JULY 26, 2018

By K Srinivasan, IRS

WHETHER services of short-term accommodation, conferencing, banqueting etc. provided to a Special Economic Zone (SEZ) developer or a SEZ unit should be treated as an inter-State supply (under section 7(5)(b) of the IGST Act, 2017) or an intra-State supply (under section 12(3)(c) of the  IGST Act, 2017)?

This was the question that was answered by the Authority for Advance Ruling in its order dated 21st March, 2018 passed in the case of GOGTE Infrastructure Development Corporation Ltd, reported at - 2018-TIOL-29-AAR-GST.

The AAR held that rendition of such services cannot be said to have been 'imported or procured' into SEZ Unit/Developer by any stretch of imagination - supply is, therefore, intra state supply and is taxable accordingly.

In a quick move to set right the purported anomaly created by this decision, the CBIC issued Circular  No. 48/22/2018-GST  dated 14-06-2018 which clarifies that the services of short term accommodation, conferencing, banqueting, etc., provided to a SEZ unit/developer is an inter-state supply.

I had penned my preliminary views on the subject in the first part of the article carried a fortnight ago.

Interestingly, the next question arises curiously from the second point of the very same CBIC Circular 48/22/2018-GST dt 14/6/2018, Whether the benefit of zero rated supply can be allowed to all procurements by a SEZ developer or a SEZ unit such as event management services, hotel and accommodation services, consumables etc.?

Let us first see what is the circular all about.

As per section 16(1) of the IGST Act, "zero rated supplies" means supplies of goods or services or both to a SEZ developer or a SEZ unit.

Whereas, section 16(3) of the IGST Act provides for refund to a registered person making zero rated supplies under bond/LUT or on payment of integrated tax, subject to such conditions, safeguards and procedure as may be prescribed.

Here there is a gap in the circular that makes it sound as though Section 16(3) of the IGST Act provides for refunds subject to such safeguards and procedures and conditions as prescribed under second proviso to Rule 89(1) of the CGST Rules, while the said Section 16(3) recognizes only the conditions and safeguards and procedures prescribed under Section 54 of the CGST Act, which does not mandate only the supply of goods and services to an authorized operation of an SEZ to be eligible for the refund.

Whereas the Circular hurriedly skips Section 54 and proceeds to associate second proviso to Rule 89(1) with Section 16(3) which perhaps tends to convey a message that refund involved in the Zero rated supplies must be claimed in accordance with the above second proviso to Rule 89(1) ibid by overriding Section 54 of the CGST Act.

The circular proceeds to state the following -

Further, as per the second proviso to rule 89(1) of the  Central Goods and Services Tax Rules, 2017  (CGST Rules in short), in respect of supplies to a SEZ developer or a SEZ unit, the application for refund shall be filed by the:

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

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

2.2 A conjoint reading of the above legal provisions reveals that the supplies to a SEZ developer or a SEZ unit shall be zero rated and the supplier shall be eligible for refund of unutilized input tax credit or integrated tax paid, as the case may be, only if such supplies have been received by the SEZ developer or SEZ unit for authorized operations. An endorsement to this effect shall have to be issued by the specified officer of the Zone.

2.3 Therefore, subject to the provisions of section 17(5) of the CGST Act, if event management services, hotel, accommodation services, consumables etc. are received by a SEZ developer or a SEZ unit for authorised operations, as endorsed by the specified officer of the Zone, the benefit of zero rated supply shall be available in such cases to the supplier.

Now the following question arises from the Board's Circular which is to be squarely addressed in terms of the relevant provisions of the Act/s of GST and the rules framed thereunder.

The question is whether or not the supplies of goods and services made to a SEZ developer/SEZ Unit located in the SEZ,regardless of its usage in authorized operations, rightfully qualify asZero rated Supply?

Luckily, the Board has come to our rescue to answer the question at Point No 1 of the Circular in the affirmative, regardless of the Place of supply Provisions, it is an established principle of interpretation of statutes that in case of an apparent conflict between two provisions, the specific provision shall prevail over the general provision.

In the instant case, section 7(5)(b) of the IGST Act is a specific provision relating to supplies of goods or services or both made to a SEZ developer or a SEZ unit, which states that such supplies shall be treated as inter-State supplies.

