The Ground Reality regarding Purchases being made by SEZ Units

[CA Seetharaman K C]

The position of SEZ Units is quite clear as per the IGST Act Section 16 (1) of which states very emphatically that the supplies made to SEZ’s are zero rated. Moreover Section 16(2) of the IGST Act states that except for the inputs as specified in sub-section (5) of Section 17 of the CGST Act, input tax credit can be availed for all these zero-rated supplies made to the SEZ virtually signifying that all these taxes paid would be eventually refunded in parity with the maxim that “Taxes should not be Exported”

Further Section 16 (3) goes to state that the supplier to the SEZ (Registered Person making supplies to the SEZ) has two options which are as follows:

1. Submit a Letter of Undertaking (LUT) or a Bond and supply at zero rate to the SEZ and claim input tax paid on input for such supplies made to the SEZ   OR
2. Alternatively pay IGST on the goods or services supplied and claim the refund of such tax paid

It needs to be emphasised that it is only the Registered Supplier to the SEZ who can claim this refund and such a refund cannot be claimed by the SEZ unit itself as there is no enabling provision which gives authority to the SEZ Unit to claim such refund

Both the above provisions are workable on certain conditions being met wherein the words “subject to such conditions, safeguards and procedure as may be prescribed” has been used which indicate that the Rules and subsequent notifications need to be looked at.

Notification no 16/2017 which has been issued in this respect has clarified as follows:

In exercise of the powers conferred by sub-rule (5) of rule 96A of the Central Goods and Services Tax Rules, 2017, the Central Board of Excise and Customs hereby specifies the conditions and safeguards for the registered person who intends to supply goods or services for export without payment of integrated tax, for furnishing a Letter of Undertaking in place of a Bond.

i. The following registered person shall be eligible for submission of Letter of Undertaking in place of a bond: -

(a) a status holder as specified in 1[paragraphs 3.20 and 3.21] of the Foreign Trade Policy 2015-2020; or

(b) who has received the due foreign inward remittances amounting to a minimum of 10% of the export turnover, which should not be less than one crore rupees, in the preceding financial year,

and he has not been prosecuted for any offence under the Central Goods and Services Tax Act, 2017 (12 of 2017) or under any of the existing laws in case where the amount of tax evaded exceeds two hundred and fifty lakh rupees.

ii. The Letter of Undertaking shall be furnished in duplicate for a financial year in the annexure to FORM GST RFD – 11 referred to in sub-rule (1) of rule 96A of the Central Goods and Services Tax Rules, 2017 and it shall be executed by the working partner, the Managing Director or the Company Secretary or the proprietor or by a person duly authorised by such working partner or Board of Directors of such company or proprietor on the letter head of the registered person.

Further  Circular No 4/4/2017 dated 07/07/2017 has been issued which states that in case a registered person intending to supply goods to SEZ at zero rate decides to furnish an LUT’s then conditions given in Notification  no 16/2017 should be met or else he has to furnish a Bond  wherein a Bank guarantee for 15% needs to be furnished and if the Commissioner so decides he can waive the requirement of a Bank Guarantee

The fact of the matter is that no cognizance is being given to the things happening at the grass root level and how the exporters are actually dealing with the situation at hand. In fact at the ground level, what actually is going on is that none of the suppliers to SEZ units are willing to go through these cumbersome formalities (even if they qualify) and are telling the SEZ units to pay IGST at the full  rate on goods supplied by them. They are willing to take the GST Number of the SEZ unit and are also willing to do the required entries while filing their sales details but they are not prepared to supply at zero rate to the units.

The SEZ Units do not have any alternative but to pay the IGST charged by these suppliers to keep their production and exports going and only hope that the Government would be kind enough to refund these taxes paid by them till all this confusion settles.

Discussions to this article

[Prasanna Cp]

As per section 16(1) Zero rated supply means:

(a) export of goods or services or both; or

(b) supply of goods or services or both to a SEZ developer or a SEZ unit.

hence SEZ units making exports of goods and services will also be eligible to claim refund.

[A K Reddy and CO]

Hello sir,

A nice article, But I would like to bring to your notice that the Notification No. 18/2017 -Integrated Tax (Rate) New Delhi, the 5th July, 2017 clearly exempts services imported by a unit or a developer in the Special Economic Zone for authorised operations, from the whole of the integrated tax leviable thereon under section 5 of the Integrated Goods and Service Tax Act, 2017 (13 of 2017). Hence the service suppliers need not submit any LUT or Bond as per my understanding. Please clarify

[sukhbir singh]

Supplier will not be able to provide bank guarantee of 15% to claim the refund. How government expect him to pay the tax and in addition file bank guarantee for claiming the refund. It is ridiculous and will not work at all and units in SEZ would suffer and would end up paying IGST.

[CA Seetharaman K C]

Notification no 18/2017 Integrated Tax (rate) talks about import of services which are exempted ,however the fate of domestic suppliers of services is the same as that of goods. In most cases, a lot of goods and services are being supplied to SEZ units by SME units which have developed over the years to feed the raw material and service requirements of these SEZ units.

Today after the advent of GST these SME units find it difficult to meet the conditions of Bond etc and are charging full IGST on their supplies made to SEZ units. Although it is a fact that the tax paid by the SEZ units can be claimed as refund as they are exporting their output, the fact remains that by declaring supplies being made to the SEZ as zero rated is not actually helping the SEZ units in any manner as the formalities surrounding the claiming of inputs by the supplier is so complicated that no supplier would venture to go into such problems and would instead prefer to charge the tax and forget about it. Hence these provisions are not helping SEZ units in any anyway and instead they are now paying IGST and will be able to claim the refund of these taxes paid only after their suppliers have filed their returns and paid the taxes and after the SEZ unit has exported the goods.

[JAIPRAKASH RUIA]

Dear Sir,

1) In case of paying the IGST by supplier for SEZ supply, What will be the procedure for claiming refund of IGST by supplier, because as in direct export outside India, online shipping bill filling system and filling of export general manifest system by vessel owner are not there in case of SEZ.

2) SEZ rules 2006 are having set of procedure for importing goods into SEZ units. How these will be complied, if we just go by GST act and rules. Whether any changes in SEZ rules 2006.

[Prasanna Cp]

Hello Sir,

I kindly like to bring to your notice Notification No.64/2017 Customs-EXEMPTS ALL GOODS IMPORTED by a unit or developer in SEZ from the whole levy of integrated Tax,

And needed clarity between the Notification No:15&18 0f integrated tax rate

[JAIPRAKASH RUIA]

Dear Sir,

Exemption of IGST is ok as per Custom Notification. My question is for document procedure like B/E and S/B to be followed or not as per SEZ rule 2006.

[A K Reddy and CO]

Hello sir,

The notification Notification No. 18/2017 -Integrated Tax (Rate) New Delhi, the 5th July, 2017 that I referred above clearly says that IGST is exempted. Hence the supply of goods or services to SEZ units or SEZ developers is nothing but export only(deemed export) and accordingly that notification is applicable to all the domestic suppliers and accordingly they can supply without payment of IGST to SEZ units or developers. But this exemption has not been given to supply to STPI or 100% EOU units.

[Ajay Doshi]

Under notification 18/2017 dated 5th july'2017, no GST is payable by supplier of input service supplied to SEZ unit or a developer in SEZ. The supplier of Service in their GST invoice can mention the notification no with IGST amount as nil. When the IGST exemption granted through notification in public interest published in official gazettee there will be no GST liability on suppliers in future.

S.P.Mahanta