Supply to SEZ under GST regime

GST- the grandest tax reform ever - in SIZE, COVERAGE AND IMPACT. GST is ushered in with great fanfare for a better future of billion Indians.  At the same time, we have stakeholders grappling with new system and wondering what it could turn out to be for them. Their response is a mix of jubilation, wonder, fear of unknown apprehensions stemming from biases and challenge of transition pangs. 

Now a day's both type of feeling gush, as on one side VAT, Service Tax and Excise as we know and grew up with has became part of history on the other side GST is ushered in with great fanfare.

As said in श्रीमदभागवत गीता, परिवर्तन ही संसार का नियम है।।

We will discuss SUPPLY TO SEZ under GST regime.

Around the world, in line with the destination principle sanctioned by the World Trade Organization, Exports are free of VAT/GST and imports are taxed on the same basis and at the same rate as that of Local Production. So, by taking exports at zero rated it is actual, based on destination based taxation principle of WTO, and what is free of VAT is termed as zero rated where costs and overheads can be recovered. GST thus being based on destination principle, exports from a country of origin go out at zero-rated tax, after exempting or refunding the input taxes that may be given to the resources used in its manufacturing. The OCED guidelines on neutrality of VAT in international trade lay this down as the first guideline.  

GOODS EXPORT

By following the above principle of destination based taxation exports continue to remain zero rated and a similar benefit continues to be given to Special Economic Zones (SEZs) under GST law. While this benefit is extended to processing zones of the SEZs, sales from SEZ to Domestic Tariff Area (DTA) continue to remain taxed under GST system.

Section 16 of IGST ACT defines Zero rated supply as under

(1) '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.

(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.

(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:

(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilized input tax credit; or

(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made there under.

Now, SPECIAL ECONMIC ZONE (SEZ) AND SEZ DEVELOPER are defined under Section 19 and 20 of the IGST Act respectively. These terms derive their meaning from The Special Economic Act, 2005. The SEZ Act, 2005 contains special provision regarding procurement of goods and services without payment of taxes, in line with the same, GST law provides for refund of taxes paid by the supplier supplying goods or services to a developer or Unit holder of SEZ.

As per Section 7(5)(b) of IGST Act, supply of goods and services or both to or by a SEZ Developer or SEZ Unit would be treated to be supply in the course of interstate trader or commerce. In accordance therewith, for example, even if a person in Bhuj provides any Service to unit in Kandla SEZ in Gujarat, it will be treated as interstate supply and IGST is chargeable primarily, notwithstanding that refund would be available since the supply is zero rated as in the case of exports.

As distinguished from VAT laws, supply of goods/services can be made without payment of IGST only under the bond or letter of undertaking or else the payment of integrated tax to be made and then claim refund therof.

In turn, the refund in respect of all zero rated supplies is governed by Section 54 of the CGST Act along with refund in other cases.

So, now there are three options available with supplier to SEZ:

1. Supply with payment of IGST
2. Supply under a Bond
3. Supply under a Letter of Undertaking

1. SUPPLY WITH PAYMENT OF IGST

Under this option person making supply to SEZ will charge IGST at applicable rate as may be applicable for supplies of Goods or Services made to SEZ or SEZ Developer. Invoice will be Export Invoice in Indian Currency with a declaration that 'SUPPLY MEANT FOR SEZ DEVELPOER/UNIT WITH PAYMENT OF INTEGRATED TAX'. This option will be beneficial for faster processing of Refund. Actually the IGST liability shown in the Invoice is only for the presentation purpose and should not be collected from the customer, actually it works as follow.

For e.g. Mr. ABC Ltd makes supplies of Goods costing Rs.100000 for Rs.1500000 which attracts IGST @18% to Mr. XYZ Ltd being located in Kandla SEZ. Invoice will be as under -

Value of Supply: Rs.150000.00
IGST @ 18%: Rs.27000.00
Total Invoice Value: 177000.00

Now, ABC Ltd, will first discharge liability of IGST of Rs.27000 by utilizing Input Credit of Rs.18000 (Rs.100000*18%) and Cash Payment of Rs.9000.00, thereafter, he will get refund of Rs.27000 whole amount of IGST, So Cash Payment of Rs.9000- Refund of Rs.27000 i.e. he get refund of Input Credit of Rs.18000 in net terms.

