Issues faced by SEZ units under GST Regime

Upon reading of the heading, one may feel that what could be issues faced by SEZ unit as they can procure the goods without payment of GST and export their supplies without payment of GST. SEZ units are facing many issues in GST regime due to lack of co-ordination between the associated enactments, GST portal technical issues, lack of timely clarification by the Government, etc. It took one and half year for the Government to make GST related changes in SEZ Rules. In this article, author tries to cover possible issues faced by SEZ units and probable solutions for the said issues. SEZ unit includes SEZ unit / SEZ developer unless otherwise specified.

1. Wrong tax-payer type exists in GST portal

Many SEZ taxpayers selected as regular at the time of new registration / migrated as regular at the time of implementation of GST.

During March’ 2018, GSTN portal had issued an advisory for change in taxpayer type where it was suggested to send a mail to [email protected] along with scanned copy of LOA for obtaining as SEZ / SEZ developer units. Even though it worked for few months initially, we observed presently there is no response / action for the e-mails sent for change of status. The possible solution could be raising a grievance in GST portal in addition to sending a mail and continuous follow up of the same.

2. Disclosure of DTA sale of goods in GSTR-1 and GSTR-3B

SEZ units can clear goods to DTA unit upon payment of applicable custom duties. GSTR-1 or GSTR-3B do not have any column to disclose such details. Due to this, many differences arise between GST returns and financial statements which resulted in many notices to SEZ units.

Reference can be made to instruction no. 9 of Form GSTR-1 which states that supply by SEZ unit to DTA has to be treated as an import in case goods are received under the cover of the bill of entry. Author is of the opinion that there is no need to disclose the details of goods cleared to DTA units in GSTR-1 or GSTR-3B. However, it is suggested to maintain a reconciliation for the same and disclose the same while filing annual returns of the SEZ unit.

3. Reverse charge liability under section 5(3) / 5 (4) of IGST Act

This is one of the common questions faced by SEZ units whether reverse charge liability under section 5 (3) of IGST Act needs to be discharged upon receipt of services specified under notification no 10/2017 – IGST (eg. GTA services, legal services, services from Government, sponsorship services, etc)? Also, until 13.10.2017, in compliance with section 5 (4) of IGST, in case of procurement of goods / services from unregistered persons upon exceeding specified limit, the registered recipient had to discharge GST liability under reverse charge. Whether SEZ units needs to discharge GST liability until 13.10.2017 for the procurements made from unregistered persons?

Author is of the opinion that there is no need to discharge GST under reverse charge for the said services / goods received. The intention of the Legislature is not to tax supplies to unit in SEZ unit or SEZ developer which have been Zero-rated under section – 16(1) of IGST Act. A unit in DTA can supply goods or services to SEZ unit without payment of IGST subject to furnishing of LUT in forward charge cases. Differentiation can’t be shown between the goods or services based on reverse charge liability applicability. The author’s opinion confirmed by the clarification given by the Tax Research Unit of CBIC vide File No. 334/335/2017- TRU dated 18.12.2017

4. Refund of accumulated ITC on inputs and input services

SEZ units have the facility to procure goods or services without payment of IGST upon furnishing of LUT / Bond by the supplier. However, at the initial phases of GST implementation, many vendors have charged GST on goods or services supplied to SEZ units and recovered GST portion also. Due to various reasons like non execution of LUT by the supplier or the supplier is not willing to go for refund, etc. Even today, few service providers like banks, insurance companies, telephone companies charging GST to SEZ units and recovering GST from the SEZ units. Few SEZ units discharged GST under RCM on goods or services received as specified under section 5(3) or 5(4) of IGST Act. All these reasons resulted in ITC accumulation on inputs or input services received in the SEZ unit. The common question is that whether the SEZ unit (which is engaged in export of goods or services) can claim the refund of such accumulated credit?

