Goods supplied by SEZ unit to DTA – Exigible to IGST twice? – An analysis

When the goods are removed from SEZ to DTA for supply to DTA, the question remains unanswered is whether the Integrated Tax is payable twice on the same transaction or only once akin to transactions between two DTAs.

The issue which needs examination is whether the Integrated Tax,

(a)    is leviable on the taxable event “supply of goods in the course of inter-state trade in India” in terms of Sec 7 (5) of IGST Act or

(b)   as a part of customs duty, is leviable on the taxable event “import of goods into India” i.e on removal of goods from SEZ to DTA in terms of Sec.30 of SEZ Act 2005 or

(c)    on both

when both the taxable events happen simultaneously i.e when the goods are cleared from SEZ to DTA for a sale.

Let us examine the leviability of integrated tax on the above events

Levy of IGST on Taxable Event – “supply of goods in the course of inter-state trade in India”

Sec 5(1) of IGST Act provides levy of Integrated Tax on inter-state supply of goods or services

Sec 5 (1) of the said Act reads as follows:

(1) Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:

Further, Sec 7 (5) of IGST Act inter-alia provides that supply of goods to or by a Special Economic Zone unit or Developer is treated as supply of goods or services in the course of inter-state trade and there by attracts levy of IGST in terms of Sec 5 (1) of IGST Act. 

Sec 7 (5) reads as follows:

(5) Supply of goods or services or both,

(a) ……

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

(c) …..

shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.

By harmonious reading of the above two provisions, it is clear that there is a levy of Intergrated Tax on the taxable event “supply of goods by SEZ to DTA”

Levy of IGST on the Taxable Event – “Removal of goods from a SEZ to DTA, which is deemed as Import”

Sec.30 of SEZ Act 2005 provides that any goods removed from Special Economic Zone to the Domestic Tariff Area shall be chargeable to duties of customs including anti-dumping, countervailing duty and safe-guard duties under the Customs Tariff Act 1975, similar to levy of customs duty on such goods imported.

Further, Sec. 53 of the Act provides that the Special Economic Zone shall be deemed outside the customs territory of India for the purpose of undertaking the authorized operations.

Hence, the goods cleared from SEZ to DTA, which is deemed as import to India, is exigible to Customs duty under Customs Tariff Act, 1975, which includes Integrated Tax in terms of Sec 3 (7) of the said Act.

Sec 3 (7) of Customs Tariff Act provides that  “any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding forty per cent. as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8).

Sec.5 of IGST Act supra provides for levy of IGST on inter-state supply of goods or services.

The first proviso to sec.5 of IGST Act also clarifies that the IGST shall be collected in terms of the provisions of Sec.3 of Customs Tariff Act.

Provided that the integrated tax on goods imported into Ind ia shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962.

Therefore, it is clear that, there exists a levy of IGST on the taxable event “removal of goods” from SEZ to DTA.

In most of the transactions, normally, both the above taxable events will take place simultaneously, except where the removal from SEZ to DTA is not for “supply” in the course of inter-state trade.

Levy of IGST twice on both the taxable event

Why IGST is leviable on both the taxable event, i.e a dual levy for the same set of goods and on the same transactions i.e the inter-state supply of goods under IGST Act and the removal of goods from SEZ to DTA under SEZ Act?

Let us analyze the same.

a) The taxable event “inter-state supply of goods” which is levied under Sec 7 (5) of IGST and the taxable event “removal of goods from SEZ to DTA” which is levied under under Sec.30 of SEZ Act are two different taxable events, need not necessarily happen simultaneously. There could be a situation, where one taxable event may happen and another may not.

Let us take a situation, where the goods are cleared from a SEZ unit to a DTA as sample or free of cost, wherein there is no “supply” involved in terms of Sec.2 (21) of IGST Act. In such a scenario, no IGST can be levied in the absence of “supply” of goods in the course of inter-state trade or commerce.

However, SEZ Act does not recognize the word “supply”, but provides levy of Customs duty, which includes IGST, irrespective of the fact whether the goods removed from SEZ to DTA are “supplied”  (in terms of Sec 2 (21) of IGST Act) to DTA or not.

It is pertinent to note in this context that, Sec.51 of SEZ Act provides an overriding effect to the provisions of the SEZ Act over the provisions of any other law in force, which is inconsistent with the provisions of SEZ Act.

Therefore, one can make an argument that the goods removed from SEZ to DTA are leviable with IGST under Sec.30 of SEZ Act, notwithstanding the fact that whether the goods removed from SEZ are “supplied” by SEZ unit to DTA and suffer IGST u/s 7 (5) of IGST Act.  In other words, said goods are leviable first with IGST u/s 30 of SEZ Act for “removal” from SEZ to DTA and leviable with IGST for the second time if they are “supplied” to DTA, as the act of “removal” and “supply” are independent.

(i) Prior to enactment of GST Laws, when the erstwhile Excise and CST/VAT Laws were in force (which still apply to the goods not covered under the GST), the additional duty called as CVD u/s 3 (1) of Customs Tariff Act and the additional duty called as SAD u/s 3 (5) of CTA were leviable on the goods cleared from SEZ to DTA.

(ii) In addition, under the provisions of the CST / VAT Laws, the taxes were levied on the sale of goods by SEZ to DTA

Thus, there was a dual levy existed in the pre-GST era also.

However, under the Customs Act, Government has issued notification 45/2005-Cus dated 16^th May 2005, providing exemption to SAD, in case the goods cleared from SEZ are sold in DTA and suffer levy of Sales Tax or VAT, as the case may be.

Whereas, Government has not yet issued any such notification for exemption of IGST.  In the absence of notification providing exemption for IGST, it can be argued technically that there exists dual levy on both the taxable event.

In contrary to the above legal position, CBEC has issued clarification suggesting single levy for the goods cleared from SEZ to DTA.

In the Instruction no 9 of GSTR-1 return, CBEC has clarified that in case the goods are supplied by SEZ unit under the cover of bill of entry, no need to report such transactions in GSTR-1 and that needs to be re-imported by the DTA unit in its GSTR-2 as imports. Goods/services supplied not covered under the bill of entry only need to be reported in GSTR-1.

By the foregoing instruction in GSTR-1 return, Government gives a view that goods suffered levy of IGST under Sec.30 of SEZ Act, cleared under the cover of bill of entry from SEZ to DTA, is not liable for IGST for the second time under the provisions of IGST Acts.

Further, CBEC has clarified in the same lines in the twitter messages also.

However, how far the above instructions and tweets are valid in the absence of suitable amendments or notifications granting exemptions for any one of the levy of IGST, is still not clear.

Therefore, unless Government come out with an exemption notification similar to the one issued for exemption of SAD supra, with retrospective effect, these transactions are prone to litigations and going to create hardships to the trading community, particularly to the SEZ units engaged in manufacturing activity and supply goods to DTA, falling under the jurisdiction of State tax authorities, who have no clue about the SEZ Laws.

Disclaimer

The views expressed are the personal opinions of the author in his personal capacity and not the views of the organization author works for and author is not responsible for loss or damage, whatsoever caused to anyone by referring to this article