MAY 24, 2017

By Rajat Dosi & Kumar Harshvardhan

WITH much of the anticipated GST law already in black and white, and the self-imposed deadline fast approaching, it will be safe to assume that the basic premise or the contours of the GST law (available in public domain) will remain the same, and there will not be any unexpected sea of changes when the GST is rolled out on July 01, 2017. Bearing this in mind, let us have a look at the mechanism for supplies to and from SEZ under the GST regime.

Supplies to SEZ from DTA

In the existing law, supply of goods from DTA to SEZ are considered as export outside India; and the DTA supplier enjoys the following benefits:

a. exemption from payment of applicable central excise duty – full exemption (rule 18 of the Central Excise Rules) or exemption by way of refund (rule 19 of the Central Excise Rules or rule 5 of the CENVAT Credit Rules)

b. exemption from CST; and

c. exemption from VAT in most of the states.

Since such supplies are akin to exports, the supplier also enjoys the benefit of either duty drawback or the advance authorization scheme (allowing him to import or procure duty free inputs for supplies to SEZ).

Similarly, services supplied from DTA enjoy exemption from payment of service tax, by way of either full exemption or refund (Notification No. 12/2013-ST dated 01.07.2013).

Under the IGST Act, 2017, supplies to SEZ have been deemed to be inter-state supplies; meaning thereby, that such supplies will only suffer from the levy of IGST, and will not be subjected to CGST and SGST.

Such supplies havebeen considered as ‘zero rated supplies', making the supplier eligible to claim input tax credit on input and input services in respect of such supplies, notwithstanding whether or not such supplies are exempt.

Further, it has been provided that the supplier will be entitled to, either of the following options:

a. Make supplies to SEZ without payment of applicable IGST(basis bond or letter of undertaking) and avail refund of input tax credit availed in respect of supplies made to the SEZ; and

b. Make supplies on payment of applicable IGST and avail refund of the said IGST.

The benefit of duty drawback and the advance authorization scheme, which flows from the provisions of the SEZ Act, will continue under the GST regime.

Thus, there is no effective change in terms of supply of goods or services or both to SEZ from DTA. Supply of goods and service will continue to be exempt, and the option to go for upfront ab initio exemption or exemption by way of refund rests with the DTA supplier. Having said that, as GST proposes to do away with the looming protectionism measures adopted by the States, supplies to SEZ from DTA would no longer be subjected to the payment of VAT, and all supplies will enjoy exemption from IGST.

Supplies from SEZ to DTA

Presently,supplies of goods from SEZ to DTA are considered as import into India. The DTA buyer is considered to be importer of such goods into India. He is obligated to file a bill of entry with the customs authorities posed at the SEZ (for the convenience of the business community, SEZs have been empowered to file a bill of entry on behalf of the DTA buyer). Such supplies are subjected to customs duty i.e., BCD, CVD, Cess and SAD, as applicable, on import of such goods into India.

On the other hand, supply of services is subject to payment of applicable service tax by the SEZ unit.

Under the IGST Act, 2017, even supplies from SEZ have been considered to be ‘inter-state' supplies.

Under the GST regime, supply of goods will continue to be considered as import into India and be subjected to payment of customs duty, as will be mandated under the SEZ Act. However, the said customs duty would comprise of BCD and IGST.

In respect of supply of services, the same will be subject to payment of applicable IGST, unless the GST council puts the same under the reverse charge mechanism.

Thus, in terms of supplies from SEZ to DTA too, there is no effective change in law. The only variation is that in lieu of CVD and SAD (in case of goods) and service tax (in case of services), the supplier will bear / pay IGST.

Registration

Going by the GST law, SEZ units involved solely in exports, and supply of goods to DTA, would not be liable to pay any tax under the GST law. Further, in case the GST Council does decide to shift the onus for payment of IGST for supply of service from SEZ to DTA on the recipient of services, i.e., employs the mechanism of reverse charge, no taxes under the GST regime will have to be paid by SEZ units providing services to DTA.

In light of the above, the fundamental question that is to be considered is whether or not is a SEZ required to take registration?

The same is not clear from the proposed provisions. Section 23(1) of the said Act absolves every person exclusively engaged in the business of supplying goods or services or both that are either exempt or not liable to tax from the registration formality. Be that as it may, Section 24(1) of the CGST Act mandatesevery person making any inter-State taxable supply , irrespective of their aggregate turnover, to be registered under the Act. Additionally, the revised GST Registration Rules mandates each unit in the SEZ to make a separate application for registration as a business vertical, distinct from its other units located in the DTA.

It can be seen that neither Section 23, nor Section 24 has an overriding effect on the other, meaning that, at this point, it cannot be safely concluded as to whether the SEZs are to take registration under GST or not.

An implication can be drawn that in order to stimulate exports and help SEZ get back its lost sheen, the legislature might have mostly kept SEZ outside the incremental compliance burden structure as well as the looming trade protectionism measures that are going to get installed, almost inevitably, with the implementation of GST. In case the mandate to take registration is done away with and the supply of services from SEZ to DTA is put under the reverse charge mechanism, SEZ in India would truly become a Free Trade Zone.

(The authors – Rajat Dosi is Partner & Kumar Harsh vardhan is Associate – Indirect Taxation, RSA Legal Solutions and the views expressed are strictly personal.)