THE Centre is examining a proposal to redefine exports of services in the service tax rules in the forthcoming Budget. The move is aimed at clearing confusion over the treatment of services exports in the tax structure, which has resulted in disputed tax claims of hundreds of crores of rupees.

    The finance ministry is considering an amendment to service tax rules --the third such if it happens--in the expectation that the problem will be solved for good, a government official said.

    The last attempt to solve the problem was in February, when the agency that administers all indirect taxes issued a `circular' to try and better explain a few words which had caused confusion about what actually constituted export of a service. The Central Board of Excise and Customs

(CBEC) had tried to make it clear that if the benefit of a service is accrued outside India, it becomes an export and so, no service tax has to been paid. Also, exporters of services can claim refund of duties that they may have paid on inputs. The aim now, the official said, is to enshrine the intent of the circular in service tax rules to put them on a sound legal footing.

    The rules governing the export of services were introduced in 2005 and

have been amended twice. The rules notified in 2007 defined the export of a service as "service provided from India and used outside India".

    The phrase `used outside India' had become a bone of contention, with service tax officials asking companies to provide proof that the service is being used overseas. This prompted CBEC to

come up with the circular in February.

Among those slapped with notices by the tax authorities, who claim the service was actually being used in India, are buying agents carrying out procurement for foreign retailers and liaison offices of foreign companies.

    Similarly, the Indian units of leading foreign IT firms have been issued notices for carrying out marketing activities for products sold directly by the parent. BPO firms catering to overseas clients have also been affected. Many had received recovery notices claiming tax on the basis of a definition, which existed prior to 2007. Those rules defined the export of service as that which was "delivered outside India and used outside India". TAX CONUNDRUM

What is the big issue?

Confusion over tax treatment of services exports, which has resulted in mammoth disputed tax claims

What is the sore point?

A circular said if service benefit is accrued outside India, it is tax-free. But the phrase `outside India' is in dispute

What will Budget do?

The aim is to enshrine the intent of the circular in service tax rules to put them on a sound legal footing