IMPACT OF GST ON SPECIAL ECONOMIC ZONE (SEZ)

SEZ is a dedicated zone wherein businesses enjoy simpler tax and easier legal compliances. SEZs are located within a country’s national borders. However, they are treated as a foreign territory for tax purposes. This is why the supply from and to Special Economic Zones have a little different treatment than the regular supplies. In simple words, even when SEZs are located in the same country, they are considered to be located in a foreign territory. SEZs are not considered as a part ofIndia. SEZ’s are considered to be located in a foreign territory and thus the transactions with SEZ’s can be classified as Exportsand Imports.

Export means:

• Taking goods or services out of India from a special economic zone byany mode of transportor
• Supply of goods or services from one unit/developer in the SEZ to another unit in the same SEZ or another SEZ.
Import means:

• Bringing goods or services into a special economic zone from a place located outside India, by any mode oftransport or Receiving goods or services from one unit/developer in the SEZ by anotherunit/developer located in the same SEZ or another SEZ.

• Based on this it can be clearly said that under GST, any supply to or by a Special Economic Zone developer or Special Economic Zone unit is considered to be an Inter-state supply and Integrated Goods and Service tax (IGST) will be applicable.

STATUTORY PROVISIONS:

(QUOTE)

Section 7(5) of the IGST Act: Inter-State Supply of goods or Services or both:

a. When the supplier is located in India and the place of supply is outsideIndia,

b. ToorbyaSpecialEconomicZonedeveloperoraSpecialEconomic Zone Unit, or

c. In the taxable territory, not being an intra-state supply and not covered elsewhere in thissection,
Shall be treated to be a supply of goods or services or both in the course of inter- state trade or commerce.

Section 16 of IGST Act:
Zero rated supply
(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 Zoneunit.

(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 supply.

(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,subjecttosuchconditions,safeguardsandprocedureasmay

be prescribed, without payment of integrated tax and claim refund of unutilized 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 madethereunder
(UNQUOTE)

As upplyofgoodsand/orserviceswhoseplaceofsupplyisoutsideIndiaandis madebyasupplierinIndiaistreatedasinter-StatesupplyundertheIGSTAct. Further,supplyofgoodsand/orservicestoaSEZunit/developerorsupplyof goods and/or services by a SEZ unit/developer are also treated as inter-State supplyundertheIGSTAct[Section7(5)]atparwithphysicalexports.Theplace of supply of goods and services in cross border transactions is determined in accordance with the provisions of Sections 11 and 13 of the IGST Act, 2017, respectively.

Inter-State supplies of goods and/or services are liable to IGST in terms of Section 5. Hence, on a strict interpretation of Section 5, IGST is payable on such supplies where the supplier is located in India and the place of supply is outside India. However, at the same time it can be argued that since IGST Act extends to whole of India, IGST cannot be levied on a supply whose place of supply is outsideIndia.
Also, fundamentally GST is a consumption tax and thus, tax cannot be levied if goods and/or services are consumed outsideIndia.

An inter-State supply under Section 7(5)(a) cannot automatically be construed as export of goods and/or services. It is only when the conditions stipulated in the definitions of export of goods and export of services under Section 2(5) & 2(6) of the IGST Act, 2017 are fulfilled, will such Inter-State supplies be considered as exports and, in turn, be zero rated.
However, the only condition which is relaxed under Export of Services to SEZ is that payment in foreign currency is not required to be fulfilled as long as the directivesoftheReserveBankofIndiainthisregardarefollowed.

By zero rating it is meant that the entire value chain of the supply is exempt from tax. This means that in case of zero rating, not only is the output exempt from payment of tax, there is no bar on taking/availing credit of taxes paid on the input side for making/providing the output supply. Such an approach wouldintruesensemakethegoodsorserviceszerorated.

All supplies need not be zero-rated. As per the GST Law, exports are meant to be zero rated. The zero rating principle is applied in letter and spirit for exports and supplies to SEZ. The relevant provisions are contained in Section 16(1) of the IGST Act, 2017, which states that “zero rated supply” means any ofthefollowingsuppliesofgoodsorservicesorboth,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. As already seen, the concept of zero rating of supplies requires the supplies as well as the inputs or input services used in supplying the supplies to be free ofGST.

