GST Act 2017 Impact on SEZ – Special Economic Zone

By | May 1, 2017
(Last Updated On: May 1, 2017)

GST Impact on SEZ – Special Economic Zone

Meaning og Special Economic Zone

As per Section 2(19) of the Integrated Goods & Services Act (‘IGST’) Act, 2017 ” special Economic Zone ” shall have the same meaning as is assigned to it in clause (za) of section 2 of the Special Economic Zones Act (‘SEZ’), 2005.

As per clause (za) of Sec. 2 of the SEZ Act, 2005 an SEZ 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. ” 

Thus, all the SEZ’s notified under the SEZ Act, 2005 are covered in the definition under the IGST Act, 2017.

Meaning of Special Economic Zone developer

As per Section 2(20) of the IGST Act 2017 ” Special Economic Zone developer ” shall have the same meaning as is 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 Sec. 2(g) of the SEZ 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.

SEZ is part of India in IGST Act 2017

SEZ unit has not been defined in the IGST Act, 2017. As per Sec. 2(zc) of the SEZ Act, 2005 a “unit” means a unit set-up by an entrepreneur in a Special Economic Zone and includes an existing Unit, an Offshore Banking Unit and a Unit in an International Financial Services Centre, whether established before or established after commencement of this Act

SEZ shall be considered as part of ‘India’ under GST law as per Section 2 (56) of CGST Act 2017.

‘India’ is defined under Section 2(56) of the Central Goods & Services Act (‘CGST’) Act 2017. Same is reproduced below for ready reference:

” ” India ” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and the air space above its territory and territorial waters”

As per above definition, SEZ will be considered as a part of India as it includes entire territory of India.

Supplies Made To SEZ 

As per Section 7(5)(b) of the IGST Act 2017 supply of goods or services or both to SEZ developer or SEZ unit shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. Simultaneously, as per Section 8 of the IGST Act 2017  supply of goods or services to SEZ developer or SEZ unit shall not be treated as intra-State supply.

Input Tax Credit on Supplies Made To SEZ 

However, as per Section 16(1) of the IGST Act 2017 supply of goods or services or both to a SEZ developer or SEZ unit shall be considered as a ‘ zero rated supply ‘. Thus, supplier making such supplies shall be entitled to input tax credit of goods and services used for making such supplies.

As per Section 16 (2) of the IGST Act 2017.– Input tax credit shall be available even if the goods or services or both supplied to SEZ developer or SEZ unit are exempted.

As per Section 16(3) of the IGST Act 2017 supplier can supply the goods or services or both either

i) without payment of tax by executing bond or  Letter of Undertaking and claim refund of unutilized tax credits or

ii) with payment of tax and then can claim refund of IGST paid on such supply.

Supplies Made From SEZ – Goods

As per Section 7(5)(b) of the IGST Act 2017 supply of goods or services or both by SEZ developer or SEZ unit shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. Simultaneously, as per Section 8 of the IGST Act 2017  supply of goods or services by SEZ developer or SEZ unit shall not be treated as intra-State supply.

As per proviso to Section 5(1) of the IGST Act 2017 IGST on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962.

Import of goods is defined under Section 2(10) of the IGST Act 2017 as ” Import of goods ” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India.

As SEZ is part of ‘India’, any removal of goods from SEZ to DTA shall not be considered as import. Hence, IGST is to be paid on removal of goods from SEZ to DTA, the same shall be payable as domestic supply transaction under section 5(1) of the IGST Act 2017 and not as an import transaction.

Apart from IGST, all other Custom duties, including basic custom duty, shall continue to be levied u/s 30 of the SEZ Act, 2005.

Presently (Before Introduction of GST ) when a supply is made from SEZ to domestic tariff area (‘DTA’) following two broad categories of duties are payable:

1.Basic custom duty, Special additional duty, Anti-dumping duty and safeguard duty including cesses as applicable. All these duties are also subject to number of concessions.
2.Additional duty of Customs u/s 3 of the Customs Tariff Act, 1975 equivalent to excise duty (known as ‘CVD’).

