Navigating the recently notified amendment to Zero Rated Supplies to SEZ Units and Developers under the GST Law
Introduction
The transition to the Goods and Services Tax (GST) regime in the year 2017 brought many sea changes in the manner in which different-different transactions are subjected to indirect taxes in India. One such crucial change was the treatment of supplies made to Special Economic Zone (SEZ) units or developers, which were recognized as ‘Zero rated supplies’ under Section 16 of the Integrated Goods and Services Tax (IGST) Act, 2017. This meant that suppliers could either make such supplies without paying IGST under a Letter of Undertaking (LUT) or pay the applicable IGST and claim a refund later. However, this provision was recently amended through the Finance Act, 2021 (Section 123) to restrict the benefits of zero-rated supplies to only those supplies which are meant for ‘authorized operations’ by the SEZ units or developers. As of July 31, 2023, this amendment has been notified by the Government, indicating that only supplies intended for ‘authorized operations’ will continue to be treated as zero-rated supplies, while others will require payment of applicable IGST.
Recent Notification on Zero Rated Supplies
For some time after the amendment, the Government did not notify the change, leading to uncertainty in the industry. However, on July 31, 2023, the Government finally issued Notification No. 27/2023-Central Tax, which officially notified the amendment, effective from October 1, 2023. This notification means that going forward, only supplies utilized for ‘authorized operations’ by SEZ units or developers under the SEZ law will be considered as ‘zero-rated supplies’. For supplies not meant for ‘authorized operations’, the option of not paying IGST upfront or claiming a refund later will no longer be available.
Understanding ‘Authorized Operations’ under the SEZ Law
To determine what qualifies as ‘authorized operations’, we must refer to the relevant provisions of the SEZ Act, 2005. Section 2(c) of the SEZ Act defines ‘authorized operations’ as operations that may be authorized under sub-section (2) of section 4 and sub-section (9) of section 15. In furtherance of this, Section 4(4) and Section 15(9) specify that operations authorized for SEZ developers or units will be listed in the Letter of Approval issued to them.
Challenges for Non-SEZ or DTA Suppliers
For suppliers operating outside the SEZ or in the Domestic Tariff Area (DTA), it becomes challenging to ascertain whether the supplies made to SEZ units or developers are indeed meant for ‘authorized operations’. This is because SEZ entities may not readily share their Letter of Approval with all their suppliers, making it difficult for the latter to determine the nature of their supplies.
Ensuring Compliance for Zero Rated Supplies – Way Forward
To avoid potential issues with GST authorities regarding the nature of supplies made to SEZ units or developers, non-SEZ or DTA suppliers need to take certain precautionary measures from October 01, 2023:
1. Endorsement on Tax Invoice: Suppliers should obtain an endorsement from the recipient SEZ unit or developer on the tax invoice stating that the supplies will be used for ‘authorized operations’ as per the SEZ law.
2. Obtaining Endorsement from SEZ Officer: Alternatively, suppliers can request the recipient SEZ unit or developer to obtain an endorsement from the specified officer[1] within the SEZ area, confirming that the goods are indeed meant for ‘authorized operations’. Such an endorsement aligns with the existing condition for obtaining IGST refund under Rule 89 of the CGST Rules for supplies made to SEZ units or developers.
By adhering to these precautions, non-SEZ or DTA suppliers can ensure that their supplies qualify as zero-rated supplies under the GST law and avoid any potential disputes with GST authorities in the future.
Conclusion
The recent amendment to the GST law regarding zero-rated supplies to SEZ units or developers brings greater clarity and streamlines the process of taxation for such transactions. With the amendment now officially notified by the Government, it is essential for suppliers to take proactive steps to ensure compliance. By obtaining necessary endorsements from the SEZ entities or specified officer, non-SEZ or DTA suppliers can continue to avail the benefits of zero-rated supplies without facing challenges from GST authorities regarding the ‘authorized operations’ status of the recipient SEZ unit or developer. These measures will contribute to a smoother GST implementation and promote ease of doing business for all stakeholders involved.
[1] Specified Officer means Joint or Assistant or Deputy Commissioner of Customs posted in the SEZ – Rule 2(zd) of the SEZ Rules.
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