Benefits of ‘Zero Rated’ Supply:
a) Thetaxespaidonthesupplieswhicharezeroratedarerefunded.

b) The credit of inputs/ input services isallowed.

c) Zero Rated Supplies made without payment of tax, are eligible for refund of the taxes paid on the inputs or input services i.e. the accumulated input tax credit isrefunded.

The provisions for the refund of accumulated input credit are contained in the explanation to Section 54 of the CGST Act, 2017, which defines refundas below:
“Refund” includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilised input tax credit as provided under sub-section (3). Thus, even if a supply is exempted, the credit of input tax may be availed for making zero-ratedsupplies.

Under GST, export and supplies to SEZ Units/developers are zero rated. Supply to SEZ Units/developers is zero-rated in the same manner as is applicable for the physicalexports.

HOW DOES ZERO RATING WORK?

The concept of zero rating of supplies requires the supplies (outward) as well as the inputs or input services used in supplying the (outward) supplies to be freeofGST.Thisisdonebyemployingthefollowingmeans:

a. The credit of inputs/ input services used in supplying the zero rated supply isadmissible;

b. IGST paid on the Zero Rated Supplies are refunded on application asgovernedunderRule89oftheCGSTRules,2017;

c. Wherever the supplies of Zero Rated are made without payment of tax i.e. under Letter of Undertaking, the ITC of GST paid on the inputs or input services, i.e. the accumulated ITC is refunded. Thus, even if a zero rated supply is free of GST, the credit of input tax is allowed to beavailed.

A registered person making zero rated supply can claim refund under either of the following options, namely:––
a) he may supply goods and/or services under bond or Letter of Undertaking (LUT) without payment of IGST and claim refund of utilized ITC;or

b) he may supply goods and/or services on payment of IGST and claimrefundofsuchtaxpaidongoodsand/orservicessupplied.

c) He may supply goods and/or services on payment of IGST and claimrefundofsuchtaxpaidongoodsand/orservicessupplied.

As per Circular No. 01/ 2017 CC dated 26.07.2017it is clarified that the provisions of Section 16 relating to zero rated supply will apply to GST Compensation Cess also. Hence,
(i) exporters can claim refund of GST Compensation Cess paid on goods exported by him,or

(ii) GST Compensation Cess will not be charged on goods exported under bond or LUT and he will be eligible for refund of ITC of GST Compensation Cess relating to goodsexported.

TAXIBILIY OF EXPORT:

Export of goods or services are treated as inter-State supply and zero rated.This means that even if there is full exemption for the supply, ITC is still available to the exporter. The exporter will have an option to either pay IGST on the output and claim refund of such IGST paid or export under Bond/LUT without payment of IGST and claim refund of ITC. The objective is to make Indian exports competitive in the internationalmarket.
It may be noted that since exports are inter-State supplies, the tax associated with them will always be IGST. Thus, there will never be any refund of CGST and SGST in case ofexports.
This benefit is available to supplies made to SEZ at par with physical exports.

GST IMPACT ON SEZ:

a. IMPORT BY SEZ UNIT or SEZDEVELOPER:

Import of goods by SEZ Unit from other countries is exempted in terms ofSection 2(m) of the SEZ Act, 2005 and IGST is exempted vide Notification No. 64/2017 Cus dated05-07-2017.
Similarly, Import of Services by SEZ is exempted from IGST under Notification No. 18/2017 IT (R) dated05-07-2017.

Therefore, suppliers of goods or services or both to any recipient in the SEZ can avail the following:

• Make supply under bond or LUT without payment of IGST and claim credit of ITC;or
• MakesupplyonpaymentofIGSTandclaimrefundoftaxespaid.

