Exemption to services received by a developer/units of a SEZ :

Notification No. 12/2013 ST dated 01.07.2013 exempts services received by a unit located in Special Economic Zone (SEZ) or a Developer of SEZ – which are used for the authorized operations – from whole of service tax leviable thereon. The significant provisions of the exemption notification are:

(A) Eligibility for exemption: The taxable services received and used for the authorized operations by any of the following are eligible for exemption under this notification: –

•  a unit located in a Special Economic Zone (hereinafter referred to as ‘SEZ unit‘)
•  developer of SEZ (hereinafter referred to as ‘Developer‘).

(B) Refund route and Upfront exemption: Exemption under this notification is provided in two ways – one by way of exemption and other by way of refund.

(i) Option not to pay service tax ab-intio in case the specified services are used exclusively for the authorized operations: Where the services received by SEZ Unit or Developer are used exclusively for the authorized operations, the person liable to pay service tax has the option not to pay the service tax ab initio.

(ii) Refund route available for specified services not exclusively used for the authorized operations or specified services on which ab initio exemption though admissible, is not claimed: In the following two cases, exemption shall be provided by way of refund i.e., SEZ Unit/Developer will have to first pay service tax on the specified services and then claim refund:

(a) when the specified services are not exclusively used for authorised operation, or

(b) when the ab initio exemption though admissible is not claimed on the specified services

Hence, ab initio exemption will not be available in this case.

(C) Quantum of refund when specified services are not exclusively used for the authorized operations

(a) the service tax paid on the specified services that are common to the authorised operation in an SEZ and the operation in domestic tariff area [DTA unit(s)] shall be distributed amongst the SEZ Unit or the Developer and the DTA unit (s) in the manner as prescribed in rule 7 of the CENVAT Credit Rules. For the purpose of distribution, the turnover of the SEZ Unit or the Developer shall be taken as the turnover of authorised operation during the relevant period.

(b) the SEZ Unit or the Developer shall be entitled to refund of the service tax paid on (i) the specified services on which ab-initio exemption is admissible but not claimed, and (ii) the amount distributed to it in terms of clause (a).

Points to be noted:- 1. SEZ Unit or the Developer shall have the option not to avail of this exemption and instead take CENVAT credit on the specified services in accordance with the CENVAT Credit Rules, 2004. 2. The SEZ unit/Developer shall maintain proper account of receipt and use of the specified services on which exemption is claimed, for authorised operations in the SEZ.

The Notification also prescribes the procedure for availing the said exemption.