Supply to SEZ under GST

Post implementation of GST i.e. from 1st July, 2017, supplies made to and supplies made by a Special Economic Zone (SEZ) shall be treated as an inter-state supply and the levy of IGST is attracted at the applicable rate. Under GST benefit of zero rate supply is available to supplies made to SEZ from a domestic tariff area, however, the supplies made by SEZ into domestic tariff area are subjected to applicability of GST. DTA units who are opting for composition scheme will not be able to supply to SEZ since any supply to SEZ would be treated as inter-state supply and composition scheme dealer are restricted from making inter-state supply. Present article would analyze GST applicability on both the situation of supplies made to SEZ and supplies made by SEZ unit.

Definition of SEZ under GST

As per provisions of section 2 (19) of IGST Act, Special Economic Zone shall have the same meaning as assigned to it in clause (za) of Section 2 of the Special Economic Zones Act, 2005. As per provisions of section 2 (za) of the Special Economic Zones Act, 2005; “Special Economic Zone” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone.

Definition of DTA (Domestic Tariff Area)

As per Section 2 (i) the definition of DTA refers as “the whole of India but does not include the area of the special economic zones”.

Supply to SEZ

Under GST the supply of goods or services or both to SEZ are treated as zero rated supplies. The below mentions the relevant provisions of zero rated supplies as per Section 16 (1) of the IGST Act, 2017 which states as: 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. As per provision of section 16 (2) of IGST Act, Input Tax Credit is available for making zero rated supplies. Under GST, there are two options available on supply of goods or services to SEZ:

Supplying goods or services to SEZ units without paying IGST ; or
Supplying goods or services to SEZ units with payment of IGST.

Click here to read on GST Refund – Supply to SEZ

Supply to SEZ units without paying IGST

In order to carry out supply to SEZ without payment of IGST, one has to carry out supply under Letter of Undertaking (LUT) or bond.

Supply under GST Bond

Following are relevant points for supplying goods or services to SEZ units without paying IGST under bond:

The supplier executing bond can use the input tax credit against any other domestic supply;
An indemnity bond in format GST RFD-11 on a non-judicial stamp paper is required;
Bank guarantee in form of security, is required while executing bond;
The bank guarantee amount does not exceed 15 % of the bond amount;
Bond will be acceptable by the Assistant Commissioner or Deputy Commissioner;

Further, on the top of the taxable invoice it should clearly be mentioned that ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT OF INTEGRATED TAX’.

Supply under LUT

Eligibility criteria for LUT: As per notification no. 16/2017 of central tax, the following registered person shall be eligible for submission of Letter of Undertaking in place of bond:

A status holder as specified in paragraph 5 of the Foreign Trade Policy 2015-2020; or
taxpayer who has received the due foreign inward remittances amounting to a minimum of 10% of the export turnover, which should not be less than one crore rupees, in the preceding financial year, and he has not been prosecuted for any offence under the Central Goods and Services Tax Act, 2017 (12 of 2017) or under any of the existing laws in case where the amount of tax evaded exceeds two hundred and fifty lakh rupees.

LUT is acceptable by the Assistant commissioner or Deputy commissioner and validity period for LUT will be 12 months. Unlike bond, under LUT only in case of breach of the LUT there would be need of bank guarantee, hence the same is easier option than bond. The supplier can use input tax credit against any other domestic supplies. Further, on the top of the taxable invoice the taxpayer should clearly mention that the ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER LUT WITHOUT PAYMENT OF INTEGRATED TAX’. LUT is prescribed to be furnished in form GST RFD 11. Initially, online filing of LUT was not enabled, however, from the end of February, 2018, online filing of LUT is enabled.

Supply to SEZ With Payment of IGST

Supply of goods or services to SEZ unit can also be done with payment of IGST. When the supplier delivers the supply and makes the IGST payment, the supplier, on top of the invoice clearly mentioned that ‘SUPPLY MEANT FOR SEZ UNIT / SEZ DEVELOPER WITH PAYMENT OF INTEGRATED TAX’. As per provisions of section 16 (3) of the IGST Act, suppliers who are not able to execute LUT for any reason could explore the option of charging IGST. Hence, the suppliers can avail refund for such amount charged as IGST. Further, if the suppliers unable to claim the IGST refund, the supplier can request the SEZ unit to claim the refund of IGST charged.

Supply of Goods or Services by SEZ

As per provisions of rule 47 of the Special Economic Zones Rules, 2006, supply of goods from SEZ is liable for payment of customs duty in terms of section 30 of the Special Economic Zone Act, 2005. As per section 30 of the Special Economic Zone Act 2005, if the concerned holder of the goods removed it from SEZ, chargeable shall apply to the duties of customs. On the basis of above provisions, it clearly state that as per SEZ scheme, supplies made by SEZ to DTA shall apply as goods imported into India and hence the importer should pay applicable customs duties to the customs division on clearance of the goods. Hence, the goods cleared from SEZ to DTA, which applies as import to India becomes liable for payment of Customs duty under Customs Tariff Act, 1975, which includes Integrated Tax as per section 3 (7) of the Customs Tariff Act. As per the provisions of section 3 (7) of Customs Tariff Act “any article imported into India shall, in addition, become liable to integrated tax at such rate, not exceeding forty per cent as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8).

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