It is, therefore, clarified that services of short-term accommodation, conferencing, banqueting etc., provided to a SEZ developer or a SEZ unit shall be treated as an inter-State supply, despite the location of the supplier and the SEZ unit being in the same state.

Having said that, how do we proceed to conclude that what has already been held as a Zero rated Supply in terms of the substantive Law namely Section 7(5)(b) of the IGST Act read with Section 16 of the IGST Act, needs to qualify again under the second proviso to rule 89(1) of the   Central Goods and Services Tax Rules, 2017  (CGST Rules in short), to be eligible for the refund of taxes paid either on the procurement or supply of goods and services made to a SEZ developer/ SEZ unit.

The said rule no doubt stipulates that in respect of supplies to a SEZ developer or a SEZ unit, the application for refund shall be filed by the:

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

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

Arguably, how can a subordinate legislation such as the CGST Rules, in the above situation seek to stipulate that only such supplies made for the authorised operations of a SEZ unit, as endorsed by the specified officer of the Zone, alone will qualify for the refund?

At best, one can turn to Section 16 of the IGST Act, which has a dedicated Chapter under the Act(Chapter VII) to explicitly and exhaustively lay down the requirements to regard a supply as a Zero rated Supply, including the requirements for claiming a refund arising thereof, which is reproduced for ease of reference, hereunder;

ZERO RATED SUPPLY

16. (1) "zero rated supply" means any of the following supplies of goods or services or both, namely:–

(a) export of goods or services or both; or

(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.

(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.

(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:–

(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or

(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.

Section 54 of the CGST Act which is the parent provision for regulating all refunds arising out of Zero rated supplies does not mention a word about any such requirement in the above case of the supply having to be made for authorized operations of a SEZ unit to qualify for the said under GST.

When substantive provisions do not contain any such stipulation regarding material aspects of Law as referred to in Rule 89ibid, which is not a declaratory provision of the GST Act/s, how can it decide on the substantive aspects of eligibility to refunds under the said Act/s except serving as a mere procedural rule confined to regulating the paper work for claiming refunds.

How can eligibility to refunds in the stated situation be made to depend solely on the said rule, would be the question on everyone's minds?

Sub-section (5) of Section 17 of the CGST Act, which blocks ITC on certain Inputs, is cross-referred under the Scope of Zero rated supply in Section 16.

The Parent legislation of IGST itself, does not stipulate the requirement of supplies having to be meant for authorized operations of SEZ Zone/ SEZ unit/SEZ developer, for claiming refunds in that context.

If it were the intention of the Legislators, it ought to have been figured under Section 16 ibid, to lend support to the requirement of second proviso to Section 89(1) of the CGST Rules.

Instead, if proviso to Section 89(1) were to declarethat a refund arising out of what satisfies a Zero rated Supply under Section 16 of the IGST Act, in addition shall also satisfy its own requirement of having to be supplied for authorized operations as well, by overriding Section 54,it won't be long before it will be struck down by Judicial forums as Ultra vires the provisions of Section 7(5)(b) and Section 16 of the IGST Act read with Section 54 of the CGST Act.

Sadly, the Circular has squarely failed to draw reference while clarifying the subject issue/ doubt, to either of the above cited Sections of the Act/s, which appears very strange.

However, in conclusion, one thing perhaps can be conceded in terms of the point No. 2 of the above circular that in case of supplies of goods and services to a SEZ developer/ SEZ unit, that a certificate of proof as to its delivery into a SEZ as stipulated even u nder the relevant SEZ Act/s in force at this material time, could be asked by the claimants of refund to be produced from the specified officer.

Another practical problem here would be there is likely to be delay in sanctioning GST refunds within 60 days as assured by the Government through its various Advisories, as the specified officer of SEZ for several SEZ's in a region would be only one located in the main EPZ.

Therefore, an officer lesser in rank, who is the Authorized officer stationed in the respective SEZ himself should suffice to certify that the said goods and services have been delivered to a SEZ, as it is near equivalent of a re-warehousing certificate of the yester years to enable the grant of the above refunds of Zero rated supplies in time, to live up to the true spirit of ease of doing business, is the humble view of the Author.

(The author is Assistant Commissioner, GST, Chennai & Master Trainer, GST.  The views expressed are strictly personal.)

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