GST applicability on SEZ Transactions

Applicability of CGST Act 2017 and IGST Act 2017:

• Section 1 of CGST Act 2017 states that CGST Act 2017 extends to whole of India.
• Section 2(22) of IGST Act- “taxable territory” – “Taxable territory” means the territory to which the provisions of this Act apply i.e., whole of India.

Definition of India as per CGST Act 2017:

• In terms of section 2(56) of CGST Act 2017, “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters(12 nautical miles), seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone (200 nautical miles) and other Maritime Zones Act, 1976 (80 of 1976), and the air space above its territory and territorial waters.
• Article 1 of constitution:(1) India, that is Bharat, shall be a Union of States. 1 [(2) The States and the territories thereof shall be as specified in the First Schedule.] (3) The territory of India shall comprise— (a) the territories of the States; 2 [(b) the Union territories specified in the First Schedule; and] (c) such other territories as may be acquired.

Whether CGST Act and IGST Act applicable to SEZ?

Provisions:

• Section 53 of SEZ Act Special Economic Zones to be ports, airports, inland container depots, land stations, etc., in certain cases. A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorised operations.
• The Hon’ble HC of Calcutta in the case of Kamyab Overseas Private Limited & Anr.. vs. Union of India & Ors. [WP no.16800 (W) of 2009] held that there is a difference between customs territory of India and territory of India. A Special Economic Zone is very much within India.
• Essar Steel Ltd vs. UOI [2010 (249) E.L.T. 3 (Guj.))] – The High Court of Gujarat held that the levy of export duty on goods supplied from the Domestic Tariff Area to the Special Economic Zone is not justified.

The same was upheld by Supreme Court of India by dismissing Appeal (Appeal (Civil) No. 5698 of 2010) against the above-mentioned order of the Hight Court of Gujarat.

Based on the above, we can conclude that SEZ forms a part of India but is only deemed to be a territory outside India under Customs law for the purposes of undertaking authorized operations.

Therefore, GST Acts and Rules are applicable to SEZs.

GST Registration for a SEZ Unit/SEZ Developer:

Provisions:

• In terms of section 24(i) of the CGST Act 2017, a person is liable to take registration if such person makes any inter-State supply.
• In terms of Section 7(5) of IGST Act, 2017, the supply of goods or services or both from or to an SEZ shall be treated as inter-State supply of goods or services.
• In terms of section 23(2) any person making inter-State supply of taxable services up to the limit of INR 20 lakh of aggregate annual turnover or INR 10 lakh in case of special category States are exempt to obtain registration in a year (NN 10/2017-IT).
• In terms of First Proviso to Section 25 of CGST Act,2017, a SEZ Unit / SEZ Developer shall have to apply for a separate registration, as distinct from his place of business located outside the Special Economic Zone in the same State or Union territory.

Therefore, SEZ Unit / SEZ Developer is mandated to obtain a separate registration irrespective of the annual aggregate turnover as per Section 2(6) of CGST Act 2017.

However, the SEZ Unit / SEZ Developer is exempted from Registration under GST Act:

• If the annual aggregate turnover on a PAN level basis (SEZ Unit / SEZ Developer along with its distinct persons) is less than 20L/10L in a year.

&

• The SEZ Unit/ SEZ Developer and its distinct persons are into supply of services only.

Treatment of Various Transactions of goods/services under GST and disclosures in GST Returns:

1. Supply of goods from SEZ Unit / Developer to any unit in DTA:

From Recipient’s POV:

• In terms of Section 30 of the SEZ Act, goods removed from an SEZ to a DTA would be liable to Customs duties (including anti-dumping, countervailing, and safeguard duties) as if the goods have been imported.
• In terms of Section 5(1) of the IGST Act 2017, integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 i.e., collected by Customs Authorities during Customs clearance.
• In terms of Section 16 r/w rule 36(d) of CGST Act 2017, a registered person shall be eligible to claim credit based on a bill of entry (“T” type or “M” type) or any similar document prescribed under the Customs Act, 1962 or rules made thereunder for the assessment of integrated tax on imports.

Therefore, the goods received by the unit in DTA shall be treated as “Import of Goods”.

