The finance ministry's point-by-point rebuttal to the issues raised by the commerce ministry on tax-elated demands of the export-oriented units has ruled out granting any exemption from service tax for supply of goods from domestic tariff area to these units.

It also said difficulties being faced by these units would disappear once the central sales tax was phased out by 2009-10.

The issues were raised by commerce minister Kamal Nath in a letter to Prime minister Manmohan Singh in March.

The prime minister then sought the comments of the finance ministry following which the revenue department examined them in detail.

The finance ministry subsequently finalised its view and sent it to the commerce ministry, sources told Business Standard.

The finance ministry has pointed out that the procedure for grant of refunds will be notified soon. It may be recalled that the committee of secretaries had also decided against revisiting the EoU tax exemption issue in view of the recommendations by the prime minister's economic advisory council.

On another demand, with regard to exemption from central sales tax for supply of goods from domestic tariff area to export-oriented units, the revenue department consulted state governments, who generally opposed the proposal.

The main difficulty in considering this proposal, which is the same as applicable to special economic zones, is that the CST is levied by the Centre but is collected and appropriated by the states.

The total amount of the CST involved in purchases made by the EoUs is around Rs 500 crore per annum, which is reimbursed by the department of commerce. However, if an exemption is given, the burden will fall on states.

Another difficulty is that unlike SEZs, EoUs are large in number and widely dispersed geographically, due to which it will be extremely difficult to effectively administer an exemption scheme.

Here again, states are of the view that such schemes are prone to misuse. Sales tax authorities in one state will find it difficult to verify the genuineness of the claim from the EoUs scattered in various parts of the country.

Further, with the introduction of value-added tax, there is a decision, in-principle, to phase out the CST.

On the whole, the finance ministry has also relied on the report of the prime minister's economic advisory council which said: "It is an accepted principle of tax reform and administration that first point tax exemption is poor practice, leads to leakage and hence must be supplanted by zero rating principles".

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