Implementation of GST regime in India is one of the huge transformations, apart from demonetisation, that the country has seen in centuries. GST has become a major contributor towards the Indian economy and has had an impact on both the common man as well as business entrepreneurs. The new tax regime has affected every industry in a very short span of time. Today we will look at its impact on Special Economic Zones in India.

Guidelines of World Trade Organisation for Special Economic Zones
Supplies across the globe are governed by some standard principles set by the World Trade Organisation. As per the rules set by WTO, exports made to Special Economic Zones or SEZs get an exemption from VAT or GST. Any import made from such areas is taxed at the same rate as applicable to local production within the country. So, considering a zero-rated tax on exports is a principle of WTO which is related to destination based taxation rules and the VAT free items here is described as zero-rated where the manufacturer can recover the costs and overheads used to get resources. As GST also depends on a destination principle of WTO, the exports made within the country go outside of it termed as zero-rated, and the cost and overheads spent on resources are refunded back to manufacturers in the name of input tax. Guidelines have been set by OECD to neutralise VAT for multi-national companies. This ensures that the companies find it easier to comply with laws and find it easier to do their business.

GST Laws on Exports made to SEZs
Under GST Regime, the guidelines mentioned above remain the same and destination based taxation persists as zero-rated and a described benefit stays for the exports to Special Economic Zones (SEZs). The extension for the stated benefit is up to processing zones of the SEZs, but the supplies from this SEZ Areas to Domestic Tariff Area (DTA) is liable to describe as a taxable trade under the scope of GST rules and regulations.

As per the IGST Act, zero-rated supplies can be described as follows:

Zero-rated supplies are mentioned below regarding the goods or services or both, viz:
a. Export of Goods/Services or both
b. Supply of Goods/Services or both to SEZ developer or unit
According to the provisions of sub-section (5) of section 17 of CGST Act, the credit of input tax can be claimed for such zero-rated supplies, despite the supply being an exempt supply
A registered person under GST regime can claim the refunds in either case:
A taxpayer can supply the goods or services or both, under a bond or a letter of undertaking, fulfilling the conditions and procedure must be as mentioned in above provisions, without paying IGST and can claim the refunds of unused input tax credit.
A taxpayer can supply the goods or services or both, fulfilling the conditions and procedure as may be mentioned, with the payment of IGST and can claim the tax paid on the supply of the Goods or Services or both, according to the rules described under CGST Act.
Some other special provisions are also described under IGST Act, 2017 pertaining procurement of Goods and Services on which taxes are not paid. GST law provides the refunds for taxes paid by the supplier for supplies made to an SEZ developer or SEZ unit.

As per section 7(5), (b) of IGST Act, the supplies of Goods or Services or both to or by a developer or Unit Holder of SEZ will be termed as the supplies within the state and IGST would be chargeable with further refund mechanism.

For example, a taxpayer living in Bhuj supplies to Kandla SEZ in Gujarat, this supply must be termed as interstate supply, and IGST will be charged, despite refund scheme is also eligible for the same procedure because the supply comes under as zero-rated supply.

The laws are quite clear that supplies made in reference to a bond or a letter of undertaking to SEZ areas will be tax-free and other supplies to this area will attract the IGST, which will be claimed further for refunds.

GST Laws for SEZs where IGST is paid for Supplies
According to CGST laws, the supplies made with the payment of IGST to an SEZ Developer or SEZ Unitholder, he is liable for the payment of IGST at applicable rates. The export invoice will be generated in Indian currency with a proclamation that ‘Supply is meant for SEZ developer / unit with payment of integrated tax’. The declaration made with the mentioned option will make the refund procedure fast. The IGST mentioned in the invoice is not charged from the customer, it is just for the acknowledgement purposes.

The procedure will go like this:

For example, An entity X Pvt. Ltd. supplies the Goods (whose purchase price is Rs 1 lakh) for Rs 1.5 lakh to an entity Y Pvt. Ltd located in Kandla SEZ. The applicable IGST will be charged at 18%. The invoice will look like:
The selling price of the supply: Rs 1.5 lakh
Applicable IGST at 18%: Rs 27,000
Invoice will consist total value: Rs 1.77 lakh
Now, the entity X Pvt. Ltd. will release the tax liability of Rs 27,000 by using Input Credit of Rs 18,000 which is available on an account and cash payment of remaining Rs 9,000. So, the entity X will get a refund of Rs 27,000, and subtracting Rs 9,000 from the whole, a refund will be Rs 18,000 which is the real net worth of input tax credit.

