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Analysis of GST Provisions in regard to SEZ Units

The Special Economic Zone commonly known as SEZ. “SEZ” Special Economic Zone as per SEZ Act, 2005, means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of Section 4 (including Free Trade and Warehousing Zone) and includes existing Special Economic Zone. When developer develops the SEZ Zone and an entrepreneur wishes to set up a unit in the zone, shall make an application to the jurisdiction Development Officer along with the requisite documents such as, details of product which will be manufactured, in case of manufacturing unit, along with manufacturing process, the raw material (inputs) and the input service, etc., after which the Board of Approval  will review it and approve the authorized operation, which is known as  ‘Letter of Approval'(LOA).  Terms and conditions may also be imposed for authorized operations in SEZ.

Procurement of Inputs and Input Services by SEZ Unit

1. Import from Outside India- Without Payment of Duty – No Customs Duty or any other Duty is leviable as per section 26 of the SEZ Act, if imported for authorised operation within the SEZ Unit. However, if the imported goods is sold to Unit located in Domestic Tariff Area(DTA), then Customs Duty will be leviable. Further, no IGST is leviable on such Import.

2. Purchase from Units located in Domestic Tariff Area- No Tax is leviable if the Goods/Services are procured for carrying out Authorised Operation in the SEZ Unit. It shall be treated as Zero Rated Supply under section 16 of the IGST Act and accordingly no tax shall be payable by the SEZ Unit.

Further, the DTA Unit suppling the Goods/Services to the SEZ Unit for Authorised Operation of the SEZ Unit is not under the purview of GST as the Supply is Treated as Zero Rated Supply as per Section 16 of the IGST Act, 2017. The DTA supplier has two options for supplying the goods/services to the SEZ unit, namely:

1. Without Payment of Tax in case of which Supplier is liable to furnish a Letter of Undertaking [ LUT] with their Jurisdictional GST Authority and Supply material/services without payment of Tax. The LUT can be submitted once in a Financial Year and it is valid for all Exports/SEZ Supplies made by the DTA unit. In this case the Supplier has the option to claim refund of the ITC used for manufacturing/trading the goods/services used for the SEZ Supply.

2. With Payment of Tax in case of which the supplier can pay applicable IGST on the goods/services supplied to the SEZ Unit and Claim Refund from the GST Authorities. This method is followed when the supplier has accumulated balance of utilisable ITC in their Electronic Credit Ledger.

However, under both the options, SEZ Unit is not liable to pay any tax to its vendors.

Meaning of DTA- As per the definition DTA means whole of India (including territorial waters and continental shelf) but does not include the area of Special Economic Zone. In simple terms it can be said that whole of India except area of Special Economic Zone is Domestic Tariff Area.

Overriding effect of GST Laws over the SEZ Act

As per Section 51 of SEZ Act, the SEZ Act has an overriding effect on any other law for the time being in force. By THE CONSTITUTION (ONE HUNDRED AND FIRST AMENDMENT) ACT, 2016, the Section 246A was inserted which reads as under:-

“2. After article 246 of the Constitution, the following article shall be inserted, namely:-

“246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State. …”

The SEZ Act, 2005, is enacted under article 246. The article 246A starts with “Notwithstanding anything contained in article 246”, this nullifies the overriding effect of SEZ Act, over GST Act as GST Act is enacted under article 246A of the constitution of India.

Determination of Place of Supply in case of Supplies to SEZ

In this respect, Section 7(5) of the IGST Act, 2017 may be referred which reads as under :-

“(5) Supply of goods or services or both,––

(a) when the supplier is located in India and the place of supply is outside India;

(b)  to or by a Special Economic Zone developer or a Special Economic Zone unit; or

(c)  in the taxable territory, not being an intra-State supply and not covered elsewhere in this section, shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.”

Therefore, Place of Supply of Goods and/or Services supplied to SEZ shall be dealt with by the provisions of IGST Act, 2017. Moreover, in order to remove even the remote possible doubt, the proviso to sub-section 2 of section 8 of IGST Act, clarifies that supply to or by SEZ unit or developer shall not be treated as ‘intra-State’ supply even in the case where both are situated within the same State.