A registered person making zero rated supply eligible for refund under two options i.e. refund of taxes paid if opted for with payment of taxes or refund of unutilized credit in-case opted for without payment of taxes. Thus, there is no tax incidence under GST on SEZ on their procurements. There is no restriction under the law (section 54 of CGST / Section 16 of IGST Act) for an SEZ unit to claim refund of unutilized ITC on inputs or input services received. Author is of the opinion that SEZ units cannot be put under disadvantageous position than that DTA units which are exporting goods or services and claiming refund (considering section 51 of SEZ Act which provides overriding effect over the provisions contained in any other Act). Statement-4A under Rule-89 inserted with effect from 14.11.2019 is an evidence for this (However, no reference/change made in the CGST rules).

Also, one can refer to Gujarat High Court Judgement in case of Britannia Industries wherein it was held that SEZ Unit can claim Refund of ITC of GST distributed by ISD Unit.

5. GST impact on goods or services received for non-authorised operations

Vendors are in dilemma whether to charge GST on goods or services supplied to SEZ unit which could not be used for authorised operations. Vendors who are supplying accommodation services to SEZ employees, Banquet services, event management services, engaged in supplying goods used for employee consumption, etc. are in the list. Many advance rulings are already issued on this aspect wherein few held that GST is applicable and IGST needs to be charged. A circular was issued in mid -June’ 2018 wherein it was clarified that Zero-rated benefit would be only applicable for authorised operations.

Section 16 of IGST Act defines supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit as Zero-rated supplies. The concept of authorised operations for an SEZ unit brought in Rule-89 of CGST Rules which deals with Refund. Rules cannot go beyond the provisions specified in the parent act and restrict the benefit provided by the parent act. Author is of the opinion that all the supplies to SEZ unit irrespective of whether it is for authorised operations or not, eligible for the benefit of Zero-rated supplies and the supplier need not charge GST on goods or services supplied to SEZ unit.

Finance Bill, 2021 restricted zero-rated benefit only for authorised operations. Suppliers who are risk averse can get a declaration from that SEZ unit that the goods or services used for authorised operations. Also, they can go through the uniform list of services which are permitted by all Unit Approval Committees as default authorised services. The list was given in F. No. D. 12/19/2013-SEZ dated 2^nd January’ 2018.

6. GST impact on purchase returns made by SEZ units

It is common that the buyer would be returning purchased goods for various reasons like quality issues, damages, etc. When the supplier supplying to SEZ units, he might have supplied under LUT without payment of IGST or supplied with payment of IGST and claimed refund of the same. While returning the procured goods, SEZ units treating such returns at par with DTA supplies (in accordance with Rule 47 of SEZ Rules, 2006) and charging Customs duties as if such goods when imported. The basic customs duty paid by the vendor would become cost as ITC is not eligible for BCD portion.

Rule 47 of SEZ Rules, 2006 applies only for sale of manufactured Goods by SEZ Unit. Rule 48 of SEZ Rules, specifies that where goods procured from Domestic Tariff Area by a Unit are supplied back to the Domestic Tariff Area, as it is or without substantial processing, such goods shall be treated as re-imported goods. Provided that in the case where such goods are supplied back to the Domestic Tariff Area, as it is, and where the import duty on such goods is ‘Nil’ and while procurement of such goods no export benefits were allowed against such goods, the Unit may be allowed to supply back such goods to Domestic Tariff Area based on invoice only and filing of Bill of Entry in such cases shall not be required.

If the SEZ unit insists to file Bill of entry, then the DTA should inform the said rule then the rate of BCD would be Zero. DTA shall make sure that the bill of entry is obtained so that there is no disallowance of ITC by the GST authorities for IGST portion if paid.

7. Bill to SEZ units Ship to DTA units

When the goods are supplied to DTA unit on the instruction of SEZ unit (billed to SEZ unit), the transaction eligible to be treated as Zero-rated supply and the vendor is eligible to claim refund in either of two routes specified under Section 16 (3) of IGST Act. However, SEZ officers are not issuing endorsement form on the reason that goods are not admitted into SEZ unit. Due to lack of endorsement certificates, vendors refund applications being rejected.

As the goods are not getting admitted to the SEZ and it is suggested that IGST can be charged on sale of goods instead of considering the same as zero rated transaction. The Government should clarify that while processing refund in such cases that there is no need for endorsement certificate / specify a procedure to the officers to issue endorsement certificate in such cases after thorough verification.

