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Recommencement of ‘work from office’ model by units established in the ‘Special Economic Zones’ (SEZs)

Brief background:

In the awake of spread of COVID-19 cases, almost all offices have opted for an unusual and untested way of ‘working from homeand the units established in various Special Economic Zones (SEZ) were no exception to it. As one may be aware that these SEZ units are established for the common purpose of exporting their supplies and are therefore, in the nation’s interest, subjected to more benefits including tax benefits followed by stringent controls and restrictions to maintain the order.

One of the restrictions is to obtain specific permissions to move assets outside SEZ premises and allow employees to work from home. Taking into consideration the COVID-19 pandemic, Offices of Development Commissioners for various SEZs have allowed Suo-moto permissions for both the above factors. Said permissions were also extended on time-to-time basis and have been in effect till this date.

Having said above, as majority of the population of India is now fully vaccinated and the spread of the pandemic is also restricted, return to office is coming back into effect. On accorded line, revised circulars are being issued by various Offices of Development Commissioners directing the units to recommence the work from office model at the earliest.

With reference to above, directions vide Circular no. F. No. SEEPZ-SEZ/ADMIN/GI/588/2020-21/VOL-II dated 22 March 2022 have been issued for recommencement of ‘work from office’ model in a phased manner for established units’ setup under SEEPZ-SEZ. In this respect, units have been directed to commence work from office with at least 50% capacity of workforce having double dose of vaccination from first day of July 2022, and eventually from first day of September 2022, the units should function with 100% capacity ensuring Covid-19 protocol.

Similar Circular has been issued by the Office of the Development Commissioner, MEPZ (Chennai) vide Circular 241/DCC/2021-22 MEPZ SEZ dated 15 March 2022 has decided to grant further extension of Work from home (‘WFH’) facility as an option up to 30 June 2022 for established units’ setup under MEPZ-SEZ till the control of pandemic situation gets stabilised. Further, it has also been directed that the companies who have opted for WFH facility should plan and workout measures for their employees to work from their established premises in respective SEZs from July 2022 subject to the government guidelines and directives.

Implications on non-observance of foregoing directions:

Work from home’ has come out be a more efficient, cost-saving, asset-lite and effective model for various businesses and the same is becoming a preferred model over the conventional ‘work from office’ model for them.

Considering the above, if, despite of above directions, a unit opts to continue its ‘work from home’ model, there may be certain implications. Below is our humble attempt to articulate the prospective implications upon SEZ units from respective outward and inward supplies standpoint under GST law and SEZ law in case of non-compliance with aforementioned guidelines:

1. GST law

Outward:

SEZ units are primarily engaged into export of services and section 2(6), IGST Act provides the exhaustive list of conditions to be fulfilled for qualifying supplies as export of services as follows:

export of services means the supply of any service when:

  • the supplier of service is located in India.
  • the recipient of service is located outside India.
  • the place of supply of service is outside India.
  • the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India; and
  • the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.’

Said conditions does not include any condition to comply with SEZ law (Act, Rule, Guidelines etc.) and therefore, once may take a view that non-compliance with WFO guidelines would not have any impact upon exports made by the units, subject to fulfilment of other conditions.

2. Inward:

With respect to supplies procured ‘With payment of tax along with actual recovery of tax’ from the supplier, GST law does not restrict an SEZ unit to avail ITC even in case of non-compliance with SEZ law.

Similarly, in case of supplies procured ‘without payment of tax under LUT’ or ‘with payment of tax without actual recovery of tax’, GST law does not provide any specific conditions for claiming such exemption and therefore the same may be continued to be availed by the unit, however, where an SEZ unit violates any condition as provided under SEZ law including guidelines, Specified/Authorised officer may cancel/terminate the letter of approval/permission granted thereto and consequently, unit would be held ineligible to avail any such exemption going forward along with requirement to pay back the duty benefit already availed by it, proportionately or fully as the officer may deem fit.