• Disclosure of availment of ITC in GSTR 3B by DTA Unit: Table 4A(1) – Import of goods

From Supplier’s POV:

• In terms of Section 2(i) of SEZ Act 2005, ‘Export’ means 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.
• In terms of Sec 2(5) of IGST Act 2017, ‘Export of goods’ means taking goods out of India to a place outside India.

Therefore, supply of goods from a unit/developer in SEZ to a unit in DTA would not be considered as Export of goods.

• Disclosure by SEZ Unit:

a) Books: Income recognized in books of accounts without GST.

b) GSTR 1: NA since GST is collected by Customs.

c) GSTR 3B: NA since GST is collected by Customs.

d) GSTR 9: NA since GST is collected by Customs.

e) GSTR 9C: Table 5(k) – Adjustments on account of supply of goods by SEZ units to DTA Units.

 2. Supply of Services by SEZ Unit / SEZ Developer to a unit in DTA:

• Section 7(5) of IGST supply of goods or service to or by SEZ will be considered as inter-State supply.

Therefore, the above transaction shall be treated as a domestic supply of services and GST would be collected and discharged by the SEZ Unit / SEZ Developer i.e., under Forward Charge Mechanism.

• Disclosure by SEZ Unit / SEZ Developer:

a) GSTR 1:

• • • Table 4A(B2B) – If DTA Unit is registered.
    • Table 5A (B2CL) – If DTA Unit is unregistered and Invoice value is greater than 1 lakh.
    • Table 7 (B2CS) – If DTA Unit is unregistered and Invoice value is less than or equal to 1 lakh.

b) GSTR 3B: Table 3.1(a) – Outward taxable supplies (other than zero rated, nil rated and exempted) (Figures are auto populated from GSTR 1)

c) GSTR 9:

a. Table 4A – If DTA Unit is unregistered.

b. Table 4B – If DTA Unit is registered.

3. Import of goods by SEZ Unit / SEZ Developer:

• In terms of Section 26 of SEZ Act,2005 a SEZ Unit / SEZ Developer is exempt from Duty under Customs Act,1962 and Customs Tariff Act,1975.
• However, the SEZ Unit / SEZ Developer must apply for Bill of Entry (“Z” Type) & follow the procedure mentioned in Rule 29 of SEZ Rules,2006.
• No disclosure required in GST returns as IGST would not be paid on such imports into SEZ.
• One can refer to the user manual available on the SEZ website or ICEGATE preferably to apply for Bill of Entry.

Link to user manual on SEZ website- https://www.sezonline-ndml.com/downloads.htm

Link to file BOE in ICEGATE:

Notification No. J. 16/3/2007-SEZ Vol-V dated 29th June,2024

4. Import of services by SEZ Unit / SEZ Developer:

• In terms of NN 18/2017-IT(R) dt. 5th July 2017 services imported by a SEZ Unit or a SEZ Developer for authorised operations is exempt from GST.

SEZ Unit or SEZ Developer need not pay GST under RCM for any service availed from a person outside India for authorized operations.

• No disclosure required in GST returns as IGST would not be paid on such imports into SEZ.

5. Export of goods/ services by SEZ Unit:

Export of goods and services by SEZ Unit shall be considered as Zero-Rated Supply as per Section 16 of IGST Act,2017.

• Disclosures by SEZ Unit / SEZ Developer:

a) GSTR 1: Table 6A – Exports (with/without payment)

b) GSTR 3B: Table 3.1(b) – Outward taxable supplies (zero rated) (Figures are auto populated from GSTR 1)

c) GSTR 9:

a. Table 4C – EXPWP

b. Table 5A – EXPWOP

6. Sale of goods/ services between SEZ Units / SEZ Developers:

• Section 7(5) of IGST supply of goods or service to or by SEZ will be considered as Inter-state supply.
• Therefore, a SEZ Unit / SEZ Developer can supply goods / services with or without payment of GST.
• In terms of Rule 30(15) of SEZ Rules,2006,(in case of sale of goods) the recipient SEZ Unit / SEZ Developer should file Bill of Entry for Home Consumption (“V” Type) for authorized operations and the supplier SEZ Unit / SEZ Developer located in other SEZ should file re-warehousing certificate with the Specified Officer having jurisdiction over the supplier SEZ Unit / SEZ Developer with 45 days failing which the Specified Officer having jurisdiction over receiving SEZ Unit / SEZ Developer shall recover the duty from the recipient SEZ Unit / SEZ Developer. The transfer of goods between units in different SEZs doesn’t attract duty if the conditions specified in Rule 38 of SEZ Rules,2006 are satisfied.