8. Drawback benefit on supplies to SEZ units

SEZ Unit eligible to claim Drawback benefit (All Industrial Rate) on the goods procured from DTA unit. In case the SEZ unit does not intend to claim such benefit, a disclaimer to this effect shall be given to the Domestic Tariff Area supplier for claiming such benefits from their jurisdictional Goods and Services Tax or Central Excise Commissioner. The author is of the opinion that more than 95% of the SEZ units / their vendors not claiming such benefit presently.

Rule 24 of SEZ Rules, 2006 as amended till date specifies the procedure to be complied for claiming the drawback benefit. With effect from 19.09.2018, the procedure specified for claiming such benefit simplified. SEZ units may examine the said benefit on all the goods procurements and claim such benefit. Alternatively, vendors can claim such benefit upon getting a declaration from the SEZ unit. 

9. Execution of Letter of Undertaking by SEZ unit

SEZ units are in dilemma whether separate LUT needs to be executed under GST or LUT executed for SEZ compliance would be sufficient for GST to make exports without payment of IGST?

Section 16(3) of the IGST Act, 2017 provides for execution of Bond / Legal Undertaking only in a case where the supplier to SEZ intends to supply goods / services without payment of tax and claim refund of the unutilized input tax credit. Rule 96A(1) r/w Rule 96A(6) of the CGST Rules, 2017 which deals with refund of taxes provides for execution of LUT in case of Zero rated without payment of duty even when the supplier does not file claim for refund of unutilized input tax credit. As executing LUT under GST made online (not even take two minutes for executing LUT), it is suggested to execute LUT in form RFD-11.

10. Invoice value calculation with respect to SEZ supplies with payment of IGST

In respect to supplies to SEZ unit with payment of IGST, whether the tax invoice, e-way bill and other GST related documents/returns should include IGST amount in the total invoice value? Total Invoice value is required for deduction of TCS under IT Act. For example, if the value of goods worth Rs. 1 lakh supplied to SEZ unit with payment of IGST @18%. Whether TCS under IT Act needs to be collected from the SEZ unit on Rs. 1 lakh or Rs. 1.18 lakh?

Author is of the opinion that with respect to SEZ supplies with payment of IGST, refund of IGST amount would be claimed from the Government and mentioning IGST amount in the invoice is to specify that the supplies are with payment of IGST. It has nothing to do with the Invoice value calculation and the total invoice value would not include IGST amount for calculation of TCS under IT Act.

11. Eligibility Zero-rated supplies benefit to Sub-contractors

Many contractors who have received work from SEZ unit/s subcontracting some portion of the work / complete back-to-back to other sub-contractors and suggesting the sub-contractor not to charge GST as the ultimate supply is provided to SEZ unit which are Zero-rated under GST.

Under GST, the levy or exemption is transaction/supply based. The first limb of the transaction i.e. transaction between SEZ unit and the main contractor would be eligible for benefit of Zero-rated supply and all the subsequent transactions (i.e. all the below transactions after the first limb) are not eligible for Zero-rated supply. The sub-contractor should charge GST and the main contractor can apply for refund if such tax accumulates under ‘Refund on supplies to SEZ unit with or without payment of tax’.

12. RoDTEP benefit to SEZ units

With effect from 01.01.2021, RoDTEP scheme replaced existing MEIS. SEZ units are eligible for MEIS benefit for the physical exports made.  Whether RoDTEP benefit applicable for SEZ units?

As on date, there is no clarity on eligibility of RoDTEP benefit for SEZ units. However, Dept of Commerce vide an advisory dated 15^th January 2021 specified that Shipping Bill can be filed under RoDTEP scheme by an SEZ unit and advised Development Commissioners to allow the same.  Based on policy decision of the Government, the eligibility of such benefit would be decided. The RoDTEP scheme would refund the embedded Central, State and local duties/taxes that were so far not being rebated/refunded. Considering the intention of the Scheme, author is of the opinion that SEZ units should not be deprived of such benefit. 

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