as they should. In my dealings with service providers, I have come across several cases where service tax refunds are pending for the last nine years. Some estimates suggest that service tax refunds of several hundred crores are pending just in Hyderabad.
With laws regarding the definition of service exports having gone through several changes over the last decade, interpretation has become a major issue. What the government should aim to do is simplify the definitions and get rid of ambiguity. Proper coordination between the Ministry of Commerce and the Ministry of Finance should achieve this. Two more issues that I would like the government to address are the high concentration of Software Technology Parks in the southern states and non-transferability of the Served From India Scheme (SFIS). While the high concentration of STPs in the South has been a boon to the southern states, the government should investigate the reasons for them not coming up in other parts of the country. SFIS has also been a big disappointment, with just 1,332 authorisations and Rs.982 crore of duty credit scrip in the first eight months of FY2014. The SFIS had initially been envisaged as a brand building exercise but has abjectly failed in achieving it. One main reason that I feel has caused this is the non-transferability of the duty credit scrip. Without transferability of duty scrip, a lot of service exporters feel let down as not having the need to import in the near future is resulting in them just sitting on their duty scrip, without any form of compensation. I think the government should seriously consider approving a long standing demand of service exporters to make duty credit scrip provided under SFIS transferable.