Note – The above compliance is not required when movement of goods occur between SEZ Units of the same SEZ.

• One can refer to the user manual available on the SEZ website or ICEGATE preferably to apply for Bill of Entry.

Link to user manual – https://www.sezonline-ndml.com/downloads.htm

Link to file BOE in ICEGATE:

Notification No. J. 16/3/2007-SEZ Vol-V dated 29th June,2024

• Disclosure by SEZ Unit / SEZ Developer (Supplier):

a) GSTR 1: Table 6B – Supplies made to SEZ unit or SEZ developer – SEZWP/SEZWOP

b) GSTR 3B: Table 3.1(b) – Outward taxable supplies (zero rated) (Figures are auto populated from GSTR 1)

c) GSTR 9:

a. Table 4D – SEZWP

b. Table 5B – SEZWOP

• Special issue: However, the sale of warehoused goods in SEZ or FTWZ would be neither considered as sale of goods nor sale of services as per the recommendations in the 55th GST Council Meeting which is not yet notified.

Therefore, GST need not be discharged.

7. Supply of goods from any unit in DTA to SEZ Unit / SEZ Developer:

• In terms of Section 16 of IGST Act 2017, supply of goods or services or both from Domestic Tariff Area to SEZ Unit / Developer for authorized operations is considered as “Zero rated Supply”.

The supplier located in DTA has the following options with respect to the discharge of GST:

• • Supply goods or services or both without payment of GST under “Letter of Undertaking” and apply for refund of un-utilized ITC. (SEZ without Payment of Tax (SEZWOP))
  • Supply of goods or services or both with payment of GST and avail refund of taxes paid in 60 days from the date of filing GSTR 3B. (SEZ with Payment of Tax (SEZWP)).

Note: Prior to 1-10-2023, the benefit of zero-rate was available to all kinds of sale of goods or services to SEZ Unit / SEZ Developer whether or not such inputs were used for the purpose of authorized operations.

• The authorized operations of a SEZ unit / SEZ Developer are prescribed in the Letter of Approval issued by the SEZ authority to each SEZ Developer/ SEZ Unit. (Letter of Approval are issued in FORM-B/ FORM-C/FORM-B1 by Central Government as per Section 4(2) r/w Rule 6 of SEZ Rules,2006 to a SEZ Developer and by Development Commissioner in FORM G as per Section 9(4) r/w Rule 19 of SEZ Rules,2006 to a SEZ Unit).
• In case GST is liable under RCM for goods/services obtained from DTA Unit:
  • In terms of NN 37/2017-CT, for services supplied by DTA to an SEZ Unit or SEZ Developer, the DTA Unit can opt for without payment of GST by furnishing LUT.
  • TRU, CBIC, vide letter F. No. 334/335/2017-TRU dated 18.12.2017, has issued a clarification that a Unit or Developer in SEZ can procure such services where they are required to pay GST under the reverse charge mechanism without payment of IGST provided the unit or developer in SEZ furnishes a letter of undertaking. Here, a Unit in SEZ or SEZ Developer is deemed supplier of service, though is the actual recipient of service. There have been some AAR & AAAR[1] supporting this view too.
  • SEZ Unit or SEZ Developer need not pay GST under RCM when such goods/services are obtained from a Unit in DTA provided the SEZ has a Letter of Undertaking for authorized operations.
  • If such services / goods availed were not for authorized operations: In this scenario, SEZ Unit / SEZ Developer should discharge GST under RCM.

