GST impact on SEZ transactions

 

CA Madhukar N Hiregange & CA Mahadev R

 

Among most of the export benefits which exist today in indirect taxation, probably, SEZ (Special Economic Zone or unit) is the only scheme which enjoys ab-initio exemption. Other schemes such as EOU had Refund option for few types of taxes such as central sales tax. With introduction of GST, the number of exemptions have seen further cut for schemes like EOU. On other hand, SEZs continue to get ab-initio exemption from all indirect taxes even after introduction of GST. The suppliers in DTA can supply the goods and services to SEZs without charging any GST. In this article, we have analyzed the exemptions Available along with few issues with respect to such exemption.

 

SEZ schemes are being promoted with an intention to create competitive environment for goods / services exported thereby to increase the foreign exchange inflow into India. The objectives of governments for SEZs include tax free procurement of goods and services with support in basic essential infrastructure facility for production of goods or services.

 

Such facilities have led to increase in foreign entities participation in India. Section 7 of SEZ Act 2005 provides for exemption to all goods or services procured from a DTA or foreign suppliers.

 

According to Section 51 of the SEZ Act 2005, the provisions of SEZ Act would have overriding effect on provisions of any other act including taxation laws. Therefore, tax exemptions were needed to be provided for SEZ transactions in all tax laws. However, this may not be the case in case of GST. The central government has powers relating to SEZ in article 246 of the constitution whereas GST is levied with article 246A. GST may prevail over SEZ provisions as article 246A provide powers to central / state governments for taxing goods or services notwithstanding anything contained in Article 246.

 

Importation of goods or services by SEZs:

Goods imported by SEZs were exempted from basic customs duty, CVD (levied in lieu of central excise duty) and SAD (levied in lieu of VAT). After GST introduction, SEZ transactions are liable for IGST. Customs notification no.64/2017 has been issued to exempt import of goods from levy of IGST for SEZ operations. IGST notification no.18/2017 exempts levy of IGST on import of services by SEZs for authorized operations.

 

Supplies to SEZ from DTA:

Supply of goods or services by or to an SEZ is deemed to be an interstate supply according to Section 7 of IGST Act 2017. Therefore, the transactions can be subject to IGST even if location of supplier and place of supply are in same State.

 

Supplies to SEZ are treated as zero rated supply in terms of Section 16 of IGST Act 2017. Therefore, any supplier supplying goods or services cannot charge GST to SEZ. The credit in respect of inputs / input services used in respect of such SEZ supplies would also be eligible for the supplier which can be utilized for other payments. Other option for supplier would be to claim refund of accumulated credits subject to conditions. The pre-requisite for claiming the refund of input tax credits for supplier is execution of letter of undertaking (LUT) or bond with bank guarantee which can be up to 15% of tax payable on goods / services expected to be cleared (Please note that the mechanism of computing 15% amount is not provided in GST law). Supplier is eligible to execute LUT if he is status holder as per foreign trade policy or if export realization in foreign currency is Rs.1 crore or 10% of total export proceeds.

 

Now the issue arises for a supplier who does not fulfill the criteria for LUT. He needs to execute bond with bank guarantee which could block cash for him.

 - Special

If one were to analyze, Section 16(3) of IGST law requires LUT / bond when supplier opts for refund. However, according to Rule 96A of CGST Rules 2017, LUT/ bond is required for supply of goods or services without payment of GST whether or not refund opted.

 

In terms of Section 16(3) of IGST Act, small suppliers who would not be able to execute bond with bank guarantee could explore option of charging IGST. Such IGST charged needs to be claimed as refund by the suppliers.

 

Supplier may also charge IGST and ask the SEZ unit to claim refund instead if claim of refund is cumbersome for supplier. This option is not clearly envisaged anywhere in law and at the same time, there is no bar either.

 

Exemption only for authorized operations:

For claim of refund towards supplies to SEZ, the supplier has the obligation to prove that the supplies made without GST or with refund option are for SEZ authorized operations. In service tax, there was a readymade list of approved services. In GST such list is not available. There is no prescribed mechanism to understand what constitutes authorized operations. The department could always question the suppliers for this. Therefore, on a precautionary note, suppliers could request SEZ units to share the list of authorized operations which is issued by Board of Approval at inception of SEZ units. A simple declaration stating that goods / services supplied are for authorized operations could be very useful in case of litigations. Whenever in doubt, suppliers could take the option of charging GST asking customer to claim refund /credit.

 

Registration issues:

There may be a situation wherein an entity would have both DTA and SEZ units in the same state. Registration rule warrants separate registration for DTA and SEZ units in such cases. This would increase compliance for both the units as supplies between these distinct persons would be subject to GST even without consideration in terms of Section 7 of CGST / SGST law. Requirement of LUT / bond could arise for supply of services by DTA unit to own SEZ unit because of separate registration requirement. Then there could be reverse charge compliance on services procured from unregistered suppliers by SEZ. Some relaxation could be provided by the government in such cases to make it business friendly.

 

Conclusion:

GST law being new, lot of issues could crop up in initial days as discussed in earlier paragraphs. Assessee should be careful in handling the transactions for which professionals like chartered accountants, advocates or cost accountants could be consulted. Otherwise, even inadvertent errors could make assessee land up with heavy penalty in GST provisions. Issues like registration requirement, bond with bank guarantee requirement needs to be addressed by government.

 

(Views expressed are strictly personal)