GST & SEZ – Supplies, Valuations, Registration Under GST Regime: It is pivotal to understand the impact of Goods & Services Tax (‘GST’) on Special Economic Zone (‘SEZ’) developer as well as SEZ units. In this article we shall understand the implications of GST on supplies made to an SEZ developer or SEZ unit or supplies made by an SEZ developer or SEZ unit.
GST & SEZ
As per Sec. 2(19) of Integrated Goods & Services Act (‘IGST’) 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 (‘SEZ’), 2005.
As per clause (za) of Sec. 2 of 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
As per Sec. 2(20) of IGST 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 Sec. 2(g) of 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 unit has not been defined in the IGST Act, 2017. As per Sec. 2(zc) of 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.
At this point it is worthwhile to understand whether SEZ shall be considered as part of ‘India’ under GST law.
‘India’ is defined under Sec. 2(56) of 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. In the above context let us analyze the impact of GST on supplies made to and from SEZ
Supplies Made to SEZ
As per Sec. 7(5)(b) of 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 Sec. 8 supply of goods or services to SEZ developer or SEZ unit shall not be treated as intra-state supply.
However as per Sec. 16(1) of 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’. Hence supplier making such supplies shall be entitled to input tax credit of goods and services used for making such supplies. It is worthwhile to note that input tax credit shall be available even if the goods or services or both supplied to SEZ developer or SEZ unit are exempted.
It must also be noted that supplies made even to non-processing area shall be zero rated. As per Sec. 16(3) of IGST Act, 2017 supplier can supply the goods or services or both either without payment of tax by executing bond or LUT and claim refund of unutilized tax credits or with payment of tax and then can claim refund of IGST paid on such supply
Supplies Made From SEZ – Goods
Presently when a supply is made from SEZ to domestic tariff area (‘DTA’) following two broad category 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 Customs Tariff Act, 1975 equivalent to excise duty (known as ‘CVD’)
Sec. 2(m) of 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 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 Sec. 30 of SEZ Act, 2005 provides that SEZ units may remove the goods to DTA. As per Sec. 2(I) of 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 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 and where such date is not ascertainable on the date of payment of duty.
Hon. Gujarat High Court in the case of Adani Power Limited v Union of India (2015) 330 ELT 883 (Guj.) held that duties under both the above referred categories are payable under Sec. 30 of 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 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 supply at the rates linked with the rates under 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 Sec. 51 of SEZ Act, 2005 which provides that the provisions of 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 SEZ Rules provide that value of goods cleared to DTA shall be in accordance with Customs Act, 1962 and its rules.
Hence at present both the above referred categories of duties are payable under SEZ Act, 2005. CVD which is equivalent to excise duty is not payable for such supply under Central Excise Act, 1944. Thus uniform principles of valuation prescribed under Customs Act, 1962 are applied for paying customs duty as well as CVD.
Under GST regime as per Sec. 7(5)(b) of 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 Sec. 8 supply of goods or services by SEZ developer or SEZ unit shall not be treated as intra-state supply.
Here it may be noted that as per proviso to Sec. 5(1) of 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 as 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 u/s 2(5) of 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 u/s 5(1) of 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 SEZ Act, 2005. This brings us to an interesting issue..
As stated above, in the preset regime for payment of basic custom duties as well as CVD common valuation principles provided under Customs Act, 1962 are applied. Under GST regime, IGST shall be payable under IGST Act, 2017 wherein GST valuation rules shall apply and custom duties including basic custom duties shall still be payable under SEZ Act, 2005 wherein customs valuation rules shall apply
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 on a same transaction two different valuation rules must be applied for payment of different levies.
This brings us to the last issue of whether levy of IGST on supplies made from SEZ to DTA can be challenged.
Hon. Gujarat High Court in the case of Torrent Energy Limited v. State of Gujarat (2014-GH- 108) has held that SEZ developer or unit shall not be liable to pay purchase tax imposed u/s 9(5) of Gujarat Value Added Tax (‘GVAT’) Act, 2003 as provisions of Gujarat Special Economic Zone (‘GSEZ’) Act, 2004 shall override the provisions of GVAT Act, 2003. Let us understand the said decision in detail.
In this case the petitioner had purchased some zero rated goods locally (i.e. without payment of tax) and used the same in generation of power which was distributed to other units including units situated in DTA. State authorities demanded purchase tax from the petitioner u/s 9(5) of GVAT Act, 2003 on the ground that the zero rated purchased goods were used for manufacturing power which was distributed outside SEZ and hence the same are liable for payment of purchase tax.
It was argued by the petitioner that as per Sec. 21 of GSEZ Act, 2004 exemption is provided to SEZ from payment of sales tax and other taxes for purchase of goods and services from unit in Domestic Tariff Area. As per Sec. 22 of GSEZ Act, 2004 provisions of said Act shall have overriding effect over any other law. Hence it was canvassed that purchase tax imposed u/s 9(5) of GVAT Act, 2003 on SEZ unit is against Sec. 21 read with Sec. 22 of GSEZ Act, 2004 and hence the same cannot be imposed.
High Court thus concluded relying on number of decisions that non-obstante clause contained u/s 22 of GSEZ Act, 2004 shall override the provisions of Sec. 9(5) of GVAT Act, 2003 especially when GVAT Act, 2003 which was enacted after GSEZ Act, 2004 did not contain non-obstante clause over GSEZ Act, 2004. Hence levy of purchase tax on SEZ developer or unit was struck down.
Ratio of said decision cannot be applied to GST regime as tax is payable on outward supply from SEZ to DTA and not on purchase. Ratio can be made applicable if purchase tax is imposed on SEZ developer or SEZ units on purchases made from DTA provided Sec. 26 of SEZ Act, 2005 is amended to provide for exemption from GST on goods procured by SEZ developer or SEZ unit.
Supplies Made from SEZ – Services
Presently Sec. 30 of 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 hence relevant valuation rules under service tax law are applied.
Under GST regime as per Sec. 7(5)(b) of 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 Sec. 8 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 Under GST Regime
The draft registration rules released on April 1, 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.
On the basis of above discussion one can conclude that all the supplies of goods or services or both to SEZ developer or SEZ unit shall be zero rated. IGST shall be payable on supplies made by SEZ developer or units. In the context of supply of goods by SEZ developer or SEZ unit author urge the Government to levy IGST under Sec. 30 of SEZ Act, 2005 itself and not under IGST Act, 2017. This will save applying two different set of valuation rules for same transaction.