Recommencement of ‘work from office’ model by units established in SEZs

Further, rule 89(2), CGST Rules provides for submitting the evidence of endorsement obtained upon zero-rated invoices by supplier to SEZ unit as follows:

‘(d) a statement containing the number and date of invoices as provided in rule 46 along with the evidence regarding the endorsement specified in the second proviso to sub-rule (1) in the case of the supply of goods made to a Special Economic Zone unit or a Special Economic Zone developer.

 (e) a statement containing the number and date of invoices, the evidence regarding the endorsement specified in the second proviso to sub-rule (1) and the details of payment, along with the proof thereof, made by the recipient to the supplier for authorised operations as defined under the Special Economic Zone Act, 2005, in a case where the refund is on account of supply of services made to a Special Economic Zone unit or a Special Economic Zone developer’

 In case of violation of SEZ law, Specified/Authorised officer may also not grant said endorsement, which in effect, would lead to ineligibility of supplier to claim ITC/IGST refund (as the case may be) under the GST law.

3. SEZ law:

Letter of Approval for unit (LoA) is granted under Rule 19 in Form G and the format prescribed for such includes certain terms and conditions and includes:

(x) You shall abide by the provisions of Special Economic Zones Act, 2005 and the rules and orders made thereunder.’

Aforementioned directions issued vide Circulars are binding upon the units and any violation of the same would lead to triggering Section 16 of the SEZ Act, 2005 ‘Cancellation of Letter of Approval to entrepreneur’ which provides as follows:

 ‘(1) The Approval Committee may, at any time, if it has any letter of reason or cause to believe that the entrepreneur has persistently contravened any of the terms and conditions or its obligations subject to which the letter of approval was granted to the entrepreneur, cancel the letter of approval. Provided that no such letter of approval shall be cancelled unless the entrepreneur has been afforded a reasonable opportunity of being heard.

 (2) Where the letter of approval has been cancelled under sub- section (1), the Unit shall not from the date of such cancellation, be entitled to any exemption, concession. benefit or deduction available to it, being a Unit, under this Act.

 (3) Without prejudice to the provisions of this Act, the entrepreneur whose letter of approval has been cancelled under sub-section (1), shall remit, the exemption, concession, drawback and any other benefit availed by him in respect of the capital goods, finished goods lying in stock and unutilised raw materials relatable to his Unit, in such manner as may be prescribed.’

Also, permissions have been granted in accordance with Rule 50 and 51 of the SEZ Rules, 2010 which provide as follows:

Rule 50 ‘Temporary removals to Domestic Tariff Area’ provides that a Unit may temporarily remove goods to Domestic Tariff Area without payment of duty and includes:

(d) laptop or notebook computers or video projection systems for use by authorized employees of a Unit or Developer.

 (e) any other goods with the prior approval of the Authorized Officer’

Rule 51 ‘Procedure for temporary removals in Domestic Tariff Area’ provides as follows:

(4) The goods shall be brought back to the Special Economic Zone within one hundred and twenty days from the date of taking the goods out of the Special Economic Zone or within such extended period as may be permitted by the Specified Officer.

 (5) If a Unit fails to bring back the goods into Special Economic Zone within the period specified in sub-rule (4), the duty applicable on such goods shall be paid by the Unit.

 (7) A Unit may take out laptop computers and video projection system(s) out of the Special Economic Zone temporarily for use by the authorized employees of such unit subject to following procedure, namely:

(a) Unit shall account for the laptop computers or video projection system(s).

 (b) Unit shall issue a certificate authorizing the employee by name and giving the full specification, namely, serial number and model number and make of the laptop computer and video projection system intended to be taken outside the processing area temporarily and a copy of the certificate shall be endorsed to Specified Officer and acknowledgement received by the Unit.

(c) Unit shall maintain a record of such certificate of authorization issued under clause (b) for temporary removal of laptop computer or video projection system.’

Keeping in view the aforementioned provisions, SEZ units may deliberate on the pros and cons and subsequently choose the road ahead.

Trust you find this insightful. Should you require any further clarifications or details, please feel free to revert.

Regards

Anurag Chopra

*Views expressed are personal in nature and for reference purpose only. Reliance upon the above shall be made basis prior advise from a domain specialist. Author shall not be held liable for any loss of any manner caused to anyone in this regard.

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