Section 2(m) of the SEZ Act, 2005 defines ‘exports’ as taking of goods or providing services from SEZ to outside India or to another Developer or SEZ unit or from DTA to a developer or SEZ unit. On the other hand Sec. 2(o) defines ‘imports’ as bringing goods or receiving services in SEZ from a place outside India or from another SEZ. Hence, supply of goods or services from SEZ to DTA is not specifically covered in the above definition of import.

However, Section 30 of the SEZ Act, 2005 provides that SEZ units may remove the goods to DTA. As per Sec. 2(i) of the SEZ Act, 2005. DTA means the whole of India (including the territorial waters and continental shelf) but does not include the areas of the Special Economic Zones. The removal shall be on payment of duties of Customs including anti-dumping duty, countervailing duty and safeguard duty under the Customs Tariff Act, 1975. It also provides that rate of duty and tariff value, if any, shall be as applicable on the date of removal, where such date is not ascertainable on the date of payment of duty.

Hon. Gujarat High Court in the case of Adani Power Ltd. v Union of India [2015] 330 ELT 883 (Guj.) held that duties under both the above referred to categories are payable under Sec. 30 of the SEZ Act as that is the charging section and not under the Customs Act, 1962. Supply of goods from SEZ to DTA cannot be considered as ‘import’ under the Customs Act, 1962 as definition of import under the said Act provides that goods must be brought from outside India. SEZ is not located outside India. It thus held that duties are payable on such supplies at the rates linked with the rates under the Customs Act, 1962. Hence, it held that if a product is exempted on imports no duty can be demanded by issuing the notification when the same product is supplied from SEZ to DTA. SEZ Act must be amended to provide for such differential treatment. Reference was also made to Section 51 of the SEZ Act, 2005 which provides that the provisions of the SEZ Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

Rule 47(4) of the SEZ Rules provide that value of goods cleared to DTA shall be in accordance with the Customs Act, 1962 and its rules.

Hence, at present both the above referred to categories of duties are payable under the SEZ Act, 2005. CVD which is equivalent to excise duty is not payable for such supplies under Central Excise Act, 1944. Thus, uniform principles of valuation prescribed under the Customs Act, 1962 are applied for paying customs duty as well as CVD.

Valuation of Supplies of Goods made from SEZ

Valuation before GST

In the preset regime for payment of basic custom duties as well as CVD common valuation principles provided under the Customs Act, 1962 are applied.

Under GST regime,

i) IGST shall be payable under IGST Act 2017 wherein GST valuation rules shall apply and

ii) Custom duties including basic custom duties shall still be payable under SEZ Act, 2005 wherein customs valuation rules shall apply.

Note :- Under Customs, predominant mode of valuation is levy of duty on CIF (i.e., including freight & insurance) value whereas under GST freight and insurance may not be part of transaction value. Similarly, under GST interest on late payment is part of value which is not the case under Customs.

Thus under GST for same transaction two different valuation rules must be applied for payment of different levies.

Supplies Made From SEZ  – Services

Presently ( Before GST )  Section 30 of the SEZ Act, 2005 does not provide for payment of service tax on taxable services provided by SEZ unit to a unit in DTA. However, Finance Act, 1994 (‘service tax law’) does not provide for any exemption to SEZ units. Hence, service tax is payable and relevant valuation rules under service tax law are applied.

As per Section 7(5)(b) of the IGST Act 2017 supply of goods or services or both by SEZ developer or SEZ unit shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. Simultaneously, as per Section 8 of the IGST Act 2017  supply of goods or services by SEZ developer or SEZ unit shall not be treated as intra-State supply.

Hence, in GST regime, IGST shall be payable on such supplies and GST valuation rules shall be applied.

Registration of SEZ

 The draft registration rules released on April 1,2017 by CBEC now provide that a SEZ unit or SEZ developer shall make a separate application for registration as a business vertical, distinct from its other units located outside the SEZ zone. Hence, any supply of goods/services to other units in DTA located in the same State where SEZ unit is located shall also be liable to IGST.

Conclusion

On the basis of the above discussion one can conclude that

i) All the supplies of goods or services or both to SEZ developer or SEZ unit shall be zero rated.

ii) IGST shall be payable on supplies made by SEZ developer or units.

iii) There will be different sets of valuation rules for the same transaction.

 

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