• Disclosures in GST Returns by a Unit in DTA:
  • Transactions on which GST needs to be discharged under FCM by seller:

a) GSTR 1: Table 6B – Supplies made to SEZ unit or SEZ developer – SEZWP/SEZWOP

b) GSTR 3B: Table 3.1(b) – Outward taxable supplies (zero rated) (Figures are auto populated from GSTR 1)

c) GSTR 9:

a. Table 4D – SEZWP

b. Table 5B – SEZWOP

• Transactions on which GST need to be discharged under RCM by the recipient:

GSTR 3B: Table 3.1(b) – Inward supplies (liable to reverse charge)

GSTR 1: Table 8 – Exempted outward supplies, practical difficulty as follows:

a. The practical difficulty faced in the GST Portal is that once the GSTIN of recipient (SEZ Unit / SEZ Developer) is entered while adding invoice details, the option to Select “Supply under Reverse Charge” and is blocked to the supplier.

b. CBIC should ideally incorporate a new line item in GSTR 1 for such transactions, possible entry could be –Table 6B (1) – Taxable outward supplies made to registered persons attracting tax on reverse charge – SEZ Reverse charge.

• Procedure to be followed to substantiate that goods are obtained by SEZ Unit / SEZ Developer:
  • The SEZ Developer must apply for a Grant of Approval for authorized operations in Form C7 to the Development Commissioner, to avail the benefit of Zero-Rate in terms of Rule 9 of SEZ Rules,2006. (Only applicable to SEZ Developer)
  • The Development Commissioner shall provide their recommendations in the same form and forward the same to the Approval Committee and the Approval Committee shall permit the goods in SEZ in terms of Rule 10 of SEZ Rules,2006. (Only applicable to SEZ Developer)
  • Later, it is the duty of the SEZ Unit / SEZ Developer to provide the details of invoices, items, Bill of Export, email id of the DTA Unit, etc. in form DPF (Domestic Procurement Form) online on SEZ website to obtain an endorsement from the Authorized Officer in terms of Rule 30 of SEZ Rules 2006.
  • In case of goods, the Authorized Officer shall examine the goods procured at the SEZ Gate and the goods shall be released to the SEZ Unit / SEZ Developer based on Invoice, DPF, Bill of Export and with reference to the Authorized Operations of the SEZ Unit / SEZ Developer mentioned in the Letter of Approval of each SEZ Unit / SEZ Developer or List of goods approved by Authorized Committee for SEZ Developer.
  • The Authorized Officer shall later issue endorsement if satisfied with the above-mentioned documents.
  • The copy of the Bill of Export, Invoice and endorsement will act as proof of Export.
  • The SEZ Unit / SEZ Developer should provide a copy of Endorsement to the GST Officer having jurisdiction over the DTA Unit within 45 days, failing which the GST Officer shall have the right to recover GST from the DTA Unit.
  • One can refer to the user manual available on the SEZ website to understand the procedure of filling DPF form and for obtaining Endorsement.

Link to user manual – https://www.sezonline-ndml.com/downloads.htm

8. Supply of services from any unit in DTA to SEZ Unit / SEZ Developer:

• The first four pointers of “Supply of goods from any unit in DTA to SEZ Unit / SEZ Developer” would apply mutatis mutandis.
• Procedure to be followed to substantiate that services are obtained by SEZ Unit / SEZ Developer:
  • The Ministry of Commerce & Industry have issued a list of 67 input services in Instruction F.No. D12/19/2013 which are deemed to be used by SEZ Unit / SEZ Developer for their authorized operations.

The list can be accessed through this link – https://www.nsez.gov.in/Resources/Default%20list%20of%20input%20services%20for%20SEZ%20developers%20and%20units.pdf

• • However, it is necessary to obtain endorsement as well for the above services by following the procedure below.
  • Rule 30 of SEZ Rules,2006 provides the procedure for procurement from DTA units wherein, it is the duty of the SEZ Unit / SEZ Developer to provide the details of invoices, items, email id of the DTA Unit, etc. in form DSPF (Domestic Services Procurement Form) online on SEZ website to obtain an endorsement from the Authorized Officer.
  • The Authorized Officer may approve or reject the DSPF keeping in mind the Authorized Operations of the SEZ Unit / SEZ Developer mentioned in the Letter of Approval of each SEZ Unit / SEZ Developer.
  • The copy of Invoice and endorsement will act as proof of Export.
  • The SEZ Unit / SEZ Developer should provide a copy of Endorsement to the GST Officer having jurisdiction over the DTA Unit within 45 days, failing which the GST Officer shall have the right to recover GST from the DTA Unit.
  • One can refer to the user manual available on the SEZ website to understand the procedure of filling DPSF form and for obtaining Endorsement.

