MARCH 21, 2017

By Mohammad Salim, CA

UNDER the current Service Tax law the services received by a SEZ Developer or a SEZ Unit and used by them for the authorized operations are exempted from whole of the service tax as per Notification No 12/2013-Service Tax dated 1st July 2013.

As per said notification, the exemption is provided by way of refund of service tax paid on the specified services received by SEZ Developer or an SEZ Unit and used for authorised operations. However, the notification further states that where the specified services received by SEZ Developer or a SEZ Unit are used exclusively for the authorized operations, the person liable to pay service tax i.e. person providing service to SEZ Unit or Developer has the option not to pay service tax ab-initio, where the authorization in Form A-2 is provided by SEZ Developer or a SEZ Unit to provider of the specified service and subject to other conditions as stated in the notification. Further the SEZ Developer or a SEZ Unit has the option not to avail the exemption and instead take CENVAT Credit on the specified services in accordance with the CENVAT Credit Rules, 2004.

Thus, under the current service tax regime,services provided to / received by SEZ Developer or a SEZ Unit which are used for authorized operations is an exempted service. However SEZ Developer or a SEZ Unit first needs to pay service tax to the service provider and later on claim refund of the same. However subject to certain conditions,ab-initio exemption is also available wherein the service provider will not charge service tax on the specified services provided to SEZ Developer or a SEZ Unit and thus in such cases there is no need for claiming of refund. Also instead of claiming exemption such entities can also avail CENVAT Credit.

Now let's go through the provisions in respect of services received by SEZ Developer or a SEZ Unit under the Revised Model GST Law. As per said Model Law the supply of services to SEZ Developer or Unit is a "Zero-rated supply". Zero rated supply means that the supply of service is taxable but is subject to NIL / zero rate of tax.

For ready reference the relevant text of Revised Model GST Law is reproduced below:-

CGST / SGST Act, 2016

Section 2(111): "Zero-rated supply" means supply of any goods and / or services in terms of section 15 of IGST Act, 2016

IGST Act, 2016

Section 2(29): "Zero-rated supply" means supply of any goods and / or services in terms of section 15 of IGST Act, 2016

Thus, all the three proposed statutes i.e. CGST, SGST and IGST Acts refers to Section 15 of IGST Act for the definition of zero rated supply. However, it appears that there has been an inadvertent error inasmuch as the correct section wherein the definition / meaning of zero rated supply is contained is Section 16 of IGST Act, 2016 and not section 15.

Be that as it may, the relevant extract of Section 16 of IGST Act is reproduced below:-

16. Zero rated supply

(1) "zero rated supply" means any of the following taxable supply of goods and/or services, namely -

(a) export of goods and/or services; or

(b) supply of goods and/or services to a SEZ developer or an SEZ unit.

(2) Subject to provisions of sub-section (3) of section 17 of the CGST Act, 2016, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.

(3)………………………………

(4) The SEZ developer or SEZ unit receiving zero rated supply specified in clause (a) of sub-section (1) shall be eligible, subject to the conditions, safeguards and procedure as may be prescribed in this regard, to claim refund of IGST paid by the registered taxable person on such supply.

As per sub section (4) (supra), the SEZ Developer or a SEZ Unit receiving zero rated supply shall be eligible, subject to the conditions, safeguards and procedure as may be prescribed, to claim refund of IGST paid by the registered taxable person (i.e. SEZ developer or a SEZ unit) on such supply.

Now,a question comes to mind is why section 16(4) is speaking only about refund of IGST and not about refund of CGST and SGST which may also be applicable in cases where supply of service is made to a SEZ developer / Unit by a supplier located in the same state.

The answer to this lies in Section 3(6) of IGST Act, 2016 which states that supply of goods and / or services to or by a SEZ developer or a SEZ unit shall be deemed to be a supply of goods and / or services in the course of Inter-State trade or commerce . Further proviso to Section 4(2) of IGST Act mandates that the intra-state supply of services shall not include supply of services to or by a SEZ developer or to or by a SEZ unit. As the supply of services to SEZ Unit or Developer is treated as inter-state supply, accordingly,they will be exigible to IGST only and accordingly section 16(4) is referring only to refund of IGST.

Further, as per sub section (4) there is option of only claim of refund of IGST paid by the registered taxable person i.e. SEZ Developer or Unit and there is no option of ab-initio exemption which is presently available in the current service tax law.

So also, another option available currently wherein instead of claiming of exemption, CENVAT Credit is availed by SEZ developer or unit on service tax paid on specified services does not figure in the Revised Model GST law.

Therefore,it appears that the following two options currently available to a SEZ Developer or a SEZ Unit have been abolished under the Revised Model GST Law and there remains only the option of claim of refund:-

i) Ab-initio exemption of tax on services received by SEZ Developer or Unit.

ii) Not availing the exemption by SEZ Developer or Unit but taking the CENVAT Credit of tax paid on specified services.

Hopefully, issues such as these are sorted out in the days to come.

(The views expressed are strictly personal.)