he Special Economic Zone (SEZ) is considered as a deemed foreign territory which provides special status to entities operating in SEZ and grants tax incentives (such as duty-free procurements) and other facilitation measures. Section 16 of Integrated Goods and Services Tax Act, 2017 (IGST Act), inter-alia, provides that supply of goods or services or both to an SEZ unit or SEZ developer would be considered as ‘Zero rated supply’ and enables the SEZ units or developers to procure goods or services from domestic market without GST.
The provisions contained in Section 16 of IGST Act were amended through Finance Act 2021 and such amendments were made effective from 1 October 2023. The amendments will have an impact on the way supplies are made by Domestic Tariff Area (DTA) units to SEZ units or developers.
An analysis of the amendments and its implications are discussed below –
Supplies must be for ‘Authorised operations’ of SEZ
The provision of Section 16 of IGST Act is amended by insertion of the word ‘for authorised operations’. Consequently, effective 1 October 2023, only the supplies made by a supplier, which are for authorised operations of SEZ unit / developer, would be treated as a zero-rated supply. This would lead to practical challenges for the supplier of goods or services to SEZ developers and units, who would be required to ensure that the supplies are meant for ‘authorised operations’ to consider the supply as zero-rated supply. This becomes more important, since the supplier is obligated to substantiate that the supplies are made for an authorised operation, or else, risk of losing the zero rating.
Considering this, it is advisable for the suppliers supplying goods or services to SEZ to obtain appropriate endorsements on the invoices from the SEZ officers. Alternatively, the SEZ units or developers should ensure that the invoices received from DTA units are captured in the SEZ online portal and a copy of the invoice is endorsed by the Specified Officer of the SEZ and share a copy of such endorsed invoice to the DTA supplier to enable the DTA supplier to have appropriate documentation for effecting zero rated supply.
Further, the SEZ units can also add the specific supplies from the suppliers in the list of goods and services for carrying out authorised operations and share the same with the suppliers. However, this may not be practically feasible. As mentioned above, despite all this, the impact of non-compliance would be on the DTA supplier, who would be required to remit applicable GST on the supplies made to SEZ, if he cannot prove that the supplies are meant for ‘Authorised operations’. While in the service tax regime, a specific procedure was prescribed for service providers to SEZ units for claiming exemption from service tax, no such process has been prescribed in the GST regime.
The above provisions are effective from 1 October 2023. However, the tax authorities have initiated investigations on DTA units for the past periods, seeking to demand GST on supplies made to SEZ units/developers, for not possessing invoices endorsed by the specified SEZ officer, despite an absence of such a requirement in the law. An appropriate set of clarifications on these issues would go a long way to ease the issues faced by the industry.
The option of supplying goods or services to SEZ ‘with payment of IGST’ and claiming refund of such GST paid.
Earlier a supplier to the SEZ units or developer had an option to make supply without payment of tax or make supply on payment of tax, with subsequent claim of refund of such tax paid. The abovementioned amendments also restricted the class of persons or class of goods or services, who can opt for making zero-rated supplies (including to SEZ) with payment of IGST and subsequently claim refund of such IGST.
An analysis of the amended provisions and notification issued in this regard led to an interpretation that from 1 October 2023, there is no provision for a DTA unit to make supplies to SEZ unit / developer on payment of IGST and subsequently claiming refund of such IGST.
However, this issue was swiftly addressed by the GST Council, in its 52nd meeting, by recommending to amend relevant notifications retrospectively, w.e.f. 1 October 2023 to permit the option to make supply to SEZ units or Developers on payment of IGST and subsequently claim refund of such IGST. The amendments are yet to be notified to make this change effective. The suppliers to the SEZ units or developers may wait for the amendments before exercising the above option, so that they are able to address any specific conditions etc., which might be included in the notification, to avoid denial of refund by tax authorities.
To address the possible challenges arising from the above amendments, the DTA units involved in effecting supplies to SEZ should amend its contracts and establish appropriate practices and processes to comply with the amendments to mitigate the risks of future tax demands or refund rejections.
Source: ETinsights