Export of goods by a SEZ unit through merchant exporter – should be subjected to levy of GST? – An analysis
Supply of goods or services by a SEZ unit in the GST regime and determining whether the transaction is subject to levy of GST is always a complicated and tricky issue, which needs thorough analysis and understanding of GST, SEZ and Customs Laws.
In this article, I would like to discuss about the levy of GST on the goods cleared from SEZ for exports through merchant exporters. In general, in such transactions, from a SEZ unit, goods are supplied i.e billed-to a registered merchant exporter/trader in India and shipped to a port of export, from where the merchant exporter intends to export the goods.
Let us understand the provisions relating to the exports through merchant exporters by a SEZ unit, under SEZ and Customs Laws.
Rule 46 of SEZ Rules allows SEZ units to export their goods through merchant exporters. Such exports would be counted for the purpose of calculation of Net foreign Exchange (NFE) earning by the SEZ units to the extent of the value at which, the goods have been sold by the SEZ unit to the merchant exporters.
Rule 46(11) provides the procedure for the merchant export transactions. It provides that,
(i) goods shall be exported directly from the Special Economic Zone or through any other port where the merchant exporter files his shipping bill, in which case the goods shall move directly from the Special Economic Zone to the said port of export on the basis of pink shipping bill as if these were movement of goods from one Warehouse to another
(ii) export document shall contain the name of the merchant exporter or the status holder and the Unit;
(iii) merchant exporter or status holder, as the case may be, shall export goods under a free Shipping Bill and submit a disclaimer that no Drawback, Duty Exemption Pass Book credit or fulfilment of export obligation under any export promotion scheme under the Foreign Trade Policy shall be availed by him on the goods so exported.
As per the above provision, the goods which are cleared from SEZ, wherein the “Let Export” order is given by SEZ-Customs can either be directly exported from the SEZ or the goods should move directly to the port of export from which the merchant export intends to exports such goods, as if the movement is between one warehouse to another and such goods should not to enter into DTA.
The word “Warehouse” as defined under Sec 2(43) of the Customs Act, 1962 means a warehouse licenced u/s 57 or 58/58A of Customs Act. Such warehouse is part of Customs area, as defined under sec 2(11) of Customs Act, 1962.
Sec 2(11) of Customs Act, 1962 reads as follows:
(11) “customs area” means the area of a customs station or a warehouse and includes any area in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities;
Further, Sec 53 (2) of SEZ Act, 2005 provides inter alia that the SEZ deemed to be a land customs station.
Sec 53 (2) of SEZ Act, 2005 reads as follows:
(2) A Special Economic Zone shall, with effect from such date as Central Government may notify, be deemed to be a port, inland container depot, land station and land customs stations, as the case may be, under section 7 of the Customs Act, 1962:
A conjoint reading of the above provisions, makes it clear that the goods moving from SEZ (which is a customs station) to the port of export are moving between two “customs areas” and are not entering the Domestic Tariff Area (DTA).
As the goods are not entering the DTA, there is no question of payment of customs duty including IGST, leviable under Customs Tariff Act, 1975, in terms of Sec.30 of SEZ Act 2005.
Further, on the procedural front also, sale of goods from SEZ in DTA requires a “bill of entry for home consumption” to be filed by the DTA entity or on their behalf. Whereas, for the aforesaid transactions, rule 46 of SEZ Rules, which talks about “Procedure for exports”, provides that the goods are to be cleared for export under the procedure of shipping bill.
Hence, it is clear that the aforesaid transactions are “exports” under SEZ Law.
Now, let us understand the provisions of GST Laws relating to the above transaction.
As the goods are supplied from a SEZ unit to a merchant exporter and the consideration for the same is collected from him, whether GST would be leviable on the same.
When the goods are supplied i.e billed-to by an entity in Domestic Tariff Area (DTA), to another entity who is also in DTA, GST is leviable on such supplies, as the supply takes place within the taxable territory of India.
However, when such goods are supplied from a SEZ unit, wherein the goods move between two customs areas (as explained above) and do not enter the DTA, whether GST is leviable on such transactions. Let us examine the same.
Sec.5 of IGST Act provides for the levy and collection of IGST on all inter-state supplies of goods or services or both.
The proviso to Sec 5(1) of IGST Act, provides that IGST shall be levied and collected, in accordance with Sec.3 of Customs Tariff Act, 1975 on goods imported into India.
Proviso to Sec 5(1) reads as follows:
Provided that the 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 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.
According to the proviso mentioned above, the IGST on goods imported, shall be levied and collected at the point when duties of Customs are levied.
