The supplier needs to file the refund application as per the laid down procedure under GST but there is ambiguity with respect to the supply on which refund shall be available.
Special Economic Zone (SEZ) is one of the most envisioned areas for businesses as it is a geographical region that normally has liberal economic laws with respect to investing, taxation, trading, quotas, and customs and labor regulations. The units in SEZ are also privileged with special tax holidays. It is a specifically dedicated duty-free area or zone and shall be deemed to be non-taxable foreign territory for the purposes of trade operations and duties and tariffs. These units contribute significantly to exports from India.
However, due to the advent of Covid, there is a major impact on exports. Indian exporters are facing global challenges and to mitigate the same. Commerce and Industry Minister recently reviewed to revamp the SEZ policy in concurrence with the remaining recommendations of Baba Kalyani Committee. Recently, ICRIER has also suggested for cross border SEZs to establish trade links with neighboring countries. And, in order to bring them at par with the lowest tariffs imposed in India’s free trade agreement partners, Delhi-based economic think tank has suggested reducing the duty levied on goods produced in SEZ units and sold outside these zones also called as Domestic Tariff Area (DTA).
Thus, all these measures will attract many more businesses in the SEZ area. Further, there is a suggestion from ICRIER to allow subcontracting without any restrictions or cap at any level thereby giving SEZ units the freedom to subcontract with export-oriented units outside the zone as well. Thus, the various measures will lead to a jump in the transactions pertaining to SEZ both within SEZ and between SEZ and DTA. Thus, it is imperative that the taxation laws are unambiguous and unblemished related to the supply of goods and services by or to SEZ.
Under the Goods and Services Tax Act, any supply made to the SEZ units or developer is treated as a Zero-rated supply giving the supplier two options for refund i.e. refund of taxes paid if opted for with payment of taxes or refund of unutilized credit in-case opted for without payment of taxes. Thus, there is no tax incidence under GST on SEZ on their procurements (except reverse charge). However, the supplier needs to file the refund application as per the laid down procedure under GST. There is ambiguity in the law with respect to the supply on which refund shall be available.
Even though there is no specific restriction in the Act with respect to the supplies on which refund shall be available, the rules stipulate the restriction on refund in respect of only authorized operations. Rules are the bye-laws prescribed to carry the provisions of the Act and they cannot take away what was conferred by the Act or carve down its effect. However, there have been several advance rulings side-stepping the general interpretations of the law. Thus, there is a need for clarity in law on this matter.
Another battle that is unsettled is with respect to the endorsement required from the SEZ officer especially in the bill to ship to model. It is a very common practice when the goods are supplied to a DTA on the instruction of SEZ. Thus, it is a bill to SEZ and ship to DTA. In such cases, it becomes difficult to obtain the endorsement from the SEZ officer that the goods have been admitted into the SEZ thus delaying the refund and sometimes rejection of the refund.
There are challenges in-case of the supply of goods or services by SEZ to DTA too. As per the provisions laid down under the GST Act, any supply of goods or services by SEZ unit to DTA shall be treated as an inter-state transaction chargeable to IGST. Further, as per provisions laid down in SEZ Act, SEZ is a territory outside the customs territory of India and in-case of goods supplied by SEZ to DTA, the custom duties are leviable on such goods when imported and as per the scheme of SEZ Act, the custom duty is to be paid by the importer.
However, the GST Act is silent and doesn’t specify who will bear the liability of IGST in such a case. Reference can only be made to instruction no. 9 of Form GSTR-1 which states that supply by SEZ unit to DTA has to be treated as an import in case goods are received under the cover of the bill of entry. However, there is still a lack of clarity with respect to the said matter and the DTA shall make sure that the bill of entry is obtained so that there is no disallowance of ITC by the GST authorities.
Another key issue is with respect to the provision of reverse charge mechanism mandating SEZs to take the registration compulsorily thus casting the additional burden of compliance. Further, as per the provisions of the GST Act, under the reverse charge mechanism the recipient has to discharge the tax liability instead of the supplier. Thus, SEZ shall discharge the tax liability on any services attracting reverse charge under GST. And, the tax liability needs to be discharged in cash and input tax credit is available. Since there is no tax on outward supply from SEZ to DTA, the said input tax credit will be accumulated.
Now the question arises whether SEZ unit can claim the refund of this accumulated credit or not keeping into consideration that reverse charge mechanism puts the recipient into the shoes of the supplier meaning thereby GST laws applicable to the recipient will apply as if he is liable to pay the tax. As discussed above, any supply to SEZ by DTA are treated as zero-rated supplies. And, as per the provisions of GST, the refund is available to the person making the zero-rated supply. Here, the supply has been made by DTA whereas the duty has been discharged by SEZ. Thus, there is an ambiguity that whether the refund can be claimed for the accumulated input tax credit on account of services received on which reverse charge is applicable.
SEZs play a vital role in the growth of economy of our country. And, to facilitate the ease of business for them in the present challenging global scenario, the Government is considering various measures like allowing manufacturing enabling services companies in SEZ area, establishing cross border special economic zones. removal of restrictions on subcontracting by SEZ to DTA. Thus, it is imperative that the taxation laws are clear with respect to each transaction pertaining to SEZs and the refund process is robust so that the very purpose to achieve the ultimate goal to propel India into a growth trajectory is not defeated.
Rajat Mohan is Senior Partner at AMRG & Associates. Views expressed are the author’s personal.