AUGUST 04, 2017

By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate

IN what could be seen as a major relief to SEZ Developers and SEZ Units, the restrictions associated with exemptions that were prevalent under the service tax law are no longer there. As we know, the exemption from the levy of service tax, on services rendered to SEZ Units and SEZ Developers was governed by Notification No, 12/2013-ST dated July 1, 2013 subject, interalia , to the condition that the SEZ Developer or the SEZ Unit furnished a declaration in Form A-1, duly approved by the Specified Officer of the SEZ which, on submission, was approved by the jurisdictional Asst /Deputy Commissioner of Central Excise, in Form A-2. One fundamental requirement for the ab-initio exemption was that, the specified services should be used exclusively for the authorised operations of the SEZ Developer or the SEZ Unit.

In fact, it used to be a procedural nightmare for SEZ Developers and SEZ Units to obtain the approval for the ab-initio exemption, in Form A-2, as in many cases, the Service Tax Department used to sit in judgement on granting approval and used to reject the request for the exemption, on the basis that the input services were not directly related to the output service of the SEZ Unit or that, these services were not rendered in the SEZ area.

With the advent of the GST regime, Notification No. 12/2013-ST dated July 1, 2013 will have no applicability. In the absence of a similar notification under GST, it would seem that, the exemption from levy of tax under GST, in respect of zero rated supplies to SEZ Developers and SEZ Units is available, sans any approval from the Department and without the need for these services to be rendered inside the SEZ area.

Thus, a SEZ Unit would be entitled to ask its suppliers to desist from levying tax under GST, in respect of supplies such as accommodation services in a Hotel outside the SEZ area for stay of the SEZ Unit's visiting customers, supply of food by the Hotel in respect of a party hosted by the SEZ Unit for its employees, etc. It would not have been possible for the SEZ Unit to obtain approval from the Service Tax Department in Form A-2 for these supplies, under the service tax law. Thus, one can see that, SEZ Developers and SEZ Units would significantly gain under the GST regime, as the exemption that is made available to them would seemingly cover allinward supplies, irrespective of whether or not such supplies are linked to their authorized operations. So long as the supplies are effected to the SEZ Developer and SEZ Units, the ab-initio exemption from levy of tax under GST cannot be denied, in my view, in the absence of a notification similar to Notification No. 12/2013, referred to above.

Of course…..the registered person who effects taxable supplies to SEZ Developers and SEZ Units would be required to execute the requisite bond or LUT, in terms of Notification No. 16/2017-CT read with Circular No. 4/4/2017, both dated 7-7-2017.

Be that as it may….registered taxable persons who effect supplies to SEZ Developers and SEZ Units would, however, be advised that they could face issues, if they claim refund of the ITC attributable to the zero rated supplies effected to the SEZ Developer or the SEZ Unit.

Rule 89 of the CGST Rules, 2017 is reproduced below…

89. Application for refund of tax, interest, penalty, fees or any other amount.

(1) Any person, except the persons covered under notification issued under section 55, claiming refund of any tax, interest, penalty, fees or any other amount paid by him, other than refund of integrated tax paid on goods exported out of India, may file an application electronically in FORM GST RFD-01 through the common portal, either directly or through a Facilitation Centre notified by the Commissioner:

Provided that any claim for refund relating to balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49 may be made through the return furnished for the relevant tax period in FORM GSTR-3 or FORM GSTR-4 or FORM GSTR-7, as the case may be:

Provided further that in respect of supplies to a Special Economic Zone unit or a Special Economic Zone developer, the application for refund shall be filed by the –

(a) supplier of goods after such goods have been admitted in full in the Special Economic Zone for authorised operations, as endorsed by the specified officer of the Zone;

(b) supplier of services along with such evidence regarding receipt of services for authorised operations as endorsed by the specified officer of the Zone:

Consequently, if the registered taxable person effecting taxable supplies to the SEZ Developer or the SEZ Unit is in a position to utilize the ITC related to his billings on SEZ Developers or Units, there would be no need to pay tax under GST on his invoices raised on the SEZ Developer or SEZ Unit. However, if such registered taxable person wants so claim refund of the ITC related to his billings on the SEZ Developers or Units, he would have to insist that his invoices (raised without charging tax) are endorsed by the specified officer of the SEZ, which should be made a pre-condition for not charging taxes under GST.