Zeroing In: Understanding Amendments Limiting Zero-Rated Supply to SEZ for Authorized Operations
An SEZ unit is like a mini economic powerhouse within a designated area, where businesses enjoy special privileges to turbocharge their growth. It’s a hub where companies can set up shop to manufacture goods, provide services, or trade internationally with fewer hassles and more incentives. SEZ (Special Economic Zone) refers to designated geographical areas in a country that offer special incentives and streamlined procedures to promote economic growth and attract investments. Benefits include tax exemptions, duty-free import of goods, simplified regulatory processes, and infrastructure support along with before under GST Law. Till September 2023, Section 16 of Integrated Goods and Services Tax Act 2017 (IGST Act), provides that supply of goods or services or both to an SEZ unit or SEZ developer would be considered as ‘Zero rated supply’ and enables the SEZ units or developers to procure goods or services from Domestic Tariff Area (DTA Unit) without payment of GST.
Section 16 of IGST Act 2016 were amended through Finance Act 2021 and such amendments were made effective from 01 October 2023. From October 2023 onwards, Section 16 of IGST Act provides that Supplies to SEZ Unit or SEZ developer for Authorised Operations would be considered as “Zero rated Supplies”. Post amendment, it becomes crucial for supplier to check that supplies made to SEZ unit are meant for “authorised operation” only. Otherwise, supplier may lose the benefit of making Zero rated Supply.
“A registered person can make zero rated supply with payment of Tax and claim refund of tax paid or can make zero rated supply without payment of Tax under under Bond or Letter of Undertaking (LUT).”
Explanation to the Extract of Section 16 of IGST Act 2017
Note that supplier must furnish Letter of undertaking for each financial year when required to make zero rated supply without payment of tax.
To ensure compliance of Section 16 along with above amendment, it is advisable for supplier of goods or services to ensure that supply to SEZ are only meant for authorised operation by following below procedure:
Obtain Letter of approval from SEZ Unit
SEZ unit receives Letter of approval from SEZ authority on approval of proposed project. Each operation undertaken by SEZ unit are mentioned in letter of approval of SEZ unit. In other word, all authorised operation of SEZ unit approved by SEZ authority are mentioned in LOA.
Supplier can obtain such copy of LOA from SEZ unit to verify the list of authorised operation of recipient of good or services (SEZ Unit).
Approval / Endorsement of good and services invoices form Specified Officer as appointed under SEZ Act.
As per SEZ Act 2017, any goods or services received by SEZ unit from DTA are required to endorsement / approval of invoices of goods or service by SEZ authority.
SEZ authority has introduced a DTA Procurement Form’ (DPF) and `DTA Services Procurement Form’ (DSPF) to be used for endorsement/approval of goods and services invoices through SEZ Online portal.
Recipient (SEZ unit) is required to upload invoice along with DPF and DSPF in case of goods and services respectively on SEZ online portal. The same is required to be approved by concerned officer of SEZ Authority. And mail of approval is received by both DTA (Supplier) and SEZ unit (Recipient).
In case, such invoice is rejected by concerned officer, such supply to SEZ unit may not be considered as supply meant for authorised operation of SEZ unit and ultimately may not be considered as Zero-rated Supply under IGST Act 2017.
It is suggested to maintain records of all the approved invoices along with Data Procurement form and Data Service procurement form for goods and serviced respectively for the supplies made to SEZ unit. And maintain record of invoices not approved yet or not submitted for approval by SEZ unit to SEZ authority.
Declaration from the SEZ unit stating that goods or services are being purchased/availed is for authorized operation.
Additionally, supplier may obtain declaration in writing from recipient of goods or services (SEZ Unit/ SEZ developer) stating that such goods procured or services availed are meant for authorised operations of SEZ unit.
Declaration/Endorsement required to be mentioned in Tax invoice under Rule 46 of CGST Rules 2017.
Supplier must mention declaration/endorsement above in Tax invoice issued to SEZ unit along with ARN of LUT for concerned financial period.
“SUPPLY TO SEZ UNIT OR SEZ DEVELOPER FOR AUTHORISED OPERATIONS ON PAYMENT OF INTEGRATED TAX” or ” SUPPLY TO SEZ UNIT OR SEZ DEVELOPER FOR AUTHORISED OPERATIONS UNDER BOND OR LETTER OF UNDERTAKING WITHOUT PAYMENT OF INTEGRATED TAX”
It is advisable to follow procedure mentioned above. Further, non-compliance of section 17 of IGST Act 2017 would result in discharge of tax on such Supply to SEZ Unit, if such supplier may not / fails to prove that such supplies are meant for authorised operation only.
To address and overcome the possible challenges arising from the above amendments, the DTA units (Supplier) involved in effecting supplies to SEZ should appropriate practices, proper documentation and processes to comply with the amendments to mitigate the risks of any future tax demands or refund rejections.
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