Link to user manual – https://www.sezonline-ndml.com/downloads.htm

GST impact in a few special scenarios:

As per Instruction No. 95 B 17/2/2018-SEZ-Part (1): SEZ is eligible to create facilities such as canteen, gym, creche and similar facilities. The bone of contention was whether the SEZ entities could obtain zero–rated benefits on such procurements to set up the above facilities?

• In exercise of section 4(2) of the SEZ Act, read with Notification No. S.O. 1846 (E). dtd 27-10-2006 – SEZ, the Central Government notifies a list of authorized operations to be used by the Board of Approval while approving authorized operations in the Special Economic Zones.
• CIR No. K-43013(13)/1/2022 SEZ, addressed that SEZ Units could avail the zero-rated benefits on the lease rentals collected by the developers for the space utilised for employee welfare.

It needs to be understood whether such facilities, which do not directly result in export supplies bringing in forex, would be considered as authorized supply?

The inclusivity of such facilities in processing/non-processing areas also would need to be understood, along with the fact whether the facility will be termed as authorized operations. If not, there could arise a situation where IGST is payable and all procurements by such facilities also remain taxable.

Other common scenarios:

Group Health Insurance:

• In terms of Section 2(93) of CGST Act,2017, “recipient” means the person liable to pay consideration is the recipient of goods/services, where consideration is payable.
• As per IRDA guidelines, the recipient of group health insurance services is employer when the employer is liable to pay premium.
• General insurance policy is covered under the list of “Services deemed to be used for authorised operations”.
• Therefore, the SEZ Unit / SEZ Developer can avail the benefit of Zero Rate on the same.
• However, if the employee obtains insurance separately and the same is reimbursed by the SEZ Unit / SEZ Developer then they can’t avail said benefit.

Canteen services:

• Outdoor Catering services is covered under the list of “Services deemed to be used for authorised operations”.
• The definition of Outdoor catering services and restaurant services under GST law have been amended, by which the possibility of canteen services to be covered under outdoor catering services may be disputed. [OCS – are event based and occasional in nature]
• If we assume that restaurant services are included in the broad meaning of Outdoor Catering (considering such terminology germinated well before the GST regime] and if the entire consideration is paid by the SEZ Unit / SEZ Developer, then they may be able to avail the benefit of zero-rated supplies.
• Where canteen services are provided directly to employees, and a partial amount is reimbursed to the employees by the SEZ, entire value is liable to tax in the hands of the caterer.
• If canteen is required to be set up mandatorily by any Act/Law in force then, SEZ Unit / SEZ Developer can avail the benefit of zero-rated supply.

Event Management:

• Event management and accommodation services are covered under the list of “Services deemed to be used for authorised operations”. Nexus to operations must be established. Circular 48/22/2018-GST may be referred.
• Therefore, the SEZ Unit / SEZ Developer can avail the benefit of zero-rated supply by ensuring it is now covered under authorised operations.
• Any other activity not authorised and not having direct nexus to operations (ex: festival celebration/dinner arranged by SEZ for employees) would be liable to tax and not eligible to the benefit.

Refunds relating to SEZ unit/developer:

Generally, the suppliers to the SEZ entities would be applying for the refund as SEZWOP/SEZWP. There would be only a few situations which may warrant refund claim by an SEZ entity where taxes are paid by the SEZ entity which may be for the following:

• Authorised operations but taxes paid
• Non-authorised operations albeit being business expenses
• Non-business/personal expenses (refund not eligible here)
• In terms of Section 54 r/w Rule 89, only the supplier of goods or services to SEZ Unit / SEZ Developer for authorized operations can file an application for refund of GST in FORM RFD – 01 manually irrespective of whether it is SEZWP or SEZWOP.
• In terms of Section 16 of the IGST Act, entities involved in export of goods or services are eligible for zero-rated benefits and refunds. SEZ entities predominantly deal with such activities and therefore, inherently are entitled to refund where their suppliers have not claimed refunds/have collected and discharged taxes.
• The Gujrat HC in case of M/S Britannia Industries Limited vs Union Of India dt.11-03-2020 allowed the SEZ Unit to apply for refund of un-utilised Electronic Credit Ledger Balance which was accumulated due to ITC apportioned to SEZ Unit from an ISD registration.

