Supplies To and FRO SEZ Unit Vis A Vis DTA Unit Under GST

Navigating the intricate landscape of Goods and Services Tax (GST), this article explores the nuanced provisions governing transactions between Special Economic Zone (SEZ) and Domestic Tariff Area (DTA) units. Delving into the definitions, analyses of relevant sections under the GST Act, and scrutinizing the SEZ Act’s impact, the article aims to unravel the tax implications for businesses engaged in cross-border exchanges. Ascertaining whether supplies from DTA to SEZ qualify as zero-rated and deciphering the complexities of goods and services movement between these zones, this exploration provides a comprehensive understanding of the GST dynamics shaping SEZ and DTA interactions.

To understand the tax liability aspect under GST for supplies made by a SEZ unit to a DTA unit and from a DTA unit to a SEZ unit, lets first go through the relevant provisions under the GST Act and the SEZ Act and analyse the said provisions.

(1) RELEVANT PROVISIONS UNDER GST ACT :

i) Sec 2(5) of IGST Act- ‘Export of goods’–

“export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;

ii) Sec 2(6) of IGST Act – ‘Export of Services’ –

“export of services” means the supply of any service when,—

iii) Sec 2(10) of IGST Act- “IMPORT OF GOODS” –

“import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India;

iv) Sec 2(11) of IGST Act- “IMPORT OF SERVICES”-

means the supply of any service, where—

v) Sec 2(56) of the CGST Act – “INDIA”-

“India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, 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 and other Maritime Zones Act, 1976 (80 of 1976), and the air space above its territory and territorial waters;

vi) Section 2(22) of IGST Act- “taxable territory” –

“Taxable territory” means the territory to which the provisions of this Act apply.

vii) Section 5(1) of IGST Act – Levy and collection –

(1) Subject to the provisions of sub- section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:

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 (51 of 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 (52 of 1962).

viii) Section 7(5) of IGST Act-‘ INTERSTATE SUPPLY’–

(5) Supply of goods or services or both,—

ix) Section 16 of IGST Act– ‘Zero-rated supply’ –

16(1) “Zero rated supply” means any of the following supplies of goods or services or both, namely:—

(x) Section 2(19) of IGST Act- Special Economic Zone shall have same meaning as assigned to it in clause (za) of Section 2 of the Special Economic Zones Act, 2005.

(2) ANALYSIS OF THE ABOVE GST PROVISIONS CONCERNING SEZ –

From the above GST provisions related to SEZ, it could be seen that SEZ has not been taken out of the definition of India. It is amplified from the fact that in the definition of zero-rated supply, it has been specifically mentioned that supply to a SEZ unit would amount to zero rated supply. If SEZ was considered to be not part of India, then there was no need for its inclusion in the definition of ‘zero rated supply’ as the definition of export of goods or services would have taken care of such situation, subject to fulfilment of conditions laid therein.

Anyways, due to the inclusion of SEZ in the definition of zero-rated supply, supply of goods or services to a SEZ unit from a DTA unit for authorised operations would be exempted and eligible for refund of unutilised ITC or alternatively tax be paid on the specified goods or services and claim refund of the tax so paid. Some changes have been affected to Section 16(3) w.e.f. 1.10.2023 relating to zero rated supply and SEZ which has been discussed separately in para 6.

The question that arises and the main focus of this article is whether goods or services supplied from an SEZ to a DTA can be treated as Import of goods or service.

As far as provisions in GST law is concerned, SEZ units are not treated as being situated outside India. Thus, supplier of goods from an SEZ cannot be considered as being from a place outside India. Similarly, supplier of service from an SEZ cannot be said to be located outside India. Hence, supply of goods or services from an SEZ to a DTA cannot be termed as ‘Import of goods’ or ‘Import of services’ respectively, in terms of Section 2(10) and 2(11) of the IGST Act.

Thus, as per GST Act, for goods supplied from SEZ to a DTA, proviso to Section 5(1) of the IGST Act appears not applicable and would be leviable to IGST on the supply of goods under forward charge mechanism by the SEZ unit, in terms of the provision of Section 7(5)(b) read with Section 5(1) of IGST Act, such a supply being inter-state supply.

For supply of services, as per Sr. no.1 of the table annexed to the RCM notification no. 10/2017-IT(R) dated 28.6.2017,  ‘Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient’ is liable to IGST under RCM and is payable by the person located in the taxable territory. Since, the SEZ is not located in the non-taxable territory, no IGST is payable on such supply of service under RCM by the recipient of service. However, the said supply of services to a DTA by an SEZ appears liable to IGST under forward charge mechanism by the SEZ unit, in terms of the provision of Section 7(5)(b) read with Section 5(1) of IGST Act.

