Introduction
A business dealing with foreign customers,
whether or not exclusively, is required to compete with various foreign
competitors who may be operating in more favourable environment in their own
countries. In order to boost such businesses, who intend to pre-dominantly
engage in export activities, India had adopted a model of Special Economic Zone
(SEZ) to provide level playing field to exporters located in SEZs. Being a unit
located in SEZ or being a developer has its’ own advantages with exemptions
under both direct (income tax) as well as indirect tax laws (Service tax, Sales
tax, Central Excise, etc. upto 30th June 2017 and Goods &
Service Tax (GST) w.e.f 1st July 2017). This article primarily
analyses the impact of SEZ operations under the GST regime.
Background to SEZ Legislation
The law relating to SEZ is governed by the provisions
of the Special Economic Zones Act, 2005 and various rules, notifications and
circulars issued thereunder. The person who is developing the SEZ is known as
SEZ developer and businesses operating from within the SEZ are known as SEZ
Units. There are elaborate conditions and processes which need to be followed
by both, SEZ developer as well as SEZ unit for getting approvals to set-up/
operate from a SEZ / as an SEZ unit.
On the indirect tax background, two
important provisions of the law are Sections 51 & 52. Section 51 of the Act
provides that the provisions of the SEZ Act shall have an overriding effect
over inconsistent provisions contained under other laws while Section 52 of the
Act provides that a SEZ is deemed to be a territory outside the customs
territory of India for the purposes of undertaking the authorized operations.
Brief Overview of the Provisions specifically
relating to SEZ under the GST Law
– Section 7 of the Integrated Goods &
Service Tax Act, 2017 (IGST Act) deals with the provision relating to
determination of nature of supply, i.e., whether a supply is to be treated as
interstate or intrastate. Clause (b) of sub-section (5) thereof provides that
supply of goods or services or both “to or by” a Special Economic Zone
developer or a Unit shall be deemed to be a supply in the course of
inter-state trade or commerce. This specific provision results in a uniform
treatment to supplies to SEZ / by SEZ Units across the country.
– Having declared all supplies to/ by an SEZ
Unit as interstate supplies, Section 16 (1) of the IGST Act provides that a
supply of goods / services or both, to a SEZ unit or developer shall be treated
as a “zero-rated supply”. It may be important to note that only supplies
to SEZ Unit/developers are treated as zero rated supplies and not supplies by
SEZ Unit/developers.
– Further, Section 16(3) provides that a
person making a zero-rated supply shall be eligible to claim refund under two
options, namely:
• Outright exemption by
applying for a Letter of Undertaking or Bond and subsequently claim refund of
unutilised input tax credit in terms of provisions of section 54 of the Central
Goods & Service Tax Act, 2017 (CGST Act).
• Rebate option, wherein the
supplier shall discharge the liability on the value of zero rated supply by
utilising balance from electronic credit ledger / cash ledger and claiming
refund thereof of the entire amount of tax paid.
– Rule 89 of the CGST Rules, 2017 lays down
various conditions for claiming of refund by suppliers making supply to a SEZ
developer / unit (under either of the above options). Second proviso to Rule 89
(1) requires the supplier to file refund application only after:
• In case of supply of
goods, the goods have been admitted in full in the SEZ for the “authorised
operations” as endorsed by the specified officer of the Zone.
• In case of supply of
services, obtaining evidence regarding the receipt of services for authorised
operations as endorsed by the specified officer of the Zone.
– Proviso to section 25 (2) of the CGST Act
provides that a person having multiple business verticals in a State / Union
Territory may apply for separate registration for each business vertical.
However, for SEZs, rule 8 of the CGST Rules, 2017 provides that a unit of a
person located in an SEZ shall be deemed to be a different vertical from the
units located in DTA and mandates the need for separate registration.
Some Issues
1. Whether Place of Supply is
relevant in case of supplies made to SEZ unit / developer?
– The charging section under the IGST Act
provides that the tax shall be levied on all inter-state supplies of goods or
services or both. Similarly, the charging section under the Central / State GST
Act provides for levy of tax on all intra-state supplies of goods or services or
both.
– What shall be treated to be inter-state or
intra-state supply is dealt with under sections 7 & 8 of the IGST Act,
2017. The general crux of the said section is that if the location of supplier
and place of supply are in same state, the transaction has to be treated as
intra-state, else it will be treated as inter-state supply. How to determine
the place of supply is also covered under Chapter V of the IGST Act.
