The finance ministry is set to withdraw a four-month-old directive that imposed service tax on use of foreign telecom networks.

The directive dealt a blow to the cash flows of IT, IT-enabled services and telecom companies, requiring them to cough up not just the tax dues but also interest for the past period running into crores of rupees.

"We have reviewed the circular... it is being withdrawn," a ministry official said, adding, "A directive to this effect may be issued soon." The levy would have also led to an increase in international telephony charges for domestic consumers.

"Receiving international private leased circuit (IPLC) service from abroad is chargeable to service tax under business support service," the circular issued in August had said.

Most firms in these sectors lease foreign networks to provide services abroad. Leased circuits are covered under telecom services. But as per the Finance Act, a telecom service has to be provided by a person with a licence in India, and since the service provider is located out of country, he could not be taxed under the 'telecom services' head. The circular said though the service could not be taxed as a telecommunication service, it was still liable to tax under business support service.

The move to withdraw the circular follows intense lobbying by industry bodies, such as the NASSCOM.

"The circular on IPLC is bad in law as it creates an aberration in the classification of services...the move (its likely withdrawal) is in the right direction," said Bipin Sapra, partner, Ernst & Young.

Industry had in its representation to the Central Board of Excise and Customs argued that IPLC services were covered by the definition of telecom services. But since foreign telecom service providers do not have a licence under the Indian Telegraph Act, these should not be classified under the business support service, which is a generic service category.