Supplies to SEZs Across India – Some Serious Issues

1. SEZs, in thousands in India, have now to face fresh challenges in GST Regime. All exemptions that were being enjoyed by them pre-GST seem to be over now i.e. service tax; central sales tax and in majority of the State VAT Acts.

2. GST is already set to subsume CVD and SAD, thus going forward BCD and Integrated Goods and Services Tax (IGST) will be charged on such supplies made from SEZ. Also, the buyer will have the credit of IGST available to set off against the liability of CGST and SGST subject to prescribed conditions.

3. These units i.e. SEZ Units and SEZ Developers are increasing day by day and so are the units’ supplies goods and services to such units. Hence, it is imperative for all of us appreciate the impact GST Regime is likely to create on such units.

4. Section 7(5)(b) of the IGST Act mandates that supply of goods or services or both to or by a Special Economic Zone Developer or a Special Economic Zone unit shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.

5. Section 8(1)(i) Proviso specifically states that, supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit shall not be treated as an intra- state supply. For example a supplier in Domestic Tariff Area (DTA) in State of West Bengal supplying goods or services or both to a unit located in Wipro SEZ Kolkatta shall treat such a supply as interstate supply of goods and services irrespective of the fact that both the supplier of goods or services and the recipient are located within the State of West Bengal. Reverse will also be true i.e. if from Wipro SEZ supplies or goods or services are made to a DTA unit in West Bengal; such supply will also be treated as inter-state supply despite the fact that goods did not move interstate. A supplier in SEZ in the State of Tamil Nadu supplies goods or services to a DTA unit in Tamil Nadu. The supply will be treated as inter-State supply despite the fact that goods did not move inter-State

6. Special Treatment to SEZs under section 16 of the IGST Act.

As per Section 16 of the IGST Act, supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit has been rated as zero rated supply. Suppliers of goods and services to these recipients can avail of one of the following options on their supplies:

a) Make their supplies under bond or Letter of under Taking without payment of IGST and claim Input Tax Credits; or

b) Make supplies on payment of IGST and claim refund of taxes paid.

Suppliers to SEZ unit or developers under either of the above options will be subjected to such conditions, safeguards and procedure as may be prescribed in this regard.

We should remember that except for the above special treatment in the nature of supply and zero rating, the SEZ unit or SEZ developer is subject to all other provisions of the GST laws.

7. Zero-rated supply refers to items that are

– taxable, but the rate of tax is nil on their supplies and

– input tax relating to them can be availed.

As per Section 16 of the IGST Act, “zero rated supply” means any of the following taxable supply of goods and/or services, namely –

(a) export of goods and/or services; or

(b) supply of goods and/or services to a SEZ developer or an SEZ unit.

Further proviso to this section read “…credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply”

It virtually means that if a supplier of goods/ services exports – no tax shall be charged on such supplied. Additionally, credit of input tax paid on service procured for providing such supplies.

However, in case of supplies to SEZ, the concept of Zero rated has been dealt differently. Under the proposed GST Law, a deeming fiction has been created wherein supply to and from SEZ shall be subject to IGST.

On conjoint reading of both the concepts, the only possible outcome is that zero-rating for SEZ has been done by way of refund. In other words, SEZ unit shall claim refund of tax paid on services procured by it. Thus, while there may not be any upfront exemption from tax, refund can be claimed.

In my view, Section 16(4) that deals specifically with SEZ issued clearly mandates the above legal proposition when it says that SEZ Developer or Unit receiving zero rated supply specified in clause (b) of sub-Section (1) shall eligible to claim refund of IGST paid.

Thus in my view there is no question of making tax free supplies to SEZ etc; suppliers will have to charge tax and SEZ etc. then claim refund of the tax they paid as per law subject to latest Notification of July 2017 discussed below.

Section 147 of the Central Goods and Services Tax Act, 2017 empowers the Government to notify, on the recommendation of the GST Council, certain supplies of goods as deemed exports, where goods supplied do not leave India, and payment for such supplies is received either in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India.

However this benefit has been restricted only on supply of goods and not services. Further, while defining relevant date for the purpose of refund claim of deemed exports explanation 2(b) to section 54 refers to only export of goods. Thus as per section 147 the status of deemed exports is available only for goods and not for services.

However, section 55(1) empowers the Government to notify class of persons who will be entitled to claim refund of taxes paid on notified supplies of goods or services.

Government has so far not notified any goods under section 147. It is expected that some of the existing deemed exports under FTP may be notified under this section.

Latest Developments – CBEC Notification.

Circular No. 26/2017-Cus, dated 1-7-2017 has been issued in this regard by the CBEC to explain certain changes in the export procedures, particularly with respect of claiming refund of taxes or duties paid on export goods or inputs used in export goods. Whereas, as per rule 96A of the Central Goods and Services Tax Rules, 2017, any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking. This bond or Letter of Undertaking is required to be furnished in FORM GST RFD-11 on the common portal.

The new regime hence provides for two options for making exports – Export under bond followed by refund of Input Tax Credit (ITC), or payment of Integrated Goods and Services Tax (IGST) and then refund of same. Central Goods and Services Tax Rules, 2017 have been amended to incorporate new Rule 96A providing for refund of Integrated tax (IGST) paid on export of goods or services under bond or Letter of Undertaking. Any registered person availing this option has to furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11, while details of the export invoices contained in FORM GSTR-1 furnished on the common portal by the exporter would be electronically transmitted to Customs and a confirmation of export from them would be electronically transmitted to the GST common portal. It may be noted that these provisions will also be applicable when goods or services are supplied to a unit or developer in Special Economic Zone (SEZ).

Will it mean that once LTU or Bond is furnished by the supplier to SEZ units etc. he will not charge tax ( this is contradictory to Section 16(4) of IGST Act where such units can claim refund of IGST only)? If so then what is the purpose of LTU or Bond. The purpose is clear once the SEZ etc. do not satisfy the requirement of Section 16(3) and do not bring on record the proof of exports as required by law of goods or services or both; then not only their liability to pay full IGST shall arise with interest but also the suppliers making supplies to SEZ etc. shall also be liable to full tax. No such clarification comes from the Act as to how such taxes shall be dealt with. There could be no other interpretation once the entire Section 16 is harmoniously construed.

Any registered person would not be required to file any application for refund of Integrated Goods and Services Tax (IGST) paid on supply of goods for exports. The Shipping Bill, having GST invoice details would be deemed to be an application for refund of integrated tax paid on the goods exported out of India. Such application would be deemed to have been filed when the person in charge of the conveyance carrying the export goods files an export manifest or an export report covering the number and the date of shipping bills.