Special Economic Zones - Related Issues Under GST

[Dinesh Kumar]

1. Introduction:

SEZ is a special scheme under Ministry of Commerce, as a part of the Government’s export promotion strategy. SEZ is a special area, subject to regulations that differ from the rest of the country, mainly to make it favorable for foreign exchange inflow into India. SEZs are governed by the Special Economic Zone Act, 2005 (Hereinafter referred to as the ‘SEZ Act’). Section 7 of SEZ ACT provides for exemption to all goods or services.

*Exported out of SEZ; or

* Procured from a DTA or foreign suppliers by a SEZ

Further, as per section 51 of the SEZ Act, the provisions of the SEZ Act would have an overriding effect on provisions of any other Act including taxation laws. However, the overriding effect of section 51 of the SEZ Act will not be the case in GST and in case of any conflict between SEZ Act and GST Act, later will prevail. This is because of Article 246A of the Constitution. Article 246A provides powers to Central/State Governments for taxing goods or services notwithstanding anything contained in Article 246 which gives power to enact the SEZ Act.

Supplies made by or to SEZ will now be under the ambit of the Goods and Services Tax Act, so far as indirect taxes are concerned. The law makers of GST have kept the provisions for the benefits of SEZs by introducing concept of Zero-rating for the suppliers made to SEZs and also exempting imports of goods or services by SEZ.

2. Registration

SEZs are specially designated economic areas, created with the principal motive to promote exports. There may be instances where an entity have a unit in Domestic Tariff area (DTA), as well as a unit, is SEZ in same State or Union territory. In such case, a question arises to mind as to whether both such units of same entity needs a registration separately under GST.

The answer is definitely a “Yes” as the second provision to section 25 of the Central Goods and Services Act, 2017 (hereinafter referred to as the CGST Act) read with rule 8 of the Central Goods and Services Rules, 2017 (Hereinafter referred to as the Rules) require a person having a unit in a Special Economic Zone or being a Special Economic Zone developer to apply for a separate registration, as distinct from his place of business located outside the Special Economic Zone in the same State or Union Territory.

This Separate registration requirement not only makes the inter-unit supplies taxable even though made without consideration but also increases the compliance burden of return filings, audit, assessment, etc.

3. Taxability of Supply of goods or services by DTA units to SEZ units.

Any supply of goods or services made to or by SEZ unit is treated as inter-State supply in terms of section 7 of the integrated Goods and Services Tax Act, 2017 (Hereinafter referred to as the ‘IGST Act”) and is subject to levy of IGST. However, in order to provide relief to SEZ units. Concept of zero ratings has been made applicable for supplies made to SEZ under GST. Zero-rated supply as defined in section 16 (1) of the IGST Act, means any of the following supplies of goods or services or both names.

a.Export of goods or services or both; or

b. Supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.

Under Zero-rated supply concept, the supplies are made by a registered supplier in DTA to SEZ unit, either without payment of taxes (under a Bond or Letter of Undertaking) and subsequently filing a refund claim of unutilized input tax credit or on payment of taxes and subsequently filing a refund claim of the taxes so paid. Therefore, there is no tax incidence of SEZ unit.

(i)Refund claim in case of supplies to SEZ units relating to authorized operations.

A person making zero-rated supplies can claim refund of input tax credits or claim refund of IGST paid on such supplies, as per section 16 of the IGST Act. The procedure for refund is given in section 54 of the CGST Act along with rule 89 of the CGST Rules. Accordingly, a supplier of goods or services to SEZ unit claiming refund of IGST paid on supplies to SEZ unit or input tax credits, may make an application before the expiry of two years from the relevant date in Form GST RFD-01 rule 89 relating to refund stipulates that the supply, in respect of which tax had been paid and refund is sought, shall be necessarily for authorized operations. However, the term ‘authorised operation’ in this context is not explicitly used in the IGST Act. Therefore, an issue arises as to whether the benefit of Zero rating will be eligible only in respect of supplies made for SEZ’s authorized operations or in respect of all operations or in respect of all operations of SEZ in the course of its business.

In re M/s Coffee Day Global Limited [2018 (8) TMI 875 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA](GST AAR Karnataka) KAR ADRG 13/2018 dated 26.07.2018, the question raised before AAR was whether supply of non-alcoholic beverages to SEZ units using coffee vending machines was in the nature of zero-rated supply as defined under section 16 of the IGST Act? The contention of applicant was that any supply of goods or services to SEZ units is zero-rated and it interpreted that the phrase ‘any supply’ would cover everything, including beverages and ingredients for beverages. Once the supplies are zero-rated, refund of input tax credit of the IGST paid on such supplies is automatic. The conditions such as they should be for authorized operations, etc.. can be treated as ultra vires.

The AAR held that benefit flowing out from the SEZ Act,  accrues to anyone only when the condition of authorized operations is fulfilled. Therefore, even in the event of the IGST Act, not explicitly using the term ‘authorised operations’ in section 16 (1) (b), it is implicit that the supply of goods or services or both described in section 16 (1) (b) have to be read as in relation to authorized operations. Since applicant had not made out a case that the activity undertaken by them is certified as an authorized operation by the proper officer of the SEZ.

Therefore activity undertaken by the applicant did not qualify to be a zero-rated supply.