The reason for allowing the same is as follows:

• • Supplier sold services to ISD registration under FCM with payment of GST therefore the supplier is not eligible for refund under Section 54 of CGST Act,2017 &
  • Procurement of services in this case is for authorised operations and such supplies fall under the ambit of Zero Rate supplies under Section 16 of IGST Act,2017.
• Similarly refunds allowed in SE Forge Limited v. Union of India (Gujarat High Court, 2023) where the refund claim was rejected on the grounds that only suppliers are eligible to claim such refunds.

Whether SEZ Units / SEZ Developers must comply with e-invoice provisions?

Only SEZ Units are exempt from raising e-invoices by NN 61/2020- CT. However, the SEZ Developer is liable to raise e-invoices if the aggregate annual turnover in any year has exceeded 5 crores in any FY.

Whether SEZ Units / SEZ Developers must comply with e-way bill provisions?

SEZ Units / SEZ Developers need to raise e-way bills in compliance with Section 68 r/w Rule 138.

Whether IMS functionality would apply to SEZ units/developers?

• For authorised operations – zero-rated supply – SEZWOP: Should not be applicable
• For authorised operations – zero-rated supply – SEZWP:
  • where supplier is going for refund – should not be applicable as no tax paid by SEZ.
  • Where SEZ is going for refund – should be applicable as taxes paid to supplier.
• For non-authorised operations – taxable transactions: should be applicable.

Although, it seems like IMS module is enabled for all GSTINs. Representations must be made by the industry to highlight these issues to the GSTN team, CBIC, Finance ministry & Commerce ministry.

Transactions between FTWZ, SEZ & Customs warehouses (before clearance for home consumption)

In terms of Entry 8. (a) to Schedule III of CGST Act provides that Supply of warehoused goods (Covered under Customs Law) to any person before clearance for home consumption would be treated neither as supply of goods nor as supply of services.

However, there was a dilemma whether transactions from Free Trade Warehouse Zone (FTWZ) [covered under SEZ Act] to any person before clearance for home consumption would be taxable or classified as a schedule III item?

The same has been clarified in the recent 55th Council Meeting as mentioned below:

Recommendation of 55th Council meeting: To insert clause (aa) in paragraph 8 of Schedule III of the CGST Act, 2017 w.e.f.01.07.2017, to explicitly provide that supply of goods warehoused in a Special Economic Zone (SEZ) or Free Trade Warehousing Zone (FTWZ) to any person before clearance of such goods for exports or to the Domestic Tariff Area, shall be treated neither as supply of goods nor as supply of services.

This is a welcoming insertion as it provides relief to the SEZ Units and SEZ Developers from the ambit of GST compliance. Any entities who have paid tax in the past for such transactions and borne the tax incidence may look at refund possibilities (irrespective of the 2 year timeline).

Conclusion

This article delves into various transactions related to an SEZ entity. The article has been prepared keeping in mind GST compliances w.r.t SEZ entities. This would serve as an introductory document to gain an understanding of GST compliances for SEZ entities and various related compliances linked to the same.

Industry practices for certain transactions may differ compared to technical deliberations above. Recent changes w.r.t FTWZ & IMS also are briefly covered.

[1] Portescap India Private Limited (Order No. MAH/AAAR/DS-RM/15/2022-23, dated January 13, 2023)

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Disclaimer:

The views expressed in this article are personal to the authors and are an attempt to interpret the nascent GST law. We recommend professional assistance where required.

Queries or Feedback on this informative article can be shared to akshay@hnaindia.com & shashank@hnaindia.co.in.

The author extends special thanks to CA Akshay M Hiregange for vetting this article.