Thus, if an SEZ unit follows the above procedure there cannot be said to be any contravention of any GST provisions. However, the following provisions of the SEZ Act, becomes relevant in the context of the issue involved.

(3) RELEVANT PROVISIONS UNDER SEZ ACT, 2005 (ACT NO. 28 OF 2005) –

(a) Sec 2(m) – “export” means—

(i) 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; or

(ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or

(iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;

(b) Sec 2(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 a Unit or Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone;

(c) Section 2(i) – “Domestic Tariff Area” means the whole of India but does not include the areas of the Special Economic Zones.

(d) Section 2(za)- “Special Economic Zone” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone.

(e) Section 30 – Domestic clearance by Units –

“Subject to the conditions specified in the rules made by the Central Government in this behalf,— (a) any goods removed from a Special Economic Zone to the Domestic Tariff Area shall be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975 (51 of 1975), where applicable, as leviable on such goods when imported; and (b) the rate of duty and tariff valuation, if any, applicable to goods removed from a Special Economic Zone shall be at the rate and tariff valuation in force as on the date of such removal, and where such date is not ascertainable, on the date of payment of duty.

(f) Section 51 – Act to have overriding effect –

The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

(g) Section 53 – 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. (2) A Special Economic Zone shall, with effect from such date as the Central Government may notify, be deemed to be a port, airport, inland container depot, land station and land customs stations, as the case may be, under section 7 of the Customs Act, 1962 (52 of 1962): Provided that for the purposes of this section, the Central Government may notify different dates for different Special Economic Zones.

(4) ANALYSIS OF THE ABOVE SEZ PROVISIONS CONCERNING SEZ UNIT

Sec 53 prescribes that SEZ shall be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorised operations.

Sub-section (2) of Section 4 of the SEZ Act empowers the Board to authorise a Developer to undertake such operations in a Special Economic Zone as the Central Government might authorise. The question that arises is whether the reference to ‘Territory outside the Customs Territory of India’ can be interpreted to mean as being “outside India”. In other words, whether ‘Customs Territory’ can be equated to ‘the territory of India’.

COURT’s INTERPRETATION ON – ‘CUSTOMS TERRITORY OF INDIA’ –

4a) In the case of Essar Steel Ltd vs. UOI [2010(249)ELT 3(GUJ)], as in terms of Sec 2(m)(ii) supplying goods or services to a DTA from an SEZ unit or developer has been termed as export, a question of law was raised as to –‘Whether export duty can be imposed under the Customs Act, 1962 by incorporating the definition of the term “Export” under the SEZ Act, 2005 into the Customs Act, 1962?’. It was held by Gujarat HC as under-

‘The term “export” having been defined in the Customs Act, 1962, for the purposes of that Act, there is no question of adopting or applying the meaning of the said term under another enactment for any purpose of levying duty under the Customs Act, 1962. In other words, a definition given under an Act cannot be displaced by a definition of the same term given in another enactment, more so, when the provisions of the first Act are being invoked….   The movement of goods from the Domestic Tariff Area to the Special Economic Zone has been treated as export by a legal fiction created under the SEZ Act, 2005. A legal fiction is to be restricted to the statute which creates it…  Moreover, such legal fiction should be confined to the purpose for which it has been created… As stated above, such movement has been treated as export under the SEZ Act 2005 for the purpose of making available benefits as in the case of actual exports like duty drawback, DEPB benefits, etc. to the Special Economic Zone Unit/Developer or the Domestic Tariff Area supplier at their option. Construing this movement of goods as entailing a liability of payment of duty runs absolutely counter to the purpose of the legal fiction created under the SEZ Act, 2005… Section 51 of the SEZ Act, 2005 providing that the Act would have overriding effect does not justify adoption of a different definition in the Act for the purposes of another statute… In the present case, the movement of goods from the Domestic Tariff Area into the Special Economic Zone is treated as an export under the SEZ Act, 2005, which does not contain any provision for levy of export duty on the same. On the other hand, export duty is levied under the Customs Act, 1962 on export of goods from India to a place outside India and the said Act does not contemplate levy of duty on movement of goods from the Domestic Tariff Area to the Special Economic Zone. Therefore, there is no conflict in applying the respective definitions of export in the two enactments for the purposes of both the Acts and therefore, the non-obstante clause cannot be applied or invoked at all… Similarly, reliance on Section 53 of the SEZ Act 2005 to contend that a Special Economic Zone is a territory outside India, is misconceived. Section 53 provides that the Zone would be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations. The term “customs territory” cannot be equated to the territory of India……’

To summarise, it was held that movement of goods from DTA to SEZ was treated as export by legal fiction under SEZ Act, 2005, for making available duty drawback, DEPB benefits etc. and such legal fiction cannot be extended to duty liability under Customs Act, 1962. Export duty was not payable on movement of goods from DTA to SEZ units or developers. The High Court further held that export duty was not leviable under Special Economic Zones Act, 2005 on goods supplied from DTA to SEZ Developers/Units since movement of goods from DTA to SEZ was envisaged as taxable event under SEZ Act and there was no charging section for levy or recovery of export duty under SEZ Act.