GST is a new taxation regime with various new laws and requirements for proper compliance. Our tax experts at earlyGST can help you get all your GST returns filed and comply with the laws so that you can focus more on your business.

 

One case study on SEZ relating to impacts of GST on Supply of Services provided by SEZ Developer to SEZ Unit/s

Section 2 (19) of Integrated Goods and Services Tax Act, 2017 “Special Economic Zone” shall have the same meaning as assigned to it in clause (za) of section 2 of the Special Economic Zones Act, 2005;

Section 2 (20) of Integrated Goods and Services Tax Act, 2017 “Special Economic Zone developer” shall have the same meaning as assigned to it in clause (g) of section 2 of the Special Economic Zones Act, 2005 and includes an Authority as defined in clause (d) and a Co-Developer as defined in clause (f) of section 2 of the said Act;

As per Section 2 ( za) of the Special Economic Zones Act, 2005 “Special Economic Zone” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone;

As per Section 2 (g) of the Special Economic Zones Act, 2005 “Developer” means a person who, or a State Government which, has been granted by the Central Government a letter of approval under sub-section (10) of section 3 and includes an Authority and a Co-Developer;



As per Section 2 (d) of the Special Economic Zones Act, 2005 “Authority” means a Special Economic Zone Authority constituted under sub-section (1) of section 31;

As per Section 2 (f) of the Special Economic Zones Act, 2005 “Co-Developer” means a person who, or a State Government which, has been granted by the Central Government a letter of approval under sub-section (12) of section 3

As per Section 16 (b) of IGST Act supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit is considered as “Zero rated Supply”.

As per section 16 (2) of IGST Act , credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply subject to Section 17 (5) of Central Goods and Service Act.



Section 17 (5) of Central Goods and Service Act deals with certain credits which are not allowed or certain credits are allowed but if certain conditions are fulfilled.

As per Section 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 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 made thereunder.

So under Option 1 which is available under section 16 (3) (a) of IGST Act that a registered person may supply such goods or services or both under bond or Letter of undertaking to SEZ Developer or SEZ Co-Developer or SEZ Units without payment of integrated tax and also claim refund of unutilized input tax credit.

So on one hand no funds will be blocked and another hand a registered person making zero rated supply can claim refund of unutilized input tax credit.

Further, under Option 2 under section 16 (3) (b) of IGST Act a registered person may supply such goods or services or both to SEZ Developer or SEZ Co-Developer or SEZ Units on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied in accordance with Section 54 of Central Goods and Service Tax Act or rules made thereunder.



So under this option First IGST is to be paid and then one can claim refund. Therefore, under this option working capital will be blocked. Getting refund from department has always been a challenge and the said process will take time & efforts too.

But in GST regime as per section 54 (6) of the CGST Act, the proper officer may in case of any refund on account of zero-rated supply of goods or services or both made by registered person refund on a provisional basis, ninety per cent of the total amount so claimed, excluding the amount of input tax credit provisionally accepted, in such manner and subject to such conditions, limitations and safeguards as may be prescribed and thereafter make an order under Section 54 (5) for final settlement of the refund claim after due verification of documents furnished by the applicant.

Therefore in case of refund is relating to supplies made to SEZ Developer/Co-Developer or SEZ Unit than in GST regime now provisional refund of 90% will be given immediately. This provision is a big relief to the registered person claiming such refund. But theoretically, 90% of refund is to be granted on provisional basis but practically the department is asking for relevant proofs from the registered persons for verification before granting any refund.

As per Section 8(1) of IGST Act, Subject to the provisions of section 10 (PLACE OF SUPPLY OF GOODS OR SERVICES OR BOTH), supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union territory shall be treated as intra-State supply:

Provided that the following supply of goods shall not be treated as intra-State supply, namely:–– (i) supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit;



So even if supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit is made within the state then also it is treated as interstate supply as per IGST Act.

As per Notification NO 15/2017- Integrated Tax (Rate) dated 30-06-2017 In exercise of the powers conferred by sub-section (1) of section 6 of the Integrated Goods and Service Tax Act, 2017 , the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts all goods or services or both imported by a unit or a developer in the Special Economic Zone, from the whole of the integrated tax leviable thereon under sub-section (7) of section 3 of the Customs Tariff Act, 1975 (51 of 1975) for authorized operations.

