Rajat Mohan
Special Economic Zone (SEZ) is one particular of the most envisioned places for corporations as it is a geographical area that typically has liberal financial laws with respect to investing, taxation, trading, quotas, and customs and labor regulations. The units in SEZ are also privileged with specific tax holidays. It is a especially committed duty-absolutely free location 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 drastically to exports from India.
However, due to the advent of Covid, there is a significant effect on exports. Indian exporters are facing international challenges and to mitigate the very same. Commerce and Industry Minister not too long ago reviewed to revamp the SEZ policy in concurrence with the remaining suggestions of Baba Kalyani Committee. Recently, ICRIER has also recommended for cross border SEZs to establish trade hyperlinks with neighboring nations. And, in order to bring them at par with the lowest tariffs imposed in India’s absolutely free trade agreement partners, Delhi-primarily based financial consider tank has recommended lowering the duty levied on goods produced in SEZ units and sold outdoors these zones also named as Domestic Tariff Area (DTA).
Thus, all these measures will attract several more corporations in the SEZ location. Further, there is a suggestion from ICRIER to enable subcontracting without the need of any restrictions or cap at any level thereby providing SEZ units the freedom to subcontract with export-oriented units outdoors the zone as properly. Thus, the many measures will lead to a jump in the transactions pertaining to SEZ each inside SEZ and involving SEZ and DTA. Thus, it is crucial that the taxation laws are unambiguous and unblemished associated to the provide of goods and services by or to SEZ.
Under the Goods and Services Tax Act, any provide created to the SEZ units or developer is treated as a Zero-rated provide providing the supplier two possibilities 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 the need of payment of taxes. Thus, there is no tax incidence below GST on SEZ on their procurements (except reverse charge). However, the supplier demands to file the refund application as per the laid down process below GST. There is ambiguity in the law with respect to the provide on which refund shall be accessible.
Even although there is no certain restriction in the Act with respect to the supplies on which refund shall be accessible, the guidelines 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 can not take away what was conferred by the Act or carve down its impact. However, there have been many advance rulings side-stepping the common interpretations of the law. Thus, there is a require for clarity in law on this matter.
Another battle that is unsettled is with respect to the endorsement necessary from the SEZ officer in particular in the bill to ship to model. It is a extremely typical 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 instances, it becomes complicated to acquire the endorsement from the SEZ officer that the goods have been admitted into the SEZ therefore delaying the refund and from time to time rejection of the refund.
There are challenges in-case of the provide of goods or services by SEZ to DTA as well. As per the provisions laid down below the GST Act, any provide 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 outdoors 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 does not specify who will bear the liability of IGST in such a case. Reference can only be created to instruction no. 9 of Form GSTR-1 which states that provide by SEZ unit to DTA has to be treated as an import in case goods are received below the cover of the bill of entry. However, there is nevertheless a lack of clarity with respect to the stated matter and the DTA shall make positive that the bill of entry is obtained so that there is no disallowance of ITC by the GST authorities.
Another essential challenge is with respect to the provision of reverse charge mechanism mandating SEZs to take the registration compulsorily therefore casting the added burden of compliance. Further, as per the provisions of the GST Act, below the reverse charge mechanism the recipient has to discharge the tax liability rather of the supplier. Thus, SEZ shall discharge the tax liability on any services attracting reverse charge below GST. And, the tax liability demands to be discharged in money and input tax credit is accessible. Since there is no tax on outward provide from SEZ to DTA, the stated input tax credit will be accumulated.
Now the query arises no matter if SEZ unit can claim the refund of this accumulated credit or not maintaining into consideration that reverse charge mechanism puts the recipient into the footwear of the supplier which means thereby GST laws applicable to the recipient will apply as if he is liable to spend the tax. As discussed above, any provide to SEZ by DTA are treated as zero-rated supplies. And, as per the provisions of GST, the refund is accessible to the particular person producing the zero-rated provide. Here, the provide has been created by DTA whereas the duty has been discharged by SEZ. Thus, there is an ambiguity that no matter if 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 important part in the development of economy of our nation. And, to facilitate the ease of business enterprise for them in the present difficult international situation, the Government is taking into consideration many measures like permitting manufacturing enabling services corporations in SEZ location, establishing cross border specific financial zones. removal of restrictions on subcontracting by SEZ to DTA. Thus, it is crucial that the taxation laws are clear with respect to each and every transaction pertaining to SEZs and the refund approach is robust so that the extremely goal to accomplish the ultimate aim to propel India into a development trajectory is not defeated.
Rajat Mohan is Senior Partner at AMRG & Associates. Views expressed are the author’s private.