GST LAW AND SEZ – BUNDLE OF CONFUSIONS AND ANOMALIES
- Now, the GST Law is in place. Our Hon’ble Prime Minister has touted this to be a ‘Good and Simple Law’, which fills our mind with the notion that this law is free from unwanted anomalies and confusions. In fact, even the trade and industry was expecting that the final law which is implemented will remove all their doubts and clarify the legal positions, so that all are aware of their obligations and entitlements. Especially, when the trade and industry was continuously representing the Government on the various anomalies in the model GST law, which was put in public domain, so that the same may be rectified in the final draft to be implemented.
- However, unfortunately, all is not so good and simple. GST law has a bundle of anomalies, particularly with regard to the Special Economic Zone (SEZ) related provisions. In this article, we have tried to highlight few of such anomalies, which are detailed below:
Condition of receipt of amount in freely convertible currency
- Section 16 of the IGST Act deems supplies made to SEZ unit / developer as ‘zero rated supply’. Given this, the DTA supplier becomes eligible to supply goods or services either on payment of applicable IGST under claim of refund or supply them under bond / LUT without payment of applicable IGST. This provision further provides that these supplies will be subject to such conditions and safeguards as may be prescribed.
- In this regard, Rule 96 of the GST Rules provides the procedure wherein the goods or services are supplied on payment of IGST. Rule 96A prescribes the conditions and procedure wherein the goods or services are supplied under bond / LUT. One of the conditions, in the case of export of services under LUT / Bond is that export proceeds should be received in freely convertible currency. It is further provided that the said Rule will be applied to SEZ mutatis mutandis in respect of goods or services supplied to SEZ. This would mean that even when services are provided by DTA unit to SEZ developer or SEZ unit even then it is obligatory for the DTA buyer to receive payment in freely convertible currency.
- In the above context, there is some possibility for SEZ units to make payment to DTA buyer in freely convertible currency subject to fulfilment of certain specified conditions (conditions applicable to EEFC accounts). However, there is no mechanism by which an SEZ developer can make payment in freely convertible currency to a registered person in DTA. It is pertinent to note here that condition of receiving payment in freely convertible currency for getting the service tax exemption was not there in the erstwhile service tax regime. Thus, this condition is impossible and incapable of being fulfilled in case of supply of services to SEZ developer by a DTA supplier and is very difficult to be complied with in case the services are supplied to SEZ unit.
- The only possible solution to this anomaly would be that whenever services are supplied to SEZ developer, the same should be on payment of applicable IGST and later the supplier should claim refund of the same as per the GST law. However, if the same are supplied under LUT / bond, the above technical anomaly will create a problem.
Requirement to pay IGST twice on supplies from SEZ to DTA
- Section 30 of the SEZ Act stipulates that the goods supplied from SEZ to DTA will be subject to customs duty, as if such goods have been imported into India. This means all the customs duties will be payable with regard to such clearance made from SEZ to DTA. For this, a Bill of Entry has to be filed either by the DTA buyer or by the SEZ unit (on behalf of the DTA buyer) for the assessment of goods sought to be cleared in DTA. In this regard, inter alia both the basic customs duty and IGST would be charged (both being the customs duties). Independently, since all the units in SEZ will also be registered person under the GST law, they would be liable for payment of IGST on such supply of goods in DTA under the provisions of the IGST Act.
- Thus, in the above referred transaction IGST would in fact be payable twice: (1) as a part of the customs duty through the route of bill of entry, as per the SEZ Act; and (2) independent IGST liability arising under the IGST Act. There is no exemption notification issued in this regard till date. Accordingly, the double payment for IGST results in non-intended and anomalous situation.
Supplies from non-registered person to SEZ Developers/units
- The exemption from registration under the GST law to persons having a turnover of INR 20 lakhs, is not applicable to persons making any inter-state supplies. The GST law mandates him to take registration under the GST law even if he makes INR 1 inter-state supply.
- In this context, supplies made to SEZ units / developer are inter-state supply by virtue of section 7 of IGST Act. This would mean that all the petty shopkeepers (in DTA) who are making supply to SEZ developer / unit, can supply goods or services only if they get themselves registered under the GST law, as such supplies tantamount to inter-state supplies requiring registration under the GST law. Small shopkeepers supplying some stationary items, water bottles, foods items, etc. cannot supply these items to SEZ developer / unit, unless he is registered. Same is the position with regard to small service providers like some carpenters, persons doing repair and maintenance, etc. Obviously, such petty services / goods supplier would never take registration under the GST law. Conversely, it would mean that SEZ unit for all its procurement from DTA, would have to deal only and only with a registered supplier, even for small / petty purchases including purchase of stationery items. This would be a complete absurd proposition. The same holds good even in case of person registered as a composition supplier in DTA and intends to supply goods to a nearby located SEZ unit/developer (as a person making inter-state supplies is not eligible to avail the benefit of composition scheme available under the GST law).
- The only solution to this would be that the employees of the SEZ unit / developer buy / avail such petty goods / services on their individual behalf and later recover the same from their respective unit/developer in SEZ (even this appears to be doubtful proposition).
- Hope the CBEC will pay attention to these anomalies and remove them as soon as possible for the removal of doubts in the mind of trade and industry and smooth functioning of GST Law.