(ii) Refund claim for supplies under ‘bill to ship to model’

In a ‘bill to ship to model’, goods are delivered by a supplier to recipient based on the instruction of a third person. This model is also used in supplies relating to SEZ units. It can happen in two ways; (a) bill to SEZ and ship to DTA scenario or (b) bill to DTA and ship to SEX scenario.

A person making supplies to SEZ can claim refund of tax paid on such supplies under section 54 of the CGST Act, read with proviso to rule 89 of the CGST Rules. One of the conditions for claiming refund for supplying goods to SEZ unit is that an endorsement is required from the SEZ officer that the goods have been admitted in full into the SEZ for authorised operations.

In a bill to SEZ and ship to DTA scenario, the goods are not getting admitted to the SEZ and it becomes quite difficult to obtain the endorsement from the specified officer of the zone as the goods have not been admitted in full in SEZ. Therefore, a suggestive measure can be charging of IGST on sale of goods, instead of considering the same as zero-rated transaction.

4. Taxability of supply of goods or services by suppliers outside India to SEZ units

Any supplies of goods or services received by SEZ from outside India shall be treated as import of goods or services within the meaning of section 2 (10) and 2 (11) of the IGST Act respectively.

However, an exemption has been granted to all goods imported by SEZ units for authorized operations vide Notification No. 64/2017-cusoms, dated 05.07.2017. Further, vide Notification No.18/2017 Integrated Tax (Rate) dated 5.7.2017, an exemption has been granted to all services imported by SEZ units for authorised operations.

5. Taxability of supply of goods or services by SEZ units

(i) Supply of goods or services to DTA units.

Any supply of goods or services by a SEZ unit to DTA unit will fall under section 7(5) (b) of the IGST Act and shall be treated as inter-State supply chargeable to IGST as per section 5 of the IGST Act.

Section 53 of the SEZ Act provides that SEZ shall be deemed to be a territory outside the customs territory of India for the purpose of undertaking authorized operations and be deemed to be port, inland container depot, land station or land customs station for the Customs Act, 1962. Section 29 and 30 of the SEZ Act further provides that removal of goods (procured, produced or manufactured) from SEZ to DTA will be chargeable to duties of customs as leviable on such goods when imported and the rate of duty shall be the rate in force on the date of such removal. Therefore DTA clearance are treated as an import into India and customs duty is to be paid by importer as per the scheme of SEZ Act.

Accordingly, basic customs duty and IGST are charged on supplies of goods made by SEZ units of DTA unit. As to who will discharge the liability of IGST, the GST laws do not offer any clarity in this regard. However, in view of instruction No.9 of Form GSTR-1 reading with SEZ Act provision, a view can be taken that supply by SEZ unit to DTA unit is to be treated akin to import and unless the recipient DTA unit is not required to file a bill of entry, IGST is to be paid by it. Representations have been made on this issue and a clarification to this effect will be a welcome relief for the stakeholders.

(ii) Supply of goods or services outside India

Any supply of goods and services by SEZ outside India shall be treated as zero-rated supply in view of section 16(1)(a) of the IGST Act. The supplier may opt any of the these two options (a) to supply without payment of taxes (under a Bond or Letter of Undertaking) and subsequently filing a refund claim of unutilized input tax credit or (ii) to supply by making payment of taxes and subsequently filing a refund claim of the taxes so paid.

6. Reverse charge mechanism

Under reverse charge mechanism, the liability to discharge the GST shifts from the supplier to the recipient and the GST laws applies to such recipient ‘as if he is the person liable for paying the tax”. However, any supplies to SEZ by any supplier from DTA are treated as zero-rated supplies in view of section 16 of the IGST Act. Hence for transactions attracting reverse charge like advocate services, etc. it is the SEZ unit who will require to discharge tax and obtain refunds for which it need to take registration compulsorily.

Import of services and goods are liable to reverse charge mechanism under section 5 (3) of the IGST Act. However, an exemption has been granted to all goods and services imported by SEZ units for authorized operations – Vide Notification no.64/2017- Custom dated 05.07.2017 and Notification No.18/2017 integrated Tax (Rate) dated 05.07.2017.

7. Concluding words

SEZs are playing vital role in the growth of economy of our country. They have been a contributor in boosting exports, employment and generating foreign direct investment. It is a dedicated zone which enjoys a host of fiscal and tax benefits. Under GST regime, a major benefit of zero rating the supplies made to SEZ units has been provided. Beside this goods and services imported by SEZ unit for authorised operations are also being exempted from the levy of GST. However, refund claim of IGST paid or unutilized input tax credit on supplies made by DTA units to SEZ units under zero-rated supply are allowed only for authorized operations and not for all operations and it becomes a cumbersome process for DTA units to bifurcate the supplies used in authorised operations or other operations. Further, SEZ units are also being made liable to pay tax on supply of goods and services under reverse charge and obtain refund under zero-rated supply mechanism. On one side, supplies to SEZs are zero-rated and on another side, supplies by SEZs are being taxed. Therefore, it is in the interest of SEZ and business communities, that Government should come up with more clarifications on the issues relating to supplies to/by SEZs.  

The procedure for businesses to register and file goods and service tax (GST) is a tough nut to crack. ADCA, which is a team of GST Consultants in bangalore helps such business with GST registration.

Discussions to this article

[Ganeshan Kalyani]

Detailed write-up gives in depth understanding on the taxability of transaction with/by SEZ. Thanks to you for sharing such valuable information.