Supply of goods and /or services by a Special Economic Zone unit to DTA/Other units

For the purpose SEZ Act, as defined in Section 2(m) “Export” means—

(i) taking goods, or providing services, out of India from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or

(ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or

(iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;

Therefore, following Outward Supplies shall be treated as Export in the case of SEZ Unit as per the provisions of the SEZ Act.

1. From SEZ Unit to any party Outside India

2. From One SEZ Unit to Another SEZ Unit

Here, there is a conflict between the provisions of the GST Law and the provisions of the SEZ Act. As per Section 2(5) of the IGST Act, 2017 “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;”

Similarly, as per section 2(6) of the IGST Act,2017 “export of services” means the supply of any service when,––

(i) the supplier of service is located in India;

(ii) the recipient of service is located outside India;

(iii) the place of supply of service is outside India;

(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange 1[or in Indian rupees wherever permitted by the Reserve Bank of India]; and

(v) 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;

Therefore, if the SEZ Unit is situated in India, supplies goods/services to any person outside India, under the both acts the same shall be considered as Export. However, the conflict arises where SEZ Unit supplies goods/services to another SEZ Unit, both situated in India. As per provisions of the SEZ Act, even though the same is categorised as Export, but as per provisions of the GST Law, the same is classified as Zero Rated Supply and therefore, IGST shall be applicable on the same. Payment such tax is not applicable if LUT is furnished by the supplier.

In this case section 30 of the SEZ Act may be referred which states that any goods removed from a Special Economic Zone to the Domestic Tariff Area shall be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975 (51 of 1975), where applicable, as leviable on such goods when imported and  the rate of duty and tariff valuation, if any, applicable to goods removed from a Special Economic Zone shall be at the rate and tariff valuation in force as on the date of such removal, and where such date is not ascertainable, on the date of payment of duty. As such, Customs Duty is leviable along with applicable IGST.

Moreover, in case of Services supplied by the SEZ Unit to any unit in the Domestic Tariff Area is a transaction of Inter State Supply and accordingly IGST shall be levied on the same. Now, there lies an ambiguity whether GST is to be paid by the SEZ Unit or the same is to be paid under Reverse Charge under Import of Service. To find a possible solution to this ambiguity,

Instruction No. 9 of Form GSTR-I may be referred, which reads as under:

“Any supply made by SEZ to DTA, without the cover of a bill of entry is required to be reported by SEZ unit in GSTR-1. The supplies made by SEZ on cover of a bill of entry shall be reported by DTA unit in its GSTR-2 as imports in GSTR- 2. The liability for payment of IGST in respect of supply of services would, be created from this Table.”

Going by the above instruction, it is clear that Supply of Services by the SEZ Unit to DTA Unit shall be reported in the GSTR-1 of the SEZ Unit and accordingly liability shall be paid by the SEZ Unit because bill of entry is not applicable for services. In respect of Goods, where the bill of entry required to be filed by the recipient, only in such cases GST needs to be discharged by the SEZ Unit, otherwise the same shall be paid by the recipient along with Customs Duty.

In this regard, a brief summary regarding Levy of GST in respect of various transactions of Inward/Outward supplies to/from the SEZ Unit can be shown as below:

Procurements by SEZ Units[ From SEZ’s Prospective]

Procurements by SEZ Units[ From SEZ’s Prospective]

Procurements by SEZ Unit[Supplier’s Prospective]

Procurements by SEZ Unit[Supplier’s Prospective]Supplies made by SEZ Unit[ Tax Impact in the hands of the SEZ Unit]

Supplies made by SEZ Unit[ Tax Impact in the hands of the SEZ Unit]

Supplies made by SEZ Unit[ Tax Impact in the hands of the Customer]

Supplies made by SEZ Unit[ Tax Impact in the hands of the Customer]

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