Introduction:
With the introduction of GST, there has been a huge chaos among SEZ Developers/ units as to the procedures to be followed w.r.t procurement of goods/ services. As the supplies to SEZ Units/Developers are declared as ‘zero rated supplies’, the suppliers to SEZ units were puzzled about the procedure to be followed for supplying the goods/services to SEZ units and SEZ Developer/units are puzzled about the procedure to be followed for procuring the goods or services.
The Central Government has made certain amendments in SEZ Act and SEZ Rules to bring the same in line with GST Law and prescribed the procedure to be followed for procuring the goods/services by SEZ Unit/Developer. Considering all the practical difficulties faced, an attempt has been made to relieve the intricacies associated with the subject matter.
Importance of procedure:
Before going to the procedure to be followed for supplies to SEZ unit, it is important to understand that during the pre-GST regime, SEZ Act, 2005 is overriding on all acts and the SEZ Act prevails if there is a conflict with other acts. During the pre-GST regime, the Finance Act, 1994 prescribes certain conditions to avail exemption from payment of service tax such as obtaining the list of approved services, Form A-1, Form A-2 etc.,. Similar forms are specified in Central Excise Act, 1944. If the said conditions are not satisfied then the department used to deny the exemption to the suppliers which has created a lot of litigation.
But various courts and tribunals has stated that SEZ Act prevails over other acts thereby extended the exemption to suppliers even though the procedure prescribed is not followed stating that SEZ Act does not specify any forms for claiming the exemption. The same was also held in Andhra Pradesh High Court in case of GMR Aerospace Engineering Ltd. V. Union of India [2019 (31) G.S.T.L. 596 (A.P.)].
However, the overriding effect of Section 51 of the SEZ Act will not be the case in GST and in case of any conflict between SEZ Act and GST Act, latter will prevail. This is because of Article 246A of the Constitution. Article 246A provides powers to Central/State Governments for taxing goods or services notwithstanding anything contained in Article 246 which gives power to enact the SEZ Act. Therefore, the suppliers should be diligent about the procedure to be followed while supplying the goods or services to SEZ units or developers.
Concept of Zero-rated supplies:
Section 16 of IGST Act, 2017 states that supply of goods/ services to SEZ Developer/ units are “zero rated supplies” and has provided the following options for the suppliers:
- Supply of goods/ services without payment of integrated tax (IGST) under bond or Letter of Undertaking and claim refund of unutilized input tax credit.
- Supply goods/ services on payment of integrated tax (IGST) and claim refund of IGST paid.
However, it has to be noted that input tax credit on inward supplies is available even though the supplies made to SEZ units are exempted from payment of GST.
Procedure for making Zero-rated supplies without payment of tax:
Execution of LUT: Rule 96A of CGST Rules, 2017 prescribes the procedure to be followed for zero-rated supplies under bond or letter of undertaking which requires the supplier to furnish a bond or Letter of Undertaking (LUT) before making such supply binding himself to pay tax dues along with interest within a period of
- 15 days after expiry of 3 months or further period extended by Commissioner from the date of invoice for export, if goods are not supplied;
- 15 days after expiry of 1 year or further period extended by Commissioner from the date of invoice for export, is payment of such service is not received by the supplier in foreign exchange or Indian rupees wherever permitted by RBI.
LUT shall be applied electronically in Form RFD-11 and the same would be valid for the remaining part of the year and a fresh application shall be filed every year. However, any person who has been prosecuted for an amount of Rs.2.5 Crores or above is not eligible to furnish LUT.
Invoicing: Rule 46 of CGST Rules, 2017 requires every registered person making supplies to SEZ units/developers to raise invoice with the following endorsements
- Supplies under Bond/LUT: SUPPLY TO SEZ UNIT OR SEZ DEVELOPER FOR AUTHORIZED OPERATIONS UNDER BOND OR LETTER OF UNDERTAKING WITHOUT PAYMENT OF INTEGRATED TAX (IGST)
- Supplies with payment of IGST: “SUPPLY TO SEZ UNIT OR SEZ DEVELOPER FOR AUTHORIZED OPERATIONS ON PAYMENT OF INTEGRATED TAX (IGST)
In addition to above, in case of supply under Bond/LUT the supplier shall indicate the Bond/LUT number on the invoice.
Endorsement: SEZ Amendment Rules, 2018 requires every registered person supplying goods/services to SEZ units or Developers to get the endorsement on the invoice prescribed under CGST Rules, 2017 or Bill of Export as the case may be by the Authorised Officer. In case of supply of goods, the authorized officer would endorse the invoice copies showing the receipt of goods and in case of services, the SEZ Unit/Developer would endorse the invoice copies showing the receipt of services.
Such endorsed invoice or Bill of Export shall be treated as proof of export and a copy of such endorsement shall be forwarded by the SEZ unit or Developer to the jurisdictional GST officer having jurisdiction over the supplier within 45 days. If SEZ unit/Developer fails to forward such endorsement then the jurisdictional officer can raise demand on the Supplier.
Documents to be submitted for endorsement: The supplier of goods or services shall submit the following documents for endorsement by the Authorised Officer
- A statement containing the number and date of invoices;
- In case of supply without payment of IGST, copies of invoices as prescribed under GST Act and Rules from the registered supplier clearly mentioning the details of Bond/LUT;
- In case of supply with payment of IGST, copies of invoices as prescribed under GST Act and Rules from the registered supplier clearly mentioning the IGST paid amount;
Clarifications issued in Circulars: Circular No. 48/22/2018-GST dated 14th June, 2018 clarified as follows
- Services of short-term accommodation, conferencing, banqueting etc. provided to a SEZ developer/unit should be treated as an inter-state supply (under section 7(5)(b) of the IGST Act, 2017) and not an intra-State supply (under section 12(3)(c) of the IGST Act, 2017).
- Event management services, consumables etc. received by a SEZ developer or a SEZ unit can avail the benefit of zero-rated supply only if such services were provided for authorized operations, as endorsed by the specified officer of the Zone, shall be available in such cases to the supplier.
Issues: Not every supply made to a Special Economic Zone can be treated as zero-rated supply. Only the supplies which are used for authorized operations shall be treated as Zero-Rated Supply. Though Section 16 do not explicitly using the term ‘authorised operations’, the department is of the view that only the supplies used for authorized operations shall be treated as ‘Zero-rated Supplies’. Few of the advance rulings in this regard are as follows: -
- Coffee Day Global Ltd., In re- [2018] 96 taxmann.com 247 (AAR Karnataka): The AAR held that though Section 16(1)(b) do not explicitly uses the terms authorized operations’, it is implicit that the supply of goods or services have to be read as in relation to authorized operations.
- Carnation Hotels (P.) Ltd., In re [2019] 110 taxmann.com 196 (AAR Karnataka): The AAR held that if the hotel or accommodation services are received by SEZ developer or SEZ unit for authorized operations, as endorsed by the specified officer of the zone, the benefit of zero rated supply shall be available to the supplier. Therefore, accommodation services supplied by the applicant to SEZ units are to be treated as 'Zero rated supplies' under GST.
Reverse Charge Mechanism: There is a lot of confusion with respect to applicability of reverse charge mechanism if the supplier does not execute LUT/Bond. One view is that Reverse Charge Mechanism liability will attract and the SEZ Supplier shall pay GST and avail ITC of GST paid. The other view is that irrespective of execution of Bond/LUT by the supplier, the supplies amount to ‘Zero-rated supplies’ once it is supplied to ‘SEZ Unit/developer’ and there is no liability to discharge GST. However, it is advisable for the management to take the decision after taking an expert advice.