Service tax refund rejections choking IT cos' cash flow

The high rejection rate of service tax refund claims by the income tax department has placed Indian IT firms firmly on the backfoot. According to a wide cross section of top IT officials and industry consultants, service tax refunds to the tune of Rs 4,000-5,000 crore are pending on various grounds, largely flimsy.

The IT industry is eligible for refund on the service tax inputs for units operating under the ambit of Software Technology Park (STP) regulations but over the last couple of years their claims have seen a high rejection rate. Of this, Bangalore accounts for the lion’s share given that the city is the sector’s hub.

Infosys board member and former CFO V Balakrishnan admitted that service tax refunds have become a huge concern for the industry and the delay in settling of claims has a bearing on the cash flow.

According to executives, the provision of refund on service tax was introduced during 2005-06 but since then it has been an uphill task for the companies to get approval on their claims. For many, though, the reasons for delay are not very clear.

“Nothing much has changed in the last two-three years and even the refund one receives is not 100%,” a senior executive said on the condition of anonymity. The delay or rejection in refund of service tax has been attributed to high internal revenue targets to be met by the I-T department.

The alternative route for getting the claims through litigation is a lengthy and costly process.

Manipal Global Education chairman and former Infosys board member TV Mohandas Pai said, “Even if a company goes on appeal there is no guarantee that there would be any refund and the entire process would take a very long time.”

PricewaterhouseCoopers executive director Pramod Banthia said, “There has been outright rejection of claims in most of the cases with many of them on untenable grounds.” The delay in refund has a higher impact on smaller companies, given the size of their profitability, while larger entities are able to offset this delay due to their deeper pockets.