Defining export of service has been very tricky due to intangible nature of service transaction and contradictory provisions in GST Law. Due to this nature of services, there has been constant confusion regarding meaning of export of services and its ramifications in various types of transactions. Let us discuss here one such case of supply of services to SEZ unit / SEZ Developers.
Supply of Services to SEZ Unit / SEZ Developer :
These supplies are treated as Inter-State Transaction & Zero Rated Supply as per Provisions of Sec 7(5) & Sec 16. (1) of IGST Act
Sec 7(5) of IGST Act, 2017:
Supply of goods or services or both,––
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
Sec 16. (1) of IGST Act which is reproduced here.
“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.
On account of zero rating of supplies, the supplier will be entitled to claim input tax credit in respect of goods or services or both used for such supplies even though they might be non-taxable or even exempt supplies. Every person making claim of refund on account of zero rated supplies has two options. Either he can export under Bond/LUT and claim refund of accumulated Input Tax Credit or he may export on payment of integrated tax and claim refund of thereof as per the provisions of Section 54 of CGST Act, 2017. Thus, the GST law allows the flexibility to the exporter (which, will include the supplier making supplies to SEZ) to claim refund upfront as integrated tax (by making supplies on payment of tax using ITC) or export without payment of tax by executing a Bond/LUT and claim refund of related ITC of taxes paid on inputs and input services used in making zero rated supplies.
The relevant provisions in GST law are reproduced here below :
Sec 16. (3) of IGST Act : 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.
Rule 96A of CGST Rules : Refund of integrated tax paid on export of goods or services under bond or Letter of Undertaking.-
(1) Any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11 to the jurisdictional Commissioner, binding himself to pay the tax due along with the interest specified under sub-section (1) of section 50 within a period of —
(a) fifteen days after the expiry of three months from the date of issue of the invoice for export, if the goods are not exported out of India; or
(b) fifteen days after the expiry of one year, or such further period as may be allowed by the Commissioner, from the date of issue of the invoice for export, if the payment of such services is not received by the exporter in convertible foreign exchange.
Rule 96A (6) of CGST Rules The provisions of sub rule (1) shall apply, mutatis mutandis, in respect of zero-rated supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit without payment of integrated tax.”
Sec 2(6) of IGST Act : “export of services” means the supply of any service when,––
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;
From the above in respect of Supplies of Services to SEZ / SEZ Developers following points are very clear:
1. Supplies of Services to SEZ Unit / SEZ Developer, treated to be an Inter-State Transaction (Sec 7(5) of IGST Act)
2. Supply of Services to SEZ unit / SEZ Developers are treated as Zero Rated Supplies. (Sec 16. (1) of IGST Act)
3. All suppliers (of goods / services) to SEZ Unit / SEZ Developers are required to execute LUT / Bond. However they can claim refund of un-utilized input tax credit (Sec 16. (3) (a) of IGST Act & Rule 96A of CGST Rules)
4. Alternatively the suppliers may go for the option of payment of integrated tax and claim refund of such tax. (Sec 16. (3)(b) of IGST Act)
5. Either of the option can be made by the Supplier only and only Supplier can Claim Refund.
6. The payment for such service shall be received by the supplier of service in convertible foreign exchange (Sec 2(6) of IGST Act)
7. In case the supplier of services is not Received Payment in Convertible Foreign Exchange, the supplier is liable to Pay Tax With Interest under Sec 50(1) – (Rule 96A (1) of CGST Rules)
Practical Difficulties :
1. Execution of Bond / LUT by Supplier :
The SEZ Unit / SEZ Developers are now facing very piquant and zesty situation. Let us discuss for example services of Man Power Supply, Annual Maintenance, Engineering Supply, Production & Labor Contracts other such small supplies of services. These suppliers may not be eligible for LUT (Notification No. 16/2017 – Central Tax dated 7th July, 2017, eligible categories for LUT are : Registered Person who has received a Minimum Foreign Inward Remittance of 10% of Export Turnover in the Preceding Financial Year – not less than Rs. one crore or A Status Holder as Specified in para 3.20 and 3.21 of the Foreign Trade Policy 2015-2020)
Then the other option is to go with Bond. Executing Bond required backing of Bank Guarantee – not Exceeding 15% of Bond Amount. For furnishing BG require certain banking formalities and also some expenses which the suppliers may not be interested especially small suppliers and onetime suppliers. This may result in very serious practical operational difficulties to SEZ units & SEZ developers.
2. Payment of IGST – Blockage of Funds & No Clarity on Claiming Refund :
In case of supply on payment of IGST, the supplier can claim refund. This may result into blockage of funds and completing certain formalities. Moreover procedures for claiming refund of IGST in case of supplies of services to SEZ units / SEZ developers is not prescribed. (Rule 96(1) provided procedure for claiming refund of IGST in case of goods exported out of India and not for services)
3. Payment Not in Convertible Foreign Exchange :
Payment for supplies of most of the services to SEZ Units / SEZ Developers are always in Indian Rupee Payment and not in Not Convertible Foreign Exchange. Therefore the fundamental question shall arise whether such supplies be treated as Export of Services and Qualify for Refund of Taxes.
4. Refund of IGST paid on receipts Can’t be Claimed by SEZ Unit / SEZ Developer :
In most of the cases small supplier of services are reluctant to supply under Bond / LUT and also may not interested in claiming refund of IGST after paying the tax because valid reasons as explained above. In such case there is no provision in GST Law to enable the SEZ Unit / SEZ Developer to claim refund of IGST Paid Receipts.
Earlier Provisions under Service tax
Vide service tax Notification No. 12/2013 on 1 July 2013 service tax levied on services received by units located in SEZ and SEZ developers is exempted. The new scheme grants an up-front exemption of service tax levied on specified services received by the SEZ units and the developer which are ‘used exclusively for the authorized operations’.
Additionally, the refund would be available of service tax paid on specified services that are not exclusively used for authorized operations, or though used exclusively for authorized operation but procured after payment of service tax.
1. Requirement of Bond / LUT for supply of services to SEZ Unit / SEZ Developer may be relaxed.
2. Provision may be made to claim credit of Input Taxes Paid by the SEZ Unit / SEZ Developer and also provisions shall be made to claim refund of the same subjective to condition that the supplier gives undertaking of not claiming refund.
3. The condition of receipt of payment in Convertible Foreign Exchange should be dropped for domestic suppliers of services.