Special Economic Zone (SEZ) unit a designated duty-free enclave and is treated as foreign territory for trade operations, duties and tariffs. Since introduction of SEZ scheme in India, the Government have been provided the beneficial provisions in SEZ Acts and SEZ Rules for duty free procurement of goods from the abroad as import as well as from domestic market. The objective of SEZ unit is to enhance exports, inflow of foreign exchange, generation of employment and to boost growth of the economy.
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Treatment of Supplies to SEZ under GST:
Supplies to SEZ units / Developer of SEZ are Zero rated supply in terms of section 16 of the IGST Act. Section 16 of the IGST Act, 2017 provides the scope of Zero-rated supply; the relevant portion of IGST Act, 2017 is reproduced as under:
“Section 16. (1) “zero rated supply” means any of the following supplies of goods or services or both, namely: ––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies; notwithstanding that such supply may be an exempt supply.
(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely: ––
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilized input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made there under”.
The above cited statutory provision of GST has clarified that Supplies of goods or services or both to SEZ unit or developer of SEZ is Zero rated. Further, it is stated that in case of any supplier supplies goods or services or both on payment of integrated tax to SEZ or developer of SEZ in that case the supplier is eligible to claim refund of such tax as per the provisions of section 54 of the CGST Act, 2017.
Board Clarification on Supply to SEZ:
C.B.I & C, vide circular No. 48/22/2018-GST, dated 14-6-2018, clarified that:
1.1 As per section 7(5) (b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act in short), the supply of goods or services or both to a SEZ developer or a SEZ unit shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. Whereas, as per section 12(3)(c) of the IGST Act, the place of supply of services by way of accommodation in any immovable property for organizing any functions shall be the location at which the immovable property is located. Thus, in such cases, if the section 12(3)(c) of the IGST Act, the place of supply of services by way of accommodation in any immovable property for organizing any functions shall be the location at which the immovable property is located. Thus, in such cases, if the location of the supplier and the place of supply is in the same State/ Union territory, it would be treated as an intra-State supply.
1.2 It is an established principle of interpretation of statutes that in case of an apparent conflict between two provisions, the specific provision shall prevail over the general provision.
1.3 In the instant case, section 7(5)(b) of the IGST Act is a specific provision relating to supplies of goods or services or both made to a SEZ developer or a SEZ unit, which states that such supplies shall be treated as inter-State supplies.
1.4 It is therefore, clarified that services of short-term accommodation, conferencing, banqueting etc., provided to a SEZ developer or a SEZ unit shall be treated as an inter-State supply.
2.1 As per section 16(1) of the IGST Act, “zero rated supplies” means supplies of goods or services or both to a SEZ developer or a SEZ unit. Whereas, section 16(3) of the IGST Act provides for refund to a registered person making zero rated supplies under bond/LUT or on payment of integrated tax, subject to such conditions, safeguards and procedure as may be prescribed. Further, as per the second proviso to rule 89(1) of the Central Goods and Services Tax Rules, 2017 (CGST Rules in short), in respect of supplies to a SEZ developer or a SEZ unit, the application for refund shall be filed by the: (a) supplier of goods after such goods have been admitted in full in the SEZ for authorised operations, as endorsed by the specified officer of the Zone; (b) supplier of services along with such evidences regarding receipt of services for authorised operations as endorsed by the specified officer of the Zone.
2.2 A conjoint reading of the above legal provisions reveals that the supplies to a SEZ developer or a SEZ unit shall be zero rated and the supplier shall be eligible for refund of unutilized input tax credit or integrated tax paid, as the case may be, only if only if such supplies have been received by the SEZ developer or SEZ unit for authorized operations. An endorsement to this effect shall have to be issued by the specified officer of the Zone.
2.3 Therefore, subject to the provisions of section 17(5) of the CGST Act, if event management services, hotel, accommodation services, consumables etc. are received by a SEZ developer or a SEZ unit for authorised operations, as endorsed by the specified officer of the Zone, the benefit of zero rated supply shall be available in such cases to the supplier.
In view of the above provisions of SEZ, the author wishes to highlight the Advance Ruling in two different situations where Accommodation services provided to SEZ within Zone and services render outside of the Zone of the SEZ unit and applicability of Zero-rated supply.
Authority of Advance Ruling: Karnataka: (Accommodation services provided to SEZ within Zone)
In the case of the applicant M/s Carnation Hotels Pvt. Ltd., Ruling No. KAR ADRG 37/ 2019 dated 16-09-2019- reported in 2019 (29) G.S.T.L. 832 (A.A.R. – GST).
Brief facts:
The applicant is an unregistered dealer in the State of Karnataka and having his registered office at New Delhi is proposing to operate hotels and rent out rooms to the employees of the SEZ units. The services rendered by the hotels are entirely consumed at the premises itself.
The applicant sought advance ruling on the following questions:
(a) Whether accommodation service proposed to be rendered by the applicant to SEZ units are liable to CGST and SGST or IGST?
(b) If the accommodation service to SEZ are covered under IGST Act, can these be treated as zero-rated supplies and the invoice be raised without charging Tax after executing LUT under Section 16?
Contention of the applicant:
Section 12(3) of the IGST Act, 2017 provides that place of supply of service by way of lodging accommodation of the hotel shall be the location at which immovable property located. Since supplier being hotel, the location of the supply is also the location of immovable property i.e. hotel. Services rendered by hotels are intra-State and accommodation services attract CGST+SGST as the transaction in the same State.
