We will discuss SUPPLY TO SEZ under GST regime.
Around the world, in line with the destination principle sanctioned by the World Trade Organization, Exports are free of VAT/GST and imports are taxed on the same basis and at the same rate as that of Local Production. So, by taking exports at zero rated it is actual, based on destination based taxation principle of WTO, and what is free of VAT is termed as zero rated where costs and overheads can be recovered. GST thus being based on destination principle, exports from a country of origin go out at zero-rated tax, after exempting or refunding the input taxes that may be given to the resources used in its manufacturing. The OCED guidelines on neutrality of VAT in international trade lay this down as the first guideline.
By following the above principle of destination based taxation exports continue to remain zero rated and a similar benefit continues to be given to Special Economic Zones (SEZs) under GST law.
While this benefit is extended to processing zones of the SEZs, sales from SEZ to Domestic Tariff Area (DTA) continue to remain taxed under GST system.
Section 16 of IGST ACT defines Zero rated supply as under
(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
(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
(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 there
Now, SPECIAL ECONMIC ZONE (SEZ) AND SEZ DEVELOPER are defined under Section 19 and 20 of the IGST Act respectively. These terms derive their meaning from The Special Economic Act, 2005. The SEZ Act, 2005 contains special provision regarding procurement of goods and services without payment of taxes, in line with the same, GST law provides for refund of taxes paid by the supplier supplying goods or services to a developer or Unit holder of SEZ.
A person having a unit in a Special Economic Zone or being a Special Economic Zone developer shall have to apply for a separate registration, as distinct from his place of business located outside the Special Economic Zone in the same State or Union territory ( second proviso to section 25(1) of CGST Act, inserted vide CGST (Amendment) Act, 2018 w.e.f. 1-2-2019)
As per Section 7(5)(b) of IGST Act, supply of goods and services or both to or by a SEZ Developer or SEZ Unit would be treated to be supply in the course of interstate trader or commerce. In accordance therewith, for example, even if a person in Bhuj provides any Service to unit in Kandla SEZ in Gujarat, it will be treated as interstate supply and IGST is chargeable primarily, notwithstanding that refund would be available since the supply is zero rated as in the case of exports.
SEZ unit will be liable to pay GST under reverse charge, wherever applicable.(FAQ issued by CBI&C on 15-12-2018, )
As distinguished from VAT laws, supply of goods/services can be made without payment of IGST only under the bond or letter of undertaking or else the payment of integrated tax to be made and then claim refund thereof.
It is held in AAR West Bengal in re Garuda Power P Ltd 2018 that Supplies to SEZ unit and SEZ developer are zero rated. DTA unit can supply goods to SEZ unit or SEZ Developer on payment of GST under section 16(3)(b) of IGST Act or without payment of tax under section 16(3)(a) of IGST Act
In turn, the refund in respect of all zero rated supplies is governed by Section 54 of the CGST Act along with refund in other cases.
So, now there are three options available with supplier to SEZ
1) Supply with payment of IGST
2) Supply under a Bond
3) Supply under a Letter of Undertaking
1- SUPPLY WITH PAYMENT OF IGST
Under this option person making supply to SEZ will charge IGST at applicable rate as may be applicable for supplies of Goods or Services made to SEZ or SEZ Developer. Invoice will be Export Invoice in Indian Currency with a declaration that ‘SUPPLY MEANT FOR SEZ DEVELPOER/UNIT WITH PAYMENT OF INTEGRATED TAX’. This option will be beneficial for faster processing of Refund. Actually the IGST liability shown in the Invoice is only for the presentation purpose and should not be collected from the customer, actually it works as follow.
For e.g. Mr. ABC Ltd makes supplies of Goods costing Rs.100000 for Rs.1500000 which attracts IGST @18% to Mr. XYZ Ltd being located in Kandla SEZ. Invoice will be as under
Value of Supply: Rs.150000.00
IGST @ 18% : Rs. 27000.00
Total Invoice Value : 177000.00
Now, ABC Ltd, will first discharge liability of IGST of Rs.27000 by utilizing Input Credit of Rs.18000 (Rs.100000*18%) and Cash Payment of Rs.9000.00, thereafter, he will get refund of Rs.27000 whole amount of IGST, So Cash Payment of Rs.9000- Refund of Rs.27000 i.e. he get refund of Input Credit of Rs.18000 in net terms.
Journal Entries to be passed will be as follow.
|1) For Purchase
Purchase A/c Dr. 1000000
SGST Credit A/c Dr. 9000
CGST Credit A/c Dr. 9000
To Party A/c 118000
|2) For Sale to SEZ
XYZ Ltd. A/c Dr. 150000
IGST Refund Receivable A/c Dr. 27000
To Sales 150000
To IGST Liability A/c 27000
|3) For Payment of IGST
IGST Liability A/c Dr. 27000
To SGST Credit A/c 9000
To CGST Credit A/c 9000
To Bank A/c 9000
|4) On Receipt of Refund
Bank A/c Dr. 27000
To IGST Refund Receivable A/c 27000
In respect of supplies of goods to a Special Economic Zone unit or a Special Economic Zone developer, the application for refund shall be filed by the supplier of goods after such goods have been admitted in full in the Special Economic Zone for authorized operations, as endorsed by the specified officer of the Zone.
