SEZ Units & Developers - Liable to RCM?
APRIL 27, 2020
By D Kalirajan, Advocate and Senior Associate at Lakshmikumaran & Sridharan, Bangalore
SPECIAL Economic Zone is a tax-free trade zone and thus the Units and Developers in SEZ enjoy various direct and indirect tax benefits either in the form of upfront exemption or in the form of refund, pursuant to payment of duties and taxes. The GST law also treats the supply of goods and Services to SEZ units and Developers as 'Zero-rated supply' and the registered person can supply the goods either without payment of tax under Bond or LUT, or on payment of IGST. The GST Law entitles the supplier to claim the refund of unutilised input tax credit when the supplies are effected without payment of IGST, or the supplier can claim refund of IGST when the supplies are effected on payment of IGST.
There is no difficulty in claiming the GST benefits in the case of supply of goods, and in the case of supply of services for which GST is payable on forward charge basis. However, there is a practical difficulty in claiming duty benefits for the supply of service which attract GST liability under Reverse Charge Mechanism (RCM). The notification No. 10/2017-Integrated tax dated 28.06.2017 specifies certain categories of supply of services which attract GST liability on RCM basis, viz., Goods Transport Agency (GTA), Legal service, etc. The receipt of such services by any business entity located in taxable territory, would attract IGST liability under RCM basis. Thus, the recipient unit would be liable to pay IGST under RCM basis.
As there is no requirement to pay GST, the supplier would not execute a Bond or LUT, and not pay IGST to the government, on such supplies. Neither the GST Law nor SEZ Law prescribe the conditions and procedures to be adopted for receipt of such services with the Zero-rated benefits when such supply attracts GST payment under RCM mechanism. It is pertinent to note here that Section 16 of the IGST Act treats supply of all categories of services as 'Zero-rated' supply irrespective of the fact that such service attracts Forward charge or Reverse charge. However, for availing the GST benefits, certain conditions and procedures should be followed viz., execution of Bond/LUT, etc. Similarly, the Department of Commerce (SEZ Section) vide Letter No. F.No. 12/19/2013-SEZ dated 02.01.2018 has prescribed the list of default authorised services which are eligible to be sourced without payment of IGST by SEZ units and Developers. The said default authorised service list covers inter alia legal services, GTA Service, etc., which attract payment of GST under RCM basis.
It is very evident that the GST Law and SEZ law extends the zero-rated supply benefits to those services which attract RCM liability also. That being the legal provisions, due to lack of clarity on the procedures to be followed for availing such Zero-rated supply benefit, different practices are adopted by the SEZs. Certain SEZs are opting to pay IGST on procuring such service to avoid future litigations.
Similar situation had cropped up under the Service tax regime also. Under the Service Tax Regime, the registered person could provide services without payment of service tax against Form A2. The CBIC vide Circular No. 142/11/2011-ST dated 18.05.2011 had clarified inter alia that there is no difference in treatment of service tax paid under Forward charge and Reverse charge under the Finance Act, 1994. Therefore, the same document (Form A-2) based on which the supplier of service under Forward charge mechanism would claim service tax benefits, can be used by the recipient of service for claiming the service tax benefits under Reverse charge mechanism.
Before parting…
In the absence of similar clarification from the CBIC, the SEZ Units and Developers would face unnecessary litigations and would be forced to procure services on payment of IGST which is against the concept of tax-free trade zone. Therefore, it is incumbent on the CBIC to issue appropriate clarification on the applicability of RCM liability to SEZs. In the absence of such suo moto clarification by the Board, SEZ units and Developers should place their representations seeking clarity on the subject.
[Views expressed in the article are strictly personal.]
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