Special Economic Zones and GST

Friends!

                Under export and import policy of goods and services, Special Economic Zones (hereinafter referred to as SEZ) have been visualized as foreign territories within India. For this purpose, Union has enacted Special Economic Zones Act, 2005 (hereinafter referred to as the SEZ Act).

                The Scheme of the SEZ Act, ensures that no tax be levied in the following cases:

(i)                  When goods or services are procured by SEZ units or SEZ developers from outside India as a result of import into the SEZ. (A transaction in between foreign country and deemed foreign territory in India) ;

(ii)                When goods or services are procured by SEZ units and SEZ developers from Domestic Tariff Area (DTA) into SEZ (A transaction in between Indian Territory and deemed foreign territory in India);

(iii)               When goods or services are procured by SEZ units and SEZ developers from any SEZ unit of the same SEZ (A transaction in between two entities of deemed foreign territory); and

(iv)              When goods or services are procured by SEZ units or SEZ developers of one SEZ from any SEZ unit of some other SEZ. (A transaction in between two deemed foreign territories).

(v)                Taking goods, or providing services, out of India, from a SEZ (A transaction in between deemed foreign territory and a foreign country).

                For achieving aforesaid objects, "export" and "import" have been defined respectively in clauses (m) and (o) of section 2 of the SEZ Act as follows;

(m) “export” means –

(a)                taking goods, or providing  services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or

(b)               supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or

(c)                supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone;

(o) “import” means-

(i)                  bringing goods or receiving services, in a Special Economic Zone, by a Unit or Developer from a place outside India by land, sea or air or by any other mode, whether physical or otherwise; or

(ii)                receiving goods, or services by, Unit or Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone;

             Here we see that only one transaction related to SEZ has not been covered under export or import. This transaction is supply of goods or services by SEZ unit to any DTA unit or procurement of goods or services by DTA unit from SEZ unit.

                Section 7 of the Act runs as follows:

7. Exemption from taxes, duties or cess.

 Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by, -

(i)                  a Unit in a Special Economic Zone; or

(ii)                a Developer;

                shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt    from the payment of taxes, duties or cess under all enactments specified in the First Schedule.

             A reading of First Schedule of the SEZ Act reveals than it does not have mention of any GST Act (CGST Act, SGST Act or IGST Act). Therefore, for providing exemption, in respect of export and import transactions, referred to in clauses (m) and (o) of section 2 of the SEZ Act, from levy of GST, the GST Act should itself recognize SEZ and should have provisions for granting exemption from levy of GST.

             Here I would like to point out that each SEZ is located within some State or Union Territory and the Constitution permits each State Legislature to make law for its State including a law providing for levy and collection of tax on goods and services. But the Constitution does not permit a State to levy tax on supply of goods and services where such supply takes place -

(i)                  in the course of inter-State trade or commerce. (Clause (2) of article 246A );

(ii)                outside the State (sub-clause (a) of clause (1) of article 286);

(iii)               in the course of import into the territory of India, (sub-clause (b) of clause (1) of article 286); and

(iv)              in the course of export out of the territory of India, (sub-clause (b) of clause (1) of article 286);

                However, the Union Government, while defining "intra-State supply" in section 8 of the IGST Act, has excluded "supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit" from the scope of intra-State supplies. Such supplies also include supplies in relation to which supplier of goods and services and place of supply of such goods and services are located within a State. In clause (b) of sub-section (5) of section 7 of the IGST Act, a provision has been made that such supplies shall be treated to be supplies in the course of inter-State trade or commerce. My opinion is that inclusion of supplies, which are of intra-State nature, in the IGST Act, is without Constitutional Authority. Supply by SEZ unit to DTA unit has been made liable to tax under the IGST Act. Earlier to GST, States have been dealing with such transactions.

                So far as it is related to providing exemption from tax on supplies to or by SEZ units or developers, following provisions have been made:

(i)                   In respect of import of goods into the territory of India, a Notification