Above notification exempts all goods or services or both imported by a unit or a developer in the SEZ from the whole of the integrated tax for authorized operations.

As per Section 2 (c) of SEZ Act 2005 “authorized operations” means operations which may be authorized under sub-section (2) of section 4 and sub-section (9) of section 15;

As per Section 15 (9) of SEZ Act 2005 The Development Commissioner may, after approval of the proposal referred to in sub-section (3), grant a letter of approval to the person concerned to set up a Unit and undertake such operations which the Development Commissioner may authorize and every such operation so authorized shall be mentioned in the letter of approval.

Notification No. 18/2017 -Integrated Tax (Rate) exempts services imported by a unit or a developer in the Special Economic Zone for authorized operations, from the whole of the integrated tax leviable thereon under section 5 of the Integrated Goods and Service Tax Act, 2017

As per F.No. D.12/19/2013-SEZ dated 02-01-2018 Government of India, Ministry of Commerce & Industry, Department of Commerce (SEZ Section) a list of 66 Services which may be permitted by all Unit Approval Committees (UACs) as default authorized services for IGST exemption. The Board of Approval, after deliberation, approved the reiteration of the default authorized operations as approved earlier.

Default List of Services approved by Department of Commerce includes Architect services, Asset Management services, Banking and other financial services, Business Exhibition expenses, commercial or industrial construction services, Consulting Engineers service, Interior decorator service, Legal consultancy services, Management, maintenance or repair services, renting of immovable property services, site formation & clearance, excavation earth moving, Works contract services, Construction services, SEZ Online services , Business Support service, Accommodation service etc.



Clarification on issues related to furnishing of Bond/Letter of Undertaking for Exports is mentioned in Circular No. 5/5/2017- GST dated 11-08-2017.

Eligibility to export under LUT

Eligibility to export under LUT
Forward inward remittance in Indian Rupee
Service tax on SEZ in earlier Service tax regime
Case Study on SEZ
Possible Solution on the said case study of SEZ
Notification No. 16/2017- Central Tax dated 07-07-2017 specifies conditions to be fulfilled for export under letter of undertaking (LUT) in place of Bond. It is clarified that any registered person who has received a minimum foreign inward remittance of 10% of export turnover in the preceding financial year is eligible for availing the facility of LUT provided, that the amount received as foreign inward remittance is not less that Rs 1 Crore.

It may however be noted that a status holder as specified in paragraphs 3.20 and 3.21 of the Foreign Trade Policy 2015-2020 is eligible for LUT facility regardless of whether he satisfies the above conditions.

Paragraphs 3.20 and 3.21 of the Foreign Trade Policy 2015-2020 is as mentioned below:

3.20 Status Holder

(a) Status Holders are business leaders who have excelled in international trade and have successfully contributed to country’s foreign trade. Status Holders are expected to not only contribute towards India’s exports but also provide guidance and handholding to new entrepreneurs.

(b) All exporters of goods, services and technology having an import-export code (IEC) number shall be eligible for recognition as a status holder. Status recognition depends upon export performance. An applicant shall be categorized as status holder upon achieving export performance during current and previous two financial years, as indicated in paragraph 3.21 Of Foreign Trade Policy. The export performance will be counted on the basis of FOB value of export earnings in free foreign exchange.

(c) For deemed export, FOR value of exports in Indian Rupees shall be converted in US$ at the exchange rate notified by CBEC, as applicable on 1st April of each Financial Year.
(d) For granting status, export performance is necessary in at least two out of three years.

3.21 Status Category

Status Category Export Performance
FOB / FOR (as converted) Value
(in US $ million)
One Star Export House 3
Two Star Export House 25
Three Star Export House 100
Four Star Export House 500
Five Star Export House 2000
Form for LUT: Bonds are furnished on non-judicial stamp paper, while LUTs are generally submitted on the letterhead containing signature and seal of the person or the person authorized in this behalf.

Time for acceptance of LUT/Bond: As LUT/bond is a priori requirement for export, including supplies to a SEZ developer or a SEZ unit, the LUT/bond should be processed on top most priority and should be accepted within a period of three working days from the date of submission of LUT/bond along with complete documents by the exporter.