First, we need to examine whether the goods move from SEZ to a port of export are “goods imported”. The word “import” as defined under Sec 2 (o) of SEZ Act, 2005 is as follows:
(o) “import” means-
(i) bringing goods or receiving services, in a Special Economic Zone, by a Unit or Developer from a place outside India by land, sea or air or by any other mode, whether physical or otherwise; or
(ii) receiving goods, or services by, Unit or Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone;
Import as defined under Sec.2(23) of Customs Act, 1962 and “import of goods” as defined under Sec 2(10) of IGST Act, means bringing the goods into India from a place outside India;
It can be seen that, the above definitions under SEZ Act, IGST Act, or Customs Act, do not define/treat movement of goods from SEZ to DTA or to a port of export as “Imports”.
Hence, it is incorrect to say the goods cleared from SEZ to port of export, for export, as “imported goods”.
This view is further strengthened by the fact that Sec.51 of SEZ Act, 2005 has an overriding effect over any other Law in force, whereby, when SEZ Law treats the goods cleared for export through merchant exporter, as exports and such goods as export goods, as explained above, if such goods are treated as “Imported goods” under the provisions of IGST Act, which is inconsistent to the SEZ Law, such provisions will have no effect and be overridden by the provisions of SEZ Law.
Even if we assume, for the sake of argument, the aforesaid goods are imported goods, IGST on imported goods, shall be levied under sec 5(1) of IGST Act, at the point when the duties of Customs on imported goods are levied under the Customs Act.
Duties of customs on the imported goods are levied under the Customs Act, when such goods are cleared for home consumption under Sec.47 or under Sec.68 of Customs Act.
Thus, it is clear that the IGST can be levied at the point when the imported goods are cleared for home consumption. Hence, the goods which move from SEZ to port of export i.e from one customs area to another customs area for export, will never be cleared for home consumption and therefore, cannot be subjected to levy of IGST under Sec.5 (1) of IGST Act.
Further, notification 41/2017-Integrated Tax (Rate) provides that when the goods are supplied to a registered merchant exporter for further exports, IGST in excess of 0.1% is exempt, subject to conditions prescribed therein. A similar notification 40/2017-CT (Rate) is issued under CGST Act, exempts levy of CGST in excess of 0.05%.
One of the important conditions prescribed under the above notifications is that the goods shall move directly to the customs area of port of export or to a warehouse from where it shall move to the customs area of port of export.
The condition (vi) of the notifications mentioned above reads as :
(vi) the registered recipient shall move the said goods from place of registered supplier – (a) directly to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported; or
(b) directly to a registered warehouse from where the said goods shall be moved to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported;
Conditions, including the one mentioned above, prescribed under the notifications supra are in the same lines as Rule 46 of SEZ Rules.
When the goods are supplied by a DTA supplier to the merchant exporter and move the goods from DTA to the customs area of port of export, as per the condition supra, GST would be leviable, as the supplier and the recipient are in taxable territory and the goods are moving from DTA to port of export and the supplier of the goods can avail the benefit of concessional rates of GST prescribed under notifications supra.
However, in the aforesaid transactions, when the goods move from the SEZ which is a customs area and move directly to another customs area (the Port, Inland Container Deport, Airport or Land Customs Station) for export in terms of Rule 46 of SEZ Rules,
the goods are not cleared for home consumption and are not subjected to levy of Customs duty and hence such goods cannot be subjected to levy of IGST under Sec 5(1) of IGST Act
Nevertheless, we cannot rule out the possibility of levy of IGST on the aforesaid goods, under Sec 7(5) of IGST Act.
Sec 7(5) of IGST Act provides inter alia that the supply of goods by a SEZ is an inter-state supply and are subject to levy of IGST under Sec 5(1). If the goods moving from SEZ to port of export i.e between two customs areas, as discussed above, are to be subjected to levy of IGST, under this provision, then the goods cleared from SEZ to DTA on payment of Customs duty including IGST under Sec.30 of SEZ Act read with Customs Tariff Act,1975, are also to be subjected to levy of IGST under section 7(5) of IGST Act, which will lead to dual levy of IGST for the same goods.
Currently, as per the instruction no.9 of GSTR1, the goods cleared from SEZ to DTA on payment of customs duty including IGST are treated as imports in the hands of the DTA buyer and such transactions are not required to be recorded in the GSTR1 filed by the SEZ supplier and GST liability arising out of such transactions under Sec 7(5) is not required to be included while calculating the tax liability of the SEZ supplier.
Therefore, as there are possibilities for levy of GST on the goods moving from SEZ to DTA or to port of export, under different provisions of IGST Act as well as under the provisions of SEZ Law, Government needs to issue suitable clarifications and do necessary amendments in Laws to bring clarity in such transactions which will help the SEZ units engaged in manufacturing activity.
The views expressed are the personal opinions of the author in his personal capacity and author is not responsible for loss or damage, whatsoever caused to anyone by referring to this article