This Issue - Icwai

INDIRECT INDIRECT TAXATION
TAXATION
of the refund claim is the period of export of the goods
or the services. All that is required in respect of inputs
and input services is that they should have been used
in or in relation to the manufacture of the export
merchandise and, in the case of service exporters, such
inputs or input services should have been used for
providing the export service. The logical and proper
inference from this scheme is that refund is granted
even if the input or input services concerned might
have been received and utilized prior to the period in
which the exports of merchandise or services, as the
case may be, have taken place.
In the backdrop of the refund provisions granted
under Rule 5 of CENVAT Credit Rules, 2004, the
Government has put in place parallel refund provisions
for service exporters, vide Notifications 41/2007 dated
6.10.2007 (since superseded) and 17/2009 dated
7.7.2009 as amended. These parallel refund provisions
available to service exporters, while appearing to be
more liberal than what is seen under CENVAT Rule 5,
actually confine the refund to a restricted range of input
services. There is no refund of service tax paid on input
services beyond the eighteen services provided for.
Service exporters whose only business is export will
potentially consume a much wider range of input
services than the 18 ordained for refund. Thus, this
parallel benefit under Notification 41/2007 read with
17/2009 does not go far enough in living up to the
widely recognized principle of tax jurisprudence that
only merchandise and services should be exported and
not the input taxes on goods and services.
There is another problem seen in the above two
Notifications 41/2007 and 17/2009. Quite unlike the
CENVAT Rule 5, which does not demand or slip in
through subaltern means any proportionate or
sequential linkage between the inputs and input
services on the one hand, and the exported goods and
services on the other, the above Notifications demand
as a requirement of the Refund Application Form that
the details of refund claim for inputs and input
services should be filed separately for each shipping
bill. The condition has the effect of demanding oneto-one
correlation between the inputs/input services
and the exported goods/services. The difficulties in
meeting this condition will be obvious. Many of the
inputs or input services could be used for export
production or export service over a considerable
length of time. The shipping bill details will likely
get repeated several times in several refund claims.
The Department rejects such repeat shipping bill
claims for no fault of the exporting industry.
Therefore, there is a sore need for a central and
integrated provision for refund of input tax credits in
export and other situations. Multiplicity of refund
mechanisms in CENVAT Credit Rule 5 and in stand
alone notifications, such as 41/2007 and 17/2009, with
subtle differences leads to unhelpful interpretations by
the tax administration resulting in denial of potential
huge claims. It is high time that the tax administration
reforms the refund provisions relating to the input tax
credits in the Central Excise and Service Tax arenas.
In this context, it cannot be missed that the
CENVAT Credit Rules have no provision for refund
of unutilized/accumulated input tax credits in
situations other than for export. Such wasteful
accumulation of tax credit money remitted to the
Department presents an unedifying picture of
unwanted additional costs adding to the woes of the
business and industry. The need of the hour is the
fastest turn-around in the usage of tax credit and the
uninterrupted inflow and outflow of input tax credits.
This will considerably enhance the tax competitiveness
of Indian Industry and Business. For this to
prevail, the government needs to put in place a specific
provision refunding input tax credits which have been
aggregated and accumulated without neutralization
through adjustment against the output taxes. It
appears that the government has not made up its mind
regarding this aspect of tax credit policy. That the
government is not in principle opposed to granting
refund of unutilized input tax credits in situations
other than export is evidenced by the fact that the
CENVAT Credit Rules do not show any specific bar
against refund of unutilized input tax credits other
than for exports. Several judicial decisions, both of
the High Courts and the Tribunals, have pointed to
this fact and favoured refund of unutilized input tax
credits. After all, the State VAT Acts have a universal
provision for such refunds. The Department of
Central Excise and Service Tax cannot be unaware of
the divergence between the CENVAT and the VAT
Credit systems in this regard. The leading case
favoring Cenvat Credit Refund in situations other than
export is UNION OF INDIA vs SLOVAK TRADING
CO PVT LTD. — 2006 (201) E.L.T. 559 (Kar.) The
Supreme Court has maintained the above decision of
the High Court vide Union of India v. Slovak India
Trading Co. Pvt. Ltd. — 2008 (223) E.L.T. A170 (S.C.).
Conclusion
The integration of procedures governing refund of
unutilized or other types of tax credit, whether for
export or otherwise, into a single statutory code will go
a long way in reforming the tax credit system to suit the
needs of the Indian Industry and Business. The cause
of increasing the tax credit efficiency is important and
will actually add to the price competitiveness of the
Indian products and services within the country as well
as in the global markets. As an urgent prerequisite,
anticipating such an integrated code, the government
should introduce specific provisions in the tax credit
laws providing for refund of unutilized and accumulated
input tax credits, bringing the CENVAT and VAT
Credits on par for business competitiveness.
We keep our fingers crossed on this. ❐
The Management Accountant |September 2011 789