Purchases from manufacturer and form CT-1: There is lack of clarity about treatment of CT-1 form which was earlier used for purchase of goods by a merchant exporter from a manufacturer without payment of central excise duty. The scheme holds no relevance under GST since transaction between a manufacturer and a merchant exporter is in the nature of supply and the same has not been exempted under GST even on submission of LUT/bond. Therefore, such supplies would be subject to GST.

The zero rating of exports, including supplies to SEZ, is allowed only with respect to supply by the actual exporter under LUT/bond or payment of IGST.

Transactions with EOUs: Zero rating is not applicable to supplies to EOUs and there is no special dispensation for them. Therefore, supplies to EOUs are taxable under GST just like any other taxable supplies. The EOUs, to the extent of exports, are eligible for zero rating like any other exporter.

Forward inward remittance in Indian Rupee
It is clarified that acceptance of LUT instead of a bond for supplies of goods to Nepal or Bhutan or SEZ developer or SEZ unit will be permissible irrespective of whether the payments are made in Indian currency or convertible foreign exchange as long as they are in accordance with applicable RBI guidelines. It may also be noted that supply of services to SEZ developer or SEZ unit will also be permissible on the same lines. The supply of services, however, to Nepal or Bhutan will be deemed to be export of services only if the payment for such services is received by the supplier in convertible foreign exchange.

Jurisdictional officer: It has been clarified in Circular Nos. 2/2/2017 – GST dated 4th July, 2017 and 4/4/2017 – GST dated 7th July, 2017 that Bond/LUT shall be accepted by the jurisdictional Deputy/Assistant Commissioner having jurisdiction over the principal place of business of the exporter. The exporter is at liberty to furnish the bond/LUT before Central Tax Authority or State Tax Authority till the administrative mechanism for assigning of taxpayers to respective authority is implemented. It is reiterated that the Central Tax officers shall facilitate all exporters whether or not the exporter was registered with the Central Government in the earlier regime.

Applicability of circulars on Bond/LUTs: It is learnt that some field officers have inferred that the instructions given by the said circulars are effective in respect of exports made only from the date of its issue despite the fact that it has been categorically clarified specifically in the said circular (dated 7th July, 2017) that the instructions shall be applicable for exports on or after 1st July, 2017. It is reiterated that the instructions issued vide said circular and this circular are applicable to any export made on or after the 1st July 2017.

Service tax on SEZ in earlier Service tax regime
Central Board of Excise and Customs, Ministry of Finance has rescinded Notification No. 40/2012-ST dated 20thJune 2012 and introduced new Notification No. 12/2013-ST dated 01-07-2013.

1. As per this Notification where the specified services received by the SEZ unit or the Developer are used exclusively for the authorized operations, the person liable to pay service tax has the option not to pay the service tax ab-initio, subject to the following conditions and procedure as stated below:

a) The SEZ Unit or the Developer shall get an approval by The Approval Committee of the list of the services as are required for the authorized operations (referred to as the specified services) on which the SEZ Unit or Developer wish to claim exemption from service tax.

b) The SEZ Unit or the Developer shall furnish a declaration in Form A-1, verified by the Specified Officer of the SEZ, along with the list of specified services in terms of abovementioned condition a);

c) On the basis of declaration made in Form A-1, an authorization shall be issued by the jurisdictional Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise, as the case may be to the SEZ unit or the Developer in Form A-2;

The SEZ Unit or the Developer shall provide a copy of said authorization to the provider of specified services. On the basis of the said authorization, the service provider shall provide the specified services to the SEZ unit or the Developer without payment of service tax;

Now in New regime of GST condition for filing declaration in Form A-1 by the SEZ Unit or Developer verified by the Specified Officer of the SEZ and on the basis of declaration made in Form A-1, an authorization shall be issued by the jurisdictional Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise, as the case may be to the SEZ unit or the Developer in Form A-2 is done away with.

So under the new GST regime for saving of GST, now efforts have been sifted from SEZ Unit or SEZ Developer to a registered person supplying such goods or services or both to SEZ Developer or SEZ Co-Developer or SEZ Units, so the same is a beneficial for SEZ Developer / SEZ Co-Developer or SEZ Units .

Case Study on SEZ
SEZ developer is having lease right of Land for 99 years obtained from say GIDC would like to Sub-Sub lease land of processing zone to SEZ unit after creating infrastructure required by SEZ Unit. So now query is SEZ unit will pay one time salami payment to SEZ Developer for acquiring Leasehold rights of 99 years. So whether GST payable on Renting of Leasehold rights of land (on one time salami payment) will be taxable or exempt.

