APRIL 05, 2022

By K V Srinivasamurthy

Analysis

THIS would depend upon the question whether the supply from SEZ to DTA is to be treated as imports in terms of Section 30 of the SEZ Act, 2005 or as Inter-State supplies in terms of Section 7(5)(b) of the IGST Act, 2017 or under both the laws.

Discussions under two Scenarios:

Under SEZ Act:

- Section 30 of the SEZ Act, 2005 - The DTA shall file a bill of entry and discharge BCD and IGST for clearance from SEZ. Hence, the supply from SEZ to DTA has created a deeming fiction to consider this supply as import in DTA. This is supported by the provisions of Section 53 of the SEZ Act,2005 which provides that a Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorised operations .

- Proviso to Section 5(1) of the IGST Act, 2017 provides that the Integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975. As per Section 3(7) of the Customs Tariff Act, any article imported into India, in addition, would be liable to integrated tax, not exceeding 40% as is leviable under Section 5 of the Integrated Goods and Services Tax Act, 2017.

- Special Economic Zone (SEZ) is a geographically delineated duty-free enclave and shall be deemed to be a foreign territory for the purposes of trade operations and duties and tariffs.

- Further, in the event of conflict between SEZ Act and other laws, SEZ would prevail over the other in terms of Section 51 of the SEZ Act.

- Going by the above, the supply from SEZ to DTA could be construed as imports into DTA and the supply from SEZ to DTA could be cleared by execution of Bill of entry and payment of IGST in terms of Section 3(7) of the Customs Tariff Act.

Under GST Laws:

- As per Section 2(10) of IGST Act, 'import of goods' with its grammatical variations and cognate expressions means bringing goods into India from a place outside India. Hence, the goods procured from SEZ unit would not be considered as import of goods. This is supported by the definition of "India" under Section 2(56) of the CGST Act, 2017, which states that "India" means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976), and the air space above its territory and territorial waters;

- Also, as per Section 2(m)(i) of the SEZ Act, export means taking goods from SEZ to place outside India. According to Section 2(i) of the SEZ Act, 2005 "DTA" includes whole of India including its territorial waters and continental zones, excluding SEZ. Further, Section 2(m)(ii) of the SEZ Act, states that supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer amounts to export. Nowhere in the said Section there is any mention about movement of goods from SEZ to DTA amounts to export. Going by this it could be viewed that when the supply from SEZ to DTA is not considered as export, it would be natural to construe, that the supply from SEZ to DTA would not amount to imports for the said DTA. Further the definition of imports under Section 2(o) of the SEZ Act, does not make any mention as to that the supplies from SEZ to DTA would amount to imports for the said DTA.

- It is also to be noted that the SEZ Act has not been aligned with the GST laws and as far GST laws are concerned, SEZ units are not situated in a place outside so as to treat the supply from SEZ to DTA as amounting to imports for the said DTA.

- Also, what is to be noted is that, though Section 51 of the SEZ Act, 2005 has an overriding effect to the effect that in the matter of inconsistency with any other law, SEZ law would prevail, there is another presumption that this principle of overriding effect is not applicable to the GST law which is the outcome of Article 246A of the Constitution of India whereas the concept of SEZ was brought into India in 2005 vide legislation in terms of Article 246 of Constitution of India.

- 246A - (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State .

- As such, the GST law enacted under 246A, could be viewed as overriding SEZ law which stands enacted under Article 246.

- To the question of SEZ area which is deemed as merely ‘outside the customs frontiers of India' be called a ‘foreign destination'? The key lies in understanding the difference between the two, while the former is only for customs purposes and does not set any terminal limit to the political territory of India, the latter refers to the sovereign boundaries of the country. The logic has been reiterated in the case of Burmah Shell vs. The Commercial Tax Officer and Ors, where the court observed that the customs barrier is a barrier for customs purposes. This was explained with an Illustration that "Goods cannot be said to be exported if they are ordered by the health authorities to be destroyed by dumping them in the sea, and for that purpose are taken out of the territories of India and beyond the territorial waters and dumped in the open sea . Thus, SEZ can never be treated as a foreign destination for GST purposes. This is followed by the observations in the case of Essar Steel Limited & Kamyab Overseas Private Limited, wherein it was held that supply of goods from DTA to SEZ would not amount to exports, and Customs duty cannot be imposed since the goods were not taken outside India.