In respect of supplies of services to a Special Economic Zone unit or a Special Economic Zone developer, the application for refund shall be filed by the supplier of services along with such evidence regarding receipt of services for authorized operations as endorsed by the specified officer of the Zone – third proviso (b) to Rule 89(1) of CGST and SGST Rules, 2017.
2. SUPPLY UNDER BOND
The concept of Bond is continued from Excise Laws, so for traders’ community the concept of Bond will be new concept, which was not there under VAT Laws or Service Tax.
Under this option there will be no tax payment on the Supply to SEZ and Invoice shall carry a declaration ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT
OF INTEGRATED TAX. This option is best option where supplier is able to utilize Input Credit against other domestic supply. Under this option supplier can supply goods or services by executing a Bond hence Supplier is not required to pay IGST and claim subsequent refund. For this purpose Indemnity Bond will be executed in the specified format GST RFD-11 on non-judicial stamp paper between the Supplier of SEZ and the Government through the President of India. Supplier need not to execute a bond for each supply to SEZ, rather Bond will be running bond i.e. Bond once executed will be valid for period of 12 months.
For, easy compliance and procedure, Bond will be accepted by the Jurisdictional Deputy or Assistant Commissioner. Alongwith bond, a Bank Guarantee is to be furnished as a security under the Bond. The Jurisdictional Officer may decide the amount of Security to be kept as Bank Guarantee depending upon track record of the Supplier. As per direction in any case the B.G. should normally not exceed 15% of the bond amount. When there is breach or failure in performance as per bond executed, the Government will invoke the B.G. to recover the loss or damage to the revenue. As on date, the module for furnishing GST RFD-11 is not available on the GST Portal, so the form is to be furnished manually to the Jurisdictional Deputy/Assistant Commissioner.
The requirement of bond has been mostly dispensed with. Thus, all direct exporters are required to execute only LUT w.e.f. 4-10-2017. Now, bond and guarantee is required in very few cases.
3- SUPPLY UNDER LETTER OF UNDERTAKING (LUT)
Under Option-2, when supplier executes bond with B.G., it will result in blocking of working capital fund of the supplier, as Bank would ask for Fixed Deposit i.e. Margin money for issuance of Bank Guarantee alongwith Commission charges for issuance of B.G. For the above reason there is another option, under which supplier would give Letter of Undertaking (LUT) instead of executing Bond.
Just like bond, LUT will also be accepted by the Jurisdictional Deputy or Assistant Commissioner. The LUT once given, will be valid for the period of 12 months, and should be furnished for each year in duplicate. No B.G. is required to be furnished alongwith LUT, however if there is breach in condition of LUT, there may be consequences to furnish Bank Guarantee.
There are following conditions prescribed, under which LUT can be furnished instead of Bond.
As per notification No.16/2017 –Central Tax, the CBEC has specified the conditions and safeguards for the registered person who intends to give Letter of Undertaking,
As per above notification the following registered person shall be eligible for submission of Letter of Undertaking in place of bond;
(a) a status holder as specified in paragraph 5 of the Foreign Trade Policy 2015- 2020; or
(b) who has received the due foreign inward remittances amounting to a minimum of 10% of the export turnover, which should not be less than one crore rupees, in the preceding financial year, and he has not been prosecuted for any offence under the Central Goods and Services Tax Act, 2017 (12 of 2017) or under any of the existing laws in case where the amount of tax evaded exceeds two hundred and fifty lakh
Talk of the town:
Are Bonds or LUT really required?
The concept of Bond and LUT is taken from excise laws, as under VAT laws there was no requirement of Bonds and LUT, but question is this really needed in GST regime or not? The government has introduced this as a measure to secure interest of the revenue, but if we look at opposite side, is there any incident of bond being enforced in the last decade? Is it necessary to follow those decades old principles in the name of legacy? Decades ago India witnessed Excise officer sitting at a factory gate monitoring all clearance from origin point only, but this procedure was done away with. This type of paradigm shifts is also possible with respect to Bonds and LUT. In the early 90’s, banks required the Cash Deposit challan to be countersigned by a designated officer before the customer was allowed to deposit cash. Though it may sound incredible today, but it was a reality back then. Over the years things have changed and we need to make a progressive departure from our restrictive mindset and adopt the change within the change.
Author is Chartered Accountant in practice and can be reached at [email protected]
(Republished with Amendments. Amendments been made by CA Anita Bhadra)