Besides, the Supplier from DTA to SEZ is entitled for benefits such asDrawback, DEPB, DFRC, Advance License provided Bill of Export is filed in termsofPara7.9ofChapter7oftheForeignTradePolicy2015-2020.

b. EXPORTS by SEZ UNIT orDEVELOPER:

Supply by SEZ Unit to another SEZ in the same SEZ Area or in other SEZ is treated as Export under SEZ Act, 2005 and will not attract any Taxes or Duties under GST & Customs.
Supply by SEZ to DTA is Export. However, the Buyer in DTA is required to discharge Customs Duties, IGST and other Taxes as applicable. The DTA Buyer can claim benefits of MEIS/SEIS License or other permissible instruments while paying CustomsDuty.
MEIS & SEIS benefits have been extended even to SEZ Units in the FTP 2015- 20.

c. Sub-Contracting bySEZ:

SEZ unit can sub-contract part of their production to their own unit in DTA or to any other unit in SEZ or EOU or STP or ETPH with annual permission from the Customs Authorities. Sub-Contracting to a unit abroad may also be permitted with permission from Development Commissioner in charge of SEZ. It may be noted sub-contracting in respect of precious metals, jewelry limit of 90 days isset.

OTHER LEVIES:

The provisions of other levies such as Anti-dumping Duty, Safeguard duty will be applicable to onward supplies made by an SEZ to any DTA Unit as SEZ is considered at par with foreign territory. For example, if an SEZ procures any goods from a Country, the import from which attracts either anti-dumping duty or safeguard duty, the SEZ will not be liable to such levy as it is considered as a territory outside India. However, if the SEZ supplies the said goods onwards toaDTAUnit,theAnti-dumping&Safeguarddutyshallbeapplicable.

EXEMPTION TO GOVERNMENT SUPPLIES:

Supply of goods (except those excluded) by SEZ to the Government including for defense and police is import for the Government and is exempted from whole of Customs Duties as well Additional Duties leviable under Section 3 of the Customs Tariff Act, 1975 (covers IGST under Section 3(7) of the Customs Tariff Act) in terms of Notification No. 39/96 Cus dated 23-07-1996 asamended (last amendment No. 43/2017 Cus dated 30-06-2017) subject to the conditions laid down in the Principal Notification.

EXEMPTION TO PRIVATE SUPPLIES:

Any supply from an SEZ Unit even to Notified Private Project such as Power Projects, Energy Projects, Irrigation Projects, Defense Projects, etc. would be exempted at par with Customs Notification applicable to such imported supplies.
As such, supplies by an SEZ even to any Private Projects notified by the Government for exemption from duties/taxes shall be also eligible for exemption under relevant Customs Exemption Notifications at par with imports.

IN A NUTSHELL:

1. An SEZ Unit/ Developer is considered as a Territory outside India under the SEZ Act,2005.
2. IGST is leviable to all supplies from DTA to SEZ. However, the same is ‘Zero Rated Supply’ and the IGST paid is either refundable to the DTA or the same can be supplied under a Letter of Undertaking withoutpayment ofIGST.
3. There is no import duty on any goods and services procured by an SEZ from foreigncountry.
4. An supply by an SEZ Unit to DTA would be liable to import duties such as Customs and IGST as it would be considered at par with import from foreigncountry.
5. For supplies to Government bodies including defense and police by an SEZ, they shall be eligible for exemption as available to imported goods under relevant CustomNotifications.
6. For any supplies even to notified Private Projects apart from Government projects such as Oil exploration, Thermal power projects, etc. they shall be eligible for exemption as available to imported goods under relevant CustomNotifications.
7. If an SEZ, supplies goods to any DTA after procuring the same from a country, the supply from where attracts anti-dumping duty or safe guard duty, the same would not be leviable on the SEZ when they import it but wouldbeleviableononwardsupplyofsuchgoodstoDTA.
8. An SEZ Unit/Developer has no burden of taxation, either domestic or underCustoms.

9. An SEZ has to abide by the rules and regulations under the SEZ Act, 2005 and the Rules madethereunder.

DISCLAIMER:

• The information contained herein and circulated to any person is on the basis of specific request for such information received by M. Neerav& Associates from that person. The information contained in this document is not intended to be relied upon as the sole basis for any decision which may affect you or yourbusiness.

• All the information and data incorporated in this document are based on our interpretation of the published documents issued by the relevant Departments of the Govt. of India, Ministry of Finance asapplicable.