- The Idea behind levying customs duty on supply to DTA from SEZ could have done with intention to neutralize the exemptions granted to SEZ's while making exports, since the rational for establishing SEZ is for promoting exports. Hence, mere levy of customs duty on supply of goods from SEZ to DTA per se should not make the transaction as amounting to exports.

- Going by the above, the supply from SEZ to DTA could be construed as Inter-State supply in terms of Section 7(5)(b) of the IGST Act, 2017.

In the backdrop of the above discussions and considering the stand adopted by both the laws, a person may choose either one among the two laws or under both the laws.

First School of Thought:

1. Supply of goods from SEZ to DTA could be treated as imports for the DTA in terms of Section 30 of the SEZ Act, 2005 resulting in clearance under a bill of entry on payment of BCD and IGST. This fact could be strengthened by having recourse to Section 51 of the SEZ Act, Or

2. Supply of goods from SEZ to DTA could be treated as Inter-state sales not amounting to imports in terms of Section 7(5)(b) of the IGST Act.

3. Based on the above, a person could adopt either one among the two laws:

a) The transaction is exigible to IGST either under SEZ Act in terms of Proviso to Section 5(1) of the IGST Act as amounting to only imports by DTA. Here, the SEZ supplier is required to issue only a "Commercial Invoice" and requirement of "Tax Invoice" does not arise. Or

b) The transaction is exigible to IGST in terms of Section 7(5)(b) read with Section 5(1) of the IGST Act as amounting to only Inter-State Supplies. As such the SEZ supplier would be required to issue a "Tax invoice" for discharging IGST under forward charge mechanism, since this transaction does not tantamount to RCM transaction as provided in the GST laws which requires the recipient to discharge the tax under reverse charge.

To this extent, there is inconsistency/conflict between the provisions of SEZ Act and GST Act.

Second School of Thought ( Safe approach):

1. Alternatively, to avoid conflict, the transaction could be considered as exigible to IGST under both the laws in terms of Section 5(1) and proviso to Section 5(1) of the IGST Act, 2017, i.e., one amounting to discharge of IGST as Inter-State supply and the other as amounting to imports. This view is strengthened on the assumption that no single law is more within the powers of the constitution than the others. In this case, there could be double levy of IGST for one transaction.

Conclusion:

- Thus, a question arises, whether the said transaction is exigible to tax twice, i.e., once under SEZ Act and the other under GST laws or under either of the two.

- In the event of taking a stand to go with the provisions of both the laws, SEZ supplier ought to issue a tax invoice, since the supplies would be Inter-State attracting IGST under forward charge under the GST provisions. The question of RCM payment by DTA does not arise here as the said Inter-State supplies do not fall under the ambit of RCM. As far it relates to SEZ provisions, the buyer is required to file a bill of entry on payment of BCD and IGST in terms Section 3(7) of the Customs Tariff Act. Input tax credit of IGST discharged on both occasions could be availed based on both the bill of entry filed and the tax invoice issued by the SEZ unit.

- In the event of one choosing to go with SEZ laws, it would be sufficient to issue only a commercial invoice. Alternatively, if one chooses to go with GST provision, the SEZ unit has to necessarily issue a tax invoice by remitting tax on forward charge by treating the transaction as Inter-State supply.

- However, in the event of the supplier declining to discharge IGST on forward charge and to avoid loss of revenue to the Government, if the DTA chooses to pay IGST on RCM basis, though it is not permitted, the possibilities of raising objection by the revenue as to the availment of input tax credit of IGST based on RCM payment appears to fairly exist.

- Further, the possibilities of objections being raised by the revenue in the event of following either of the one among the two laws or in the event of non-compliance by the SEZ to discharge IGST on forward charge in terms of Section 7(5)(b) of the IGST Act appears to fairly exist.

- Thus, the answer as to the question of double taxation for a single transaction as well to the procedure to be followed, there appears to be no clarity available. Since, the above two questions remaining unanswered, efforts should be undertaken by the CBIC to resolve the issue. This, is turn, would result in huge relief both to the SEZ and DTA units .

[The author is Principal Consultant - Indirect Taxes, PKF Sridhar & Santhanam LLP, Chartered Accountants, Chennai and the views expressed are strictly personal.]