Even as the Union commerce ministry is yet to implement the findings of the task force on 'reducing transaction cost in exports', the pharma exporters in the country have urged the government to keep the activities of the foreign office of the Indian export firms out of the purview of service tax to reduce transaction costs of the exporters.
Asking the Union commerce ministry to urgently review the provisions of the service tax law in the country, exporters stressed that the activities carried out by the foreign offices of the Indian parent companies are not services in true sense of the term. In fact, the setting up of the foreign office is a need, if not compulsion, to increase the exports. These offices are essentially not revenue generating and therefore Indian parent companies have to necessarily fund their activities, said DB Mody, Pharmexcil's panel chief for foreign trade policy & indirect taxation.
Exporters need to establish non-trading representative offices abroad to boost the exports. These foreign offices undertake liaison, regulatory as well as promotional activities for their Indian parent companies and the Indian parent companies remit, from time to time, Imprest money to enable such foreign offices to fund their activities locally, Mody said.
The tax department has initiated inquiry in the pharma industry and seeks to collect tax on activities of such foreign offices. In other words, the tax department seeks to levy service tax on Imprest money remitted by the Indian parent companies for their foreign offices. This is a new surprise thrown by the tax department to the pharma exporters. Service tax, if levied on activities of foreign office, would be a big setback to the exporters and to the exports, Mody lamented.
The exporters have apprised the commerce ministry that such levy of service tax on Imprest remittance is clearly beyond the jurisdiction of the service tax. Such levy has been seriously affecting transaction cost and would severely hit the exports if such levy is not reviewed by the government, Mody said and added that with the current account deficit touching a whopping US$ 32.69 billion during the third quarter, if the transaction cost is not reduced it will have far-reaching implications on exports.
Earlier in 2011, the Union commerce ministry had constituted a task force under the then minister of state for commerce Jyodiraditya Scindia on the issue of reduction of transaction costs in exports. But, the ministry is yet to act upon the issues identified by the task force.