Journal Entries to be passed will be as follow.

2. SUPPLY UNDER BOND

The concept of Bond is continued from Excise Laws, so for traders' community the concept of Bond will be new concept, which was not there under VAT Laws or Service Tax.

Under this option there will be no tax payment on the Supply to SEZ and Invoice shall carry a declaration 'SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT OF INTEGRATED TAX. This option is best option where supplier is able to utilize Input Credit against other domestic supply. Under this option supplier can supply goods or services by executing a Bond hence Supplier is not required to pay IGST and claim subsequent refund. For this purpose Indemnity Bond will be executed in the specified format GST RFD-11 on non-judicial stamp paper between the Supplier of SEZ and the Government through the President of India. Supplier need not to execute a bond for each supply to SEZ, rather Bond will be running bond i.e. Bond once executed will be valid for period of 12 months.

For, easy compliance and procedure, Bond will be accepted by the Jurisdictional Deputy or Assistant Commissioner. Along with bond, a Bank Guarantee is to be furnished as a security under the Bond. The Jurisdictional Officer may decide the amount of Security to be kept as Bank Guarantee depending upon track record of the Supplier. As per direction in any case the B.G. should normally not exceed 15% of the bond amount. When there is breach or failure in performance as per bond executed, the Government will invoke the B.G. to recover the loss or damage to the revenue. As on date, the module for furnishing GST RFD-11 is not available on the GST Portal, so the form is to be furnished manually to the Jurisdictional Deputy/Assistant Commissioner.

3. SUPPLY UNDER LETTER OF UNDERTAKING (LUT)

Under Option-2, when supplier executes bond with B.G., it will result in blocking of working capital fund of the supplier, as Bank would ask for Fixed Deposit i.e. Margin money for issuance of Bank Guarantee along with Commission charges for issuance of B.G. For the above reason there is another option, under which supplier would give Letter of Undertaking (LUT) instead of executing Bond.

Just like bond, LUT will also be accepted by the Jurisdictional Deputy or Assistant Commissioner. The LUT once given, will be valid for the period of 12 months, and should be furnished for each year in duplicate. No B.G. is required to be furnished along with LUT, however if there is breach in condition of LUT, there may be consequences to furnish Bank Guarantee.

There are following conditions prescribed, under which LUT can be furnished instead of Bond.

As per notification No.16/2017 - Central Tax, the CBEC has specified the conditions and safeguards for the registered person who intends to give Letter of Undertaking,

As per above notification the following registered person shall be eligible for submission of Letter of Undertaking in place of bond;

1. a status holder as specified in paragraph 5 of the Foreign Trade Policy 2015-2020; or
2. 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.

Looking to the above notification it is cleared that all the Exporters/Supplier not covered by the above notification, would submit bond. As supplier to SEZ/SEZ Developer will not fall in any of the above category, the option of Letter of Undertaking will not be available to them. So they are left with option of executing bond only, so we are not discussing this option in detailed.

Talk of the town:

Are Bonds or LUT really required?

The concept of Bond and LUT is taken from excise laws, as under VAT laws there was no requirement of Bonds and LUT, but question is this really needed in GST regime or not? The government has introduced this as a measure to secure interest of the revenue, but if we look at opposite side, is there any incident of bond being enforced in the last decade? Is it necessary to follow those decades old principles in the name of legacy? Decades ago India witnessed Excise officer sitting at a factory gate monitoring all clearance from origin point only, but this procedure was done away with. This type of paradigm shifts is also possible with respect to Bonds and LUT. In the early 90's, banks required the Cash Deposit challan to be countersigned by a designated officer before the customer was allowed to deposit cash. Though it may sound incredible today, but it was a reality back then. Over the years things have changed and we need to make a progressive departure from our restrictive mindset and adopt the change within the change.

The author is Chartered Accountant in practice at Bhuj, Gujarat and can also be reached at bmmehta89@gmail.com