MARCH 05, 2018

By Siddartha Bhatt, Tax Consultant & Advocate

POST implementation of GST, one area which was kept intact was Special Economic Zones (hereinafter referred to as SEZ). SEZs are kept out of tax net under GST regime, allowing the freedom of operations without cash outflow issues. However, the way GST provisions are drafted and the way it is implemented, has created operational issues for the SEZs for which answers are yet to be found. This article tries to highlight such difficulties faced by SEZs.

1. CGST & SGST Invoices

1.1. SEZ personnel when they avail stay/accommodation services, in the same State or outside the State, they get GST invoices which carry CGST+SGST. Technically, by virtue of second proviso to Sec. 8 of IGST Act, 2017, no supply of services to the SEZ can be intra-State supply. However, Sec. 12(3)(b) of the IGST Act, 2017 states that the place of supply of services in respect of lodging accommodation by a hotel, inn, guesthouse etc., shall be the location at which the immovable property is located.

1.2. It is to be noted that second proviso to Sec. 8 is not "not withstanding" Sec. 12. Hence, all the hotels provide a GST invoice with CGST+SGST.

1.3. The question pertinent here is can a SEZ take credit of CGST+SGST invoices which are received within the State? As per Section 7(5)(b) of the IGST Act, 2017, all supplies made to or by a SEZ unit or developer shall be treated to be a supply in the course of inter-State trade or commerce.

1.4. Sec. 16 or 17 of CGST Act, 2017 which allow taking input tax credit, do not restrict SEZs from taking input tax credit of CGST+SGST. Now with this background, SEZs are uncertain as to whether to take credit of CGST+SGST or to cost the same in the books.

2. Bill to Ship to Problem

Case-I

2.1. Let us take a scenario where an SEZ placed order on DTA supplier to bill to SEZ and ship to another DTA end customer, as depicted below.

2.2. It is interesting to know that the definition of "recipient" vide Sec. 2(93) of the CGST Act, 2017 means "the person who is liable to pay consideration". In the instant case, the recipient is SEZ unit. However, he does not receive the goods in the SEZ area.

2.3. In terms of Sec. 10(1)(b) of the IGST Act, 2017, in a "bill to ship to" case, it is deemed that the "bill to" party receives the goods. However, in the instant case, there will be no acknowledgement from the SEZ authorized officer regarding receipt of goods in the SEZ area.

2.4. While the DTA supplier, can't claim refund of taxes paid under Rule 89 of CGST Rules, 2017, on account of Zero Rated supply (under Sec. 16 of the IGST Act, 2017), because Rule 89(2)(d) requires the refund applicant to submit endorsement evidencing the admission of goods in SEZ. The same condition is provided vide Rule 89(1)(a) as well.

2.5. Predominant question in this transaction is whether it is inter-State supply, as the "bill to" party is a SEZ unit?

Case-II

2.6. Let us take a converse scenario where aDTA customer placed order on DTA supplier to bill to DTA customer and ship to SEZ, as depicted below.

2.7. In this case, recipient is DTA customer while the goods are actually shipped to SEZ. Question pertinent here is whether supplier should treat this transaction as inter-State as the goods are actually received at SEZ?

2.8. Because goods are received and acknowledged at SEZ gate, can the supplier treat this supply as zero-rated supply and seek refund of taxes paid?

Case-III

2.9. This scenario is slightly different from the above two, where a foreign party placed order on DTA customer to bill to foreign party and ship to SEZ, as depicted below.

2.10. This case is neither export of goods nor supply to SEZ. SEZ is not a recipient in terms of Section 2(93) of the CGST Act. Actual recipient is foreign party. At the same time can this be a zero-rated supply as provided under Section 16 of the IGST Act and can the supplier claim refund?

3.Customs Valuation Issues

3.1. In terms of Rule 47 of SEZ Rules, 2006, supply of goods from SEZ to DTA is liable to payment of customs duty in terms of Section 30 of the SEZ Act, 2005.

3.2. Section 30 of the SEZ Act states that goods removed from SEZ to DTA shall be chargeable to customs duties including the additional duties chargeable under Customs Tariff Act, 1975.

3.3. Rule 47(4) of the SEZ Rules provides that the valuation and assessment of goods cleared into DTA shall be made in accordance with Customs Act and Rules made thereunder. Hence, valuation of goods supplied from SEZ to DTA shall be in terms of Customs Valuation Rules.

3.4. The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 has been amended vide Notification No. 91/2017-Customs (N.T.) dated 26.09.2017. The said amendment defines "place of importation" and makes certain changes in Rule 10 which provide for not adding the loading, unloading and handling charges which are incurred in Indian port (place of importation).

3.5. Normally, SEZs enter into contract with DTA buyers on CIF basis. Hence, the invoice value (transaction value) is inclusive of cost + insurance + freight. Question here is how to demonstrate the same.

3.6. SEZ officers insist that the invoice value shall be added with cost of transportation and insurance, while the SEZs are not incurring any such cost or the invoice value is all inclusive. Customs valuation rules use the expression "cost of transportation and insurance up to the place of importation". What is the place of importation in case of supply from SEZ to DTA? The problem is all the more aggressive if the supplies are through pipelines.

4. Unorganized Service Providers

4.1. Several SEZ parks and zones in India, especially in South India are outside the city limits. Few of them are near coastal line or surrounded by forest belts. In addition, petroleum and petro-chemical SEZs are required to grow green belt surrounding the SEZ.

4.2. Common problem faced by these zones are snakes, honey bees and monkeys. Sounds funny, but the ramification of these problems is quite high. To mitigate the problem, SEZs appoint snake catchers, monkey catchers and honey bee catchers. Surprisingly the cost of these go beyond 20 lakhs per annum. It is to be noted that the people who provide these services are not organized. They do these activities as part of their tradition / culture etc. If the SEZ asks them to get registered under GST and then provide service under the cover of GST invoice, probably those service providers may not look at the SEZ client.

4.3. Same is the case of tyre puncture shops who upkeep the tyres of SEZ vehicles. As the SEZs are outside the city, these puncture shops are setup next to the zone. Surprisingly, the annual turnover of few puncture shops is more than 20 lakh. Most of this turnover will be towards reimbursement on account of spare tyres, tubes etc. If SEZs start asking them to register under GST and then provide service under GST invoice, probably such service providers may stop serving to SEZs.

5. Conclusion

In the light of the aforesaid discussions,I am of the view that the trade community should represent to the Board and to the Ministry of Commerce and Industry to issue specific clarifications to ease the operations of SEZ.

Payment of tax is not a problem to any business. Uncertainty as to what to pay, or whether to pay or not, is what holds the operations back. After all, the zones should be investing their time and effort in bringing foreign exchange to India and not on interpretation of law. Therefore, it is necessary to have clarifications on these operational issues.

(The views expressed are strictly personal.)