Possible Solution on the said case study of SEZ
In the IGST Act or notification, it is mentioned that what is to be done if services are provided by a registered person to SEZ Developer/ Co-Developer or SEZ Units but it is nowhere mentioned that what is to be done if services are provided by SEZ Developer to SEZ Units.

As per F.No. D.12/19/2013-SEZ dated 02-01-2018 Government of India, Ministry of Commerce & Industry, Department of Commerce (SEZ Section) a list of 66 Services which may be permitted by all Unit Approval Committees (UACs) as default authorized services for IGST exemption. The Board of Approval, after deliberation, approved the reiteration of the default authorized operations as approved earlier.

Renting of immovable property services is mentioned in the above default list of authorized services for IGST exemption.

The said services is in the processing zone & the said service is also for the authorized operation but as mentioned earlier in the IGST Act or notification what is to be done if services are provided by a registered person to SEZ Developer/ Co-Developer or SEZ Units but it is nowhere mentioned that what is to be done if services are provided by SEZ Developer to SEZ Units.

I have found out one clarification in respect of GST on points raised by SGJMA, F NO. Seepz- SEZ/GST Legislation/62/2017-18 Dated 30-06-2017 issued by Office of the Development Commissioner, SEEPZ Special Economic Zone, Ministry of Commerce & Industry, Government of India, Andheri (East), Mumbai – 400096 dated 30-06-2017 issued to the Secretary, SEEPZ Gems & Jewellery Manufacturer’s Association, Business- facilitation center, 3rd floor, Office no 2, behind SEEPZ service centre, Seepz – SEZ, Andheri (East) – Mumbai – 96

I am reproducing Question no 5 & Answer for the same

Question no 5) Supply of Goods to SEZ Units will be zero rated. Will this hold good for Inter Unit Transfer (IUT) among units within the same SEZ as also between two SEZ. We understand that it is for the supplier of such goods to SEZ to make supplies under Bond or LUT without payment of IGST and claim credit of ITCs or supply on payment of IGST and claim refund of taxes paid.

Answer NO 5) Supply will remain zero rated within SEZ (IUT) and also between SEZs. Bond/LUT will remain same for goods and services for supply to SEZ.

So above clarification also considered case of Supply of Goods or Services between SEZ Units or between two SEZs but our case study is not answered which is relating to Supply of Services between SEZ Developer to SEZ Unit.

Even though our case study’s answer is not given under IGST Act or any notification and the same is also not covered in the said clarification but I am of the view that based on above cited clarification one can take the stand that Supply of services provided by SEZ Developer to SEZ Unit which is covered under default list of authorized services for IGST exemption & also keeping in mind the said service is provided in processing zone and also the same is towards authorized operation so Supply will remain zero rated subject to that a SEZ Developer may supply such goods or services or both under bond or Letter of undertaking without payment of IGST to SEZ Units and also claim refund of unutilized input tax credit or

Supply on payment of IGST and claim refund of taxes paid.

Conclusions:

1. Under GST regime formality of Form A1 & Form A2 etc. for services provided to SEZ developer or SEZ Units are done away with.

2. Under Option 1 which is available under section 16 (3) (a) of IGST Act that a registered person may supply such goods or services or both under bond or Letter of undertaking to SEZ Developer or SEZ Co-Developer or SEZ Units without payment of integrated tax and also claim refund of unutilized input tax credit. So on one hand no funds will be blocked and another hand a registered person making zero rated supply can claim refund of unutilized input tax credit.

3. Under Option 2 under section 16 (3) (b) of IGST Act a registered person may supply such goods or services or both to SEZ Developer or SEZ Co-Developer or SEZ Units on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied in accordance with Section 54 of Central Goods and Service Tax Act or rules made thereunder.

So under this option First IGST is to be paid and then claim refund. Therefore, under this option working capital will be blocked and not only getting refund from department is always a challenge but the said process will also take time & efforts

4. Supply will remain zero rated in case of SEZ subject to following option 1 or option 2 as mentioned above in all cases of Supply of Goods or services by a registered person to SEZ Developer/Co-Developer or SEZ Units or supply of goods or services between Two SEZ developers or between Two SEZ Units or between SEZ Developer and SEZ Units and also subject to compliance of other conditions as mentioned in this article.

 

 

 

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