4b) The Hon’ble HC of Calcutta in the case of Kamyab Overseas P Ltd. vs. UOI [WP no.16800 (W) of 2009] fully agreed with the view taken by the Divisional Bench of Gujarat HC in the above case and held that ‘There is a difference between customs territory of India and territory of India. A Special Economic Zone is very much within India. Even though Special Economic Zone may be deemed to be outside the customs territory of India for purposes, specified in Section 53(1) of the SEZ Act, it is not to be deemed outside the customs territory for the purpose of levy of customs duty. Export means taking out of India to a place outside India and import means bringing into India from a place outside India. Bringing any goods from any part of India to a Special Economic Zone is not import or export for levy of customs duty.’

4c) The above decision of Essar Steel (supra) was upheld by the Hon’ble Supreme Court [2010(255) A115 (SC) 12.7.2010].  The ratio of the said decision is in tune with the provisions in GST Act [Sec 16 of IGST Act], wherein such supply of goods or services to an SEZ unit or developer for authorised operations has been categorised as a ‘zero rated supply’ and not as ‘export of goods or services’.

Thus, as regards supply of goods or services from a DTA unit to a SEZ unit is concerned, it’s further amply clear that the same is to be treated as zero rated supply under GST and no customs duty is payable thereon.

(5) COMING BACK TO THE ISSUE OF SUPPLY OF GOODS OR SERVICES FROM A SEZ UNIT TO A DTA UNIT, when SEZ is held to be as being within India, the supply of goods or services cannot be termed as ‘Import of goods or services’. It is also to be noted that in terms of Section 2(m)(i) of the SEZ Act, 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 has been defined to be ‘export of goods or services’. However, supply of goods or services from an SEZ to a DTA has not been defined as export of goods or services from SEZ. Consequently, supply of goods or services from SEZ to a DTA appears to be neither export of goods or services for the SEZ nor is it import of goods or services for the DTA.

5A) SUPPLY OF GOODS – However, in terms of Section 30 of the SEZ Act, goods removed from an SEZ to a DTA would be liable to Customs duties as if the goods have been imported.  Thus, on the one hand, as per the definition of export of goods or services the supply of goods or services from SEZ to DTA, the same does not fall under the category of export for SEZ and consequently would not be import for the DTA unit, on the other hand, vide Sec 30 of the SEZ Act, a charging provision has been created to levy customs duties on the domestic clearance by SEZ units to DTA, as if the goods have been imported by DTA unit from the SEZ.

Under Sec 2(23) of Customs Act, “import”, with its grammatical variations and cognate expressions, means bringing into India from a place outside India and in terms of Sec2(25)ibid, “imported goods” means any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption.

In terms of Section 12 of the Customs Act, levy of import duty is attracted only if the goods are imported into India. Naturally, in terms of Section 2(23) and 2(25) it has to be imported from a place outside India.

This leads to a situation, wherein, neither in the definition under the Customs Act nor in the definition of SEZ Act, the movement of goods from SEZ to DTA has been treated as import of goods by DTA, however, there is a charging section in SEZ Act, Sec 30, which charges customs duties on such movement treating the movement as import of goods by DTA. Thus, there is no conflict in the SEZ Act and the Customs Act, as regards the definition of import for the respective Act and purpose. However, there is a conflict between the SEZ Act and the Customs Act as regards the levy of Customs duties on domestic clearance from SEZ to DTA is concerned and hence the terms of the provision of Section 51 of the SEZ Act is invokable as far as levy of Customs Duty on such clearances are concerned, in terms of Section 30 of the SEZ Act [SITUATION DIFFERENT FROM THAT OF ESSAR STEEL LTD. CASE, DISCUSSED ABOVE]. Thus, Customs Duty is leviable on supply of goods from SEZ to a DTA unit.