Section 7(5)(b) of the IGST Act,2017 provides that supplies of goods and services to SEZ will treated as IGST supplies and will be treated as inter-State supplies and liable to IGST under Section 5(1) of the IGST Act,2017 and not under Section 9(1) of the CGST / SGST Act,2017.
Findings and Discussion:
Supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit are treated as zero-rated supply in terms of Section 16(1) (b) of IGST Act, 2017. Further Rule 46 of CGST Rules, 2017 stipulates that the invoice shall carry an endorsement “Supply meant for export / Supply to SEZ unit or SEZ Developer for authorised operations on payment of Integrated Tax or Supply meant for Export / Supply to SEZ unit or SEZ developer for authorised operations under Bond or letter of undertaking without payment of integrated tax as the case may be.
On reading Section 16(1) (b) of IGST Act,2017 & Rule 46 of CGST Rules,2017 together it is clearly evident that the supplies of goods or services or both towards the authorised operations only shall be treated as supplies to SEZ developer / SEZ unit.
Further, the Central Government has issued a Circular Bearing No. 48/22/2018-GST dated 14-06-2018 has clarified the supplies of goods and services to SEZ is inter-Sate supplies. Hence, the supply of accommodation services provided to a SEZ unit would be treated as a zero-rated supply and this is subject to the provisions of Section 17(5) of the CGST Act.
Ruling:
(1) The accommodation service proposed to be rendered by the applicant to SEZ units are covered under IGST as it is an inter-State supply as per Section 7(5)(b) of the Integrated Goods and Services Tax Act,2017.
(2) Since the accommodation service supplied to an SEZ are covered under IGST Act, the same can be treated as zero-rated supplies and the invoice can be raised without charging tax after executing LUT under Section 16.
Authority of Advance Ruling: Karnataka: (Accommodation services rendered outside SEZ Zone)
In the case of the applicant M/s Poppy Dorothy Noel., Ruling No. KAR ADRG 59/ 2019 dated 20-09-2019- reported in 2019 (30) G.S.T.L. 129 (A.A.R. – GST).
Brief facts:
The Applicant is a proprietary concern and is registered under the Goods and Services Tax Act, 2017. The applicant is engaged in the business of providing accommodation services to various corporates in Bengaluru and they include certain SEZ units and “The Pommels” is located in Kalyannanagar, Banaswadi which is outside the SEZ Zone.
The applicant sought advance ruling on the following question:
Whether the IGST at 0% is applicable for the invoices raised to the SEZ Units, even if the accommodation services were rendered outside the SEZ Zone?
Submission of the applicant:
Accommodation services to the SEZ Unit employees for which the SEZ Unit had advised them to raise invoices with IGST at 0% as per Section 16 of the IGST Act, 2017.
As per Section 12(3) of the IGST Act, which determine the place of supply, since the supply has taken place outside the SEZ Zone, they are not entitled for IGST at 0% but need to be charged IGST @ 18%.
Findings and Discussion:
The applicant is providing accommodation services to the employees of the SEZ Company and invoices are raised to the Company. The booking for accommodation is also made by the SEZ Company who is responsible for making the payment of the consideration.
The consideration for the accommodation services provided is payable by the company which is an SEZ Unit and hence as per sub-section (93) of Section 2 of the CGST Act,2017, the SEZ Unit would be the recipient of service and the supplier being the applicant.
C.B.I & C, Circular No.48/22/2018-GST dated 14-6-2018 has clarified this issue and treatment of supply to SEZ unit. Since applicant’s transaction is a supply made to the SEZ Unit, it would be covered under clause (b) to sub-section (5) of Section 7 of the IGST Act and would hence be treated as an inter-State supply of services.
Hence it is clear that the provisions in Section 7(5) (b) of the IGST Act,2017 overrides the provisions in Section 12(3)(C) of the IGST Act,2017 and hence the transaction of the applicant is an inter-State supply of services, provided that the supply of services made to the SEZ Unit is an authorised operation under the SEZ Act.
The Accommodation Services are added to the list of services to enable the SEZ Units to avail service tax benefits for their authorised operation and the said list was included in Circular No.2/2014, dated 25-7-2014 issued by the Development Commissioner, Kerala and Karnataka SEZ.
In case of services provided to the SEZ Unit is not for authorised operations, then they would not be treated as supplies to SEZ Units and would not be covered under the zero-rated supplies but still would be a transaction covered under the IGST Act, 2017 and taxable at 18% with the place of supply being the provision of such services.
Ruling:
The supply of accommodation services to the SEZ Units is an inter-State supply under clause (b) of sub-section (5) of Section 7 of the Integrated Goods and Services Tax Act, 2017 and if it is for:
(a) authorised operations, then it is covered under “zero-rated supplies” under section 16(1) of the Integrated Goods and Services Tax Act,2017
(b) non-authorised operations, then it would be not covered under “zero-rated supplies” under Section 16(1) of the Integrated Goods and Services Tax Act, 2017 and hence liable to tax at 18% IGST with the place of supply being the provision of such services.
Conclusion: In view of Rulings of AARs as well as C.B.I. & C Circular, it can be concluded that the accommodation services provided to SEZ Unit or Developer of SEZ are covered under IGST Act, the same can be treated as zero-rated supplies and the invoice can be raised without charging tax after executing LUT under Section 16 and not liable to GST. In case of services are provided to a SEZ unit or Developer of SEZ for the purposes of non-authorised operations are not covered under zero rated supplies and liable to tax @ 18% IGST.
The Author is a practicing advocate at Orissa High Court and can be reached at [email protected].
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