– However, there are certain cases where a
deeming fiction has been introduced to treat certain transactions as
inter-state supplies. For instance, supplies in the course of import of goods /
services are deemed to be inter-state supplies u/s. 7 (2) and 7 (4)
respectively. Likewise, the supplies made to or by an SEZ developer / unit are also
treated to be an inter-state supply u/s. 7 (5) (b).
– The question that actually arises is whether
the place of supply needs to be determined in all cases where a transaction is
entered into with / by a unit in SEZ? Let us try to understand this with the
help of the following example:
ABC Limited is a SEZ
Unit. They organize a convention in a hotel located in DTA. ABC Limited has
intimated the hotel that they being an SEZ, the supply is to be treated as
inter-state supply and no tax should be charged on them on account of zero
rating u/s. 16. However, the hotel contends that in terms of provision of
section 7 (3) r.w. Section 12 (3), the location of supplier and Place of Supply
is the same, i.e., the hotel and hence the transaction is to be treated as
intra-state and CGST plus SGST will be applicable. They also claim that GST
being a consumption driven tax and consumption having taken place within the
DTA, tax is applicable.
– There are two aspects which need consideration here:
• Whether section 7 (3) –
which deals with determination of nature of supply in case of services and is a
general provision shall prevail over a specific provision, i.e., section 7 (5)
(b) which creates a legal fiction by deeming all supplies by or to a SEZ unit /
developer as inter-state?
• Whether the nature of
supply is to be determined basis the “person”, i.e., SEZ Developer / unit or
the actual location where the consumption takes place?
– In legal jurisprudence, in the context of
Monopolies & Restrictive Trade Practice Act, 1969, the Supreme Court in the
case of Voltas Limited vs. Union of India [AIR (1995) SC 1881] concluded
that an agreement falling within any of the clauses (a) to (l) will be held to
be an agreement relating to restrictive trade practice because of the legal
fiction and it will be immaterial to consider whether it falls within the
definition of restrictive trade practice in section 2 (o). No exception can be
taken against this view.
– In similar context, if a supply is made to /
by a SEZ developer / unit, it will have to be classified u/s. 7 (5) (b) and not
section 7 (1) or section 7 (3). In fact, this can also be a basis to say that
the provisions relating to determination of place of supply covered under
Chapter V of the IGST Act are not applicable to supplies by / to SEZ as they
merely aid in determining the place of supply, which is one factor for
determining whether a transaction is interstate or intrastate. Cases where the
main section itself treats a transaction to be either interstate or intrastate
shall need no reference to the provisions relating to place of supply.
– Another aspect to bear in mind is that while
the general provisions u/s. 7(1) and section 7(3) are subject to sections 10
& 12 dealing with the place of supply provisions, section 7(5), which interalia
deals with supplies to or by SEZ is not subject to the provisions of
sections 10 & 12 lending further support to the contention that the place
of supply provisions are irrelevant for such supplies.
– To answer the second sub-question relating
to consumption within the SEZ Area, one important distinction that needs to be
brought out is that section 7 (5) (b) is person centric and not consumption
centric, i.e., the section says supplies “to or by a SEZ developer / unit
located in SEZ” and not “in and from a SEZ developer / unit located in SEZ”.
This distinction is essential, because even for general cases for determination
of place of supply in case of services, more relevance is given to the location
of the person and not the location where the services are actually consumed.
For instance, in case of a person providing event management service to a
company located in Mumbai for the event to be held in Delhi, the place of
supply, which needs to be determined basis the location of such person (refer
section 12 (2) (a)) shall be Mumbai and not Delhi, though the services might
have actually been provided in Delhi. In similar context, even in case of SEZ
Developer / Unit, so long as the services are provided to a SEZ developer/
Unit, the location from where the services are provided may not be
relevant.
– In this context, there is one more scenario
which needs consideration here. Let us take an example of a person in DTA
supplying services to a domestic client but the consumption of the service
takes place in a SEZ, for example subcontracting of services. The supplier of
service has obtained an LUT for making such zero-rated supplies. However, the
question that arises is whether this supply shall be treated as zero-rated
supply considering the fact that the supply is not made to a SEZ developer /
unit but to a contractor who in turn renders services to the SEZ Developer/unit
for consumption by a SEZ developer / unit, admittedly in SEZ Area? It can be
said that this transaction shall perhaps be covered by section 7 (1) / 7 (3)
and not 7 (5) (b). This is because while the supply is consumed in SEZ, the
same is not made to a SEZ Developer / Unit. The supply is made to a person in
DTA and hence, the Place of Supply will have to be determined as per the
provisions of Chapter V of the IGST Act. However, it cannot be said that the
said person has made a supply to SEZ developer/ unit and should be eligible for
zero rating.
– To summarise, it can be concluded that:
• In case of supplies made
to a SEZ developer / unit, the transaction always has to be treated as
inter-state supplies and the provisions relating to Chapter V of the IGST Act
are not applicable.
• It is the actual supply to
SEZ developer / unit which is relevant and not the place of consumption. There
might be a case where the supply might have been consumed in the DTA, but the
supply is made to SEZ developer / Unit in which case provisions of section 7
(5) (b) shall continue to apply and the transaction shall be treated as zero
rated supply.
2. Whether the provisions
relating to Reverse Charge are applicable on supplies received by a SEZ
developer / unit?
– The GST law provides for two specific
instances where Reverse Charge Mechanism shall apply, one being the cases where
supply of specified goods / services is notified to be covered under reverse
charge and second being the case where the supply of goods / services, which
are other wise taxable but no tax is levied on account of the supplier being
unregistered.
– At the outset, it should be noted that a
SEZ developer / unit receiving inward supplies (other than those on which
reverse charge is applicable) from registered person are liable to tax subject
to LUT/ Bond. In that context, there is no reason for no tax on inward supplies
on which reverse charge is applicable. Infact, when such supplies are received
from registered suppliers, they can opt to execute LUT / Bond and state so in
their invoice, in which case, the zero rating continues to apply for the SEZ
developer/ unit as well and no tax shall be applicable.
– The notified reverse charge, which is in
effect today is applicable on domestic services as well as import of services.
However, the important question that arise is as per the provision of the SEZ
Act, SEZ is deemed to be outside the customs territory of India. Therefore, the
question that arise is whether the reverse charge provisions can be made
applicable to the SEZ?
– In this regard, reference can be drawn to
the decision of the Gujarat High Court in the case of Torrent Energy Limited
vs. State of Gujarat in Special Civil Application 14856 of 2010 decided on
16.04.2014. The facts of the said case were that the Appellants had a power
generation unit in a SEZ. Section 21 of the Gujarat SEZ Act provided for total
exemption from payment of various state taxes to the units situated in SEZ
area. However, vide a subsequent amendment to the VAT Act by introduction of
Section 5A and amendment to Section 9, a liability was created on SEZ units to
pay tax on purchase of zero rated goods used for purposes specified in Section
9 (5). In this case, the Hon’ble High Court found that the levy was not
sustainable on the grounds that any contrary intention emerging from any other
State fiscal statute would not limit the scope of the non-obstante clause when
no overriding effect is given to the provisions under the VAT Act, which were
enacted much after the SEZ Act.
– In this context, one can say that under
the GST law, by merely not giving an exclusion to the SEZ in the definition of
India in itself cannot make the non-obstante clause ineffective and the
provisions of the SEZ Act providing that the SEZ shall be deemed to be a unit
located outside the customs territory of India shall continue to prevail.
However, such a view may be subject to litigation at the ground level. Further,
it is important to note that the above matter is currently pending before the
Supreme Court and hence, the matter is yet to attain finality.
– However, a conservative view may always be
taken appreciating the fact that a person making zero rated outward supplies is
eligible for refund of accumulated input tax credit. In such a case, the onus
to discharge tax liability on the SEZ shall be as under:
|
Nature of Supply
|
Tax Position
|
|
Import of Services by a SEZ Unit or Developer for authorized
operations
|
Exempted as per Notification 18/2017 (Integrated Tax – Rate)
|
|
Procurement of goods or services notified to be liable under
RCM from registered dealer
|
No tax since zero rating continues in cases where the vendor
has obtained LUT
|
|
Procurement of goods or services notified to be liable under
RCM from unregistered dealer
|
IGST payable under RCM
|
|
Procurement of goods or services (other than notified) from
unregistered dealer
|
Since the operation of this provision is currently suspended,
no tax payable
|
3. What are the conditions
for claiming refund of tax paid / accumulated input tax credit on supplies to
SEZ developer / unit?
– Section 54 of the CGST Act provides for
refund of accumulated input tax credit on account of zero rated supplies made
or taxes paid on zero rated supplies. The section further provides that the
application for refund shall be accompanied by such documentary evidences as
may be prescribed.
– The said documentary evidences required for
filing the refund claim have been prescribed in Rule 89 of the CGST Rules,
2017. Second proviso thereof provides that refund shall be granted only if the
supplies made are used for the authorised
operations of the SEZ Developer / Unit. However, it is important to
note that there is no such requirement under the Act which provides that the
refund shall be allowed for zero rated supplies made. There is no provision under
the CGST Act which provides for any conditions / power to prescribe conditions
for the claim of refund for zero rated supplies, specifically supplies to SEZ
Developer /unit made. Therefore, the question that arises is whether the
provisions of Rule 89 are ultravires to the provisions of the Act or
not?
– However, before proceeding further, it is
also important to understand the need for answering the said question. There
can be two kinds of suppliers making supply to SEZ, one being a person
exclusively / pre-dominantly supplying to SEZ resulting in accumulated credit
and the other being a case where a person is pre-dominantly supplying in DTA
with some supplies to SEZ resulting in accumulated credits being adjusted
against liabilities on account of other supplies.
– In the first case, this aspect will be
important because not all supplies received by a SEZ Developer/ Unit may be
categorised as being received for authorised operations. For instance, an SEZ
unit, supplying software consultancy services, may be receiving supply from a
canteen operator which the proper officer may not certify as being used for
authorized operations & in such case, even if the supplier has opted for
LUT, he will not be able to claim refund of accumulated credits.
– In this context, to decide whether the Rule
89 is ultravires to the Act or not, one can refer to the provisions of
the Supreme Court decision in the case of Indian National Shipowners
Association vs. Union of India [2010 (017) STR 0J57 (SC)]. The issue in the
said case was the validity of the provisions of reverse charge mechanism on
import of services for the period upto 18.04.2006 where the liability was
created by Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 without
corresponding provisions in the Finance Act, 1994. The Court confirmed by the
Bombay High Court ruling [2009 (013) STR 0235 (Bom.)] which held that the Rules
were ultravires to the provision of the Act by holding as under:
… Before enactment of section 66A it is
apparent that there was no authority vested by law in the Respondents to levy
service tax on a person who is resident in India, but who receives services
outside India. In that case till section 66A was enacted a person liable was
the one who rendered the services. In other words, it is only after enactment
of section 66A that taxable services received from abroad by a person belonging
to India are taxed in the hands of the Indian residents. In such cases, the Indian
recipient of the taxable services is deemed to be a service provider. Before
enactment of section 66A, there was no such provision in the Act and therefore,
the Respondents had no authority to levy service tax on the members of the
Petitioners-association.
21. In the result, therefore, the
petition succeeds and is allowed. Respondents are restrained from levying
service tax from the members of the Petitioners-association for the period from
1-3-2002 till 17-4-2006, in relation to the services received by the vessels
and ships of the members of the Petitioners-association outside India, from
persons who are non-residents of India and are from outside India.
– In similar context, till the time provisions
of section 54 are amended empowering the imposition of conditions for grant of
refund, Rule 89 should be treated as ultravires to the provisions of
section 54 and shall have no effect.
4. How shall supplies by SEZ
to DTA be treated?
– While SEZs are formed with specific goal to
promote exports and units within the SEZ are required to achieve specified
export targets, there can be instances when supplies may be made to customers.
Let us try to analyse such scenarios with the help of following examples:
Example
relating to supply of goods by an SEZ to a unit located in DTA
ABC Limited is a trader and has imported
goods in its’ warehouse in Free Trade Warehousing Zone, which is located within
the SEZ in Gujarat, i.e., the goods have not crossed the customs frontier and
the Bill of Entry for Home Consumption is not filed. ABC Limited has a customer
in DTA in Gujarat willing to buy the said goods. Following issues arise in this
transaction for ABC Limited:
a. Will ABC Limited be required to
discharge GST on its’ sale invoice to the customer or customer will discharge
the IGST at the time of filing Bill of Entry for Home Consumption at the time
of removal of goods from the SEZ?
b. Whether the supply is to be treated as
intra-state considering that both the location of supplier and place of supply
are in same state?
– To answer the above question, let us first
refer to the proviso to section 5 (1), which is the charging section for the
levy of IGST, and provides that the integrated tax on goods imported
into India shall be levied and collected in accordance with the provisions of
section 3 of the Customs Tariff Act 1975 at the point when the duties of
customs are levied as per section 12 of the Customs Act, 1962. Further,
reference to section 7 (2) also becomes necessary which provides that the
supply of goods imported into the territory of India till they cross the
customs frontiers of India shall be treated to be a supply in the course of
inter-state trade or commerce.
– What is meant by “imported goods”, while not
defined in IGST Act, is defined under the Customs Act, 1962 as any goods
brought into India from a place outside India but does not include goods which
have been cleared for home consumption”.
– In the above example, since the goods are
being sold from the FTWZ itself, which is a bonded warehouse, in other words, a
customs area under a bill of entry for warehousing, i.e., before the goods have
been cleared for home consumption, they are imported goods. In view of section
7 (2), the supply will have to be treated as interstate supply and in view of
proviso to section 5 (1), since the goods are imported goods, there shall be no
levy under the charging section of IGST Act and tax will have to be levied
under the Customs Act only. Further, it is provided that the Bill of Entry for
Home Consumption can be filed either by the buyer in the DTA or the SEZ unit
(on authorization from the buyer) (Refer Rule 22 of Special Economic Zone
(Customs Procedure) Regulations, 2003.
– However, it is important to note that the
Central Board of Excise & Customs has given a contrary view in Circular
46/2017 dated 24.11.2017 wherein it has been clarified that the supply of the
nature stated in the above example squarely falls within the definition of
“supply” as per section 7 of the CGST Act and shall be liable to IGST in view
of section 7 (2) treating such supplies as interstate supplies.
– However, the above notification clearly
appears to be issued without considering the specific provisions of section 5
(1) clearly keeping the taxability of imported goods outside the purview of
IGST Act and imposing the levy under the Customs Act, 1962 and hence, appears
to be erroneous. Further, the proposition suggested in the Circular hints at
double taxation, as at the time of removal of goods from the SEZ, a Bill of
Entry shall also be required to be filed which will create a tax liability on
the party filing the document as well as the unit within the SEZ shall also be
required to charge IGST on its’ invoice.
– Section 7 (5) (b) clearly states that
supplies by SEZ are to be treated as interstate supplies and hence, if at all
ABC Limited decides to file the Bill of Entry with the authorities (after
obtaining the necessary authorisations), the applicable tax shall be IGST by
treating the transaction as an interstate supply.
– So far as supply of services by SEZ to DTA
is concerned, the same would be a taxable inter-state supply irrespective of
whether the customer is in the same state or not on account of the deeming
fiction under the law.
5. Specific aspects of
dealing with / being a SEZ Developer/ Unit
– Dealing with SEZ developer / Unit, it has to
be noted that the supply being made to the SEZ developer / unit is never to be
questioned at the time of application of LUT. For instance, the jurisdictional
officer of the supplier cannot deny the grant of LUT on grounds that since the
supply is of a goods/ service on which credit would not have been eligible had
the zero rating not been prescribed.
– Registering for GST as SEZ Developer / Unit
– at the time of obtaining registration, care should be taken to ensure that
the fact the person registering is a SEZ developer/ unit is being selected in
the portal as this is expected to have its’ own challenges. For instance, if a
SEZ developer / unit is not registered as such on the portal, it will face a
peculiar situation where it would have charged IGST on all its DTA supplies
(even where the customer is in same state) but the portal will not allow the
same while filing GSTR 1 since the supplier is not registered as SEZ. This will
also impact the credit claim of the customer resulting in disputes. Similarly,
on inward side as well, all the vendors would have charged IGST but while
filing their GSTR 1, they may not be able to select IGST (of course, this
specific issue is not identified since filing of GSTR 2 has been postponed for
the time being).
Conclusions
While the
intention of the law is to ensure that the maximum benefits flow to the SEZ
developer / units to promote exports, the manner in which the provisions have
been drafted has increased the scope of probable tax litigation. While the law
is now in place for more than six months, there is sufficient time for business
in SEZ or dealing with SEZ to take correct tax positions to avoid future pains
!!! _