The above interpretation is further amplified by the Gujarat High Court decision on 15.7.2015 in the case of “Adani Power Ltd. vs. UOI’ [2015(330)ELT 883 (GUJ)]. Para 53 and 54 of the said order lays down as under-

‘53. However, from the above statutory provisions, it can be seen that by virtue of Section 30 of the SEZ Act, a SEZ unit on its clearance of goods to any DTA invites duty of customs where applicable as leviable on such goods when imported. Such DTA clearance by a SEZ unit would, thus,  be treated as imports for computation of customs duty. Section 30 of the SEZ Act only imposes conditions for a SEZ unit to clear the goods to a DTA. Such condition is payment of authorized duties, as applicable and leviable on such goods when imported. By reference, therefore, the charging Section 12 of the Customs Act, 1962 would be leviable as if the goods cleared by SEZ unit to the DTA are in the nature of imports. If, therefore, by virtue of an exemption notification, the whole of customs duty payable is exempted, then no customs duty would be payable on import of such goods. Even otherwise, Section 51 of the SEZ Act gives overriding effect to the provisions of the Act.

54. Section 30(a) of the SEZ Act provides that if any goods are removed from SEZ to DTA, such goods will be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975 as leviable on such goods when imported. Meaning thereby, that if any goods are removed from the SEZ to DTA, then the present customs duty will be leviable treating the goods to be imported from outside India………………..’

The above decision was maintained by the Hon’ble Supreme Court on 20.11.15 [2016 (331)ELT A129 (SC)]. It’s therefore clear that when goods are supplied by an SEZ to a DTA, Customs duty as applicable to such goods when imported into India shall be levied on such goods.

Further, in terms of Section 7(5) of IGST Act read with Section 5(1) ibid, as such supply is to be treated as goods imported into India, IGST is also liable to be paid in accordance to the provisions of Section 3 of the Customs Tariff Act, 1975 (51 of 1975). In other words, IGST is also liable to be paid by the DTA unit on such supply along with Customs duty.

5B) SUPPLY OF SERVICES – For supply of services from an SEZ to a DTA unit, there is no separate charging provision for services under SEZ Act treating it as ‘import of service’ by the DTA as in the case of goods being supplied from an SEZ to a DTA unit. Thus, supply of services from SEZ to DTA, not being ‘import of service’ and since it has been categorised as ‘Inter state supply’, only IGST is liable to be paid by the SEZ unit on such supply, in terms of Section 7(5) of IGST Act read with Section 5(1) ibid.

6) IMPACT OF AMENDMENT TO SECTION 16(3) OF IGST ACT- RELATED TO ZERO RATED SUPPLY AND SEZ –

As per Finance Act, 2021, wef 1.10.2023, sub-section (3) of Section 16 has been amended and sub-section (4) also inserted. Prior to amendment, Section 16(3) laid down the following provision-

“(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 unutilised 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 thereunder.”

After the said amendment wef 1.10.2023, it read as under-

“(3) A registered person making zero rated supply shall be eligible to claim refund of  unutilised input tax credit on supply of goods or services or both, without payment of  integrated tax, under bond or Letter of Undertaking, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder,  subject to such conditions, safeguards and procedure as may be prescribed:

Provided that the registered person making zero rated supply of goods shall, in case of  non-realisation of sale proceeds, be liable to deposit the refund so received under this  sub-section along with the applicable interest under section 50 of the Central Goods and Services Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 (42 of 1999.) for receipt of foreign exchange remittances, in such manner as may be prescribed.

(4) The Government may, on the recommendation of the Council, and subject to such  conditions, safeguards and procedures, by notification, specify—

(i) a class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid;

(ii) a class of goods or services which may be exported on payment of integrated tax and the supplier of such goods or services may claim the refund of tax so paid.”

No notification appears to have been issued so far in terms of sub-section (4) as above specifying that an SEZ can make zero rated supply on payment of integrated tax and hence it appears that all supplies to SEZ wef 1.10.2023 has to be without payment of integrated tax under bond or LUT and claim refund of unutilised ITC.

CONCLUSION :

A) SUPPLY OF GOODS OR SERVICES FROM DTA TO SEZ –

Supply of goods or services to SEZ from DTA, for authorised operations, shall NOT BE TREATED AS EXPORT OF GOODS OR SERVICES, but shall be treated as ‘zero rated supply’ and leviable to IGST.

WEF 1.10.2023, goods or services supplied to SEZ has to be without payment of integrated tax under Bond or LUT.

B) SUPPLY OF GOODS OR SERVICES FROM SEZ TO DTA –

a) Supply of goods – To be treated as IMPORT OF GOODS and leviable to Customs duty as well as liable to IGST, payable by the DTA unit.

b) Supply of services – To be treated as INTER STATE SUPPLY of services and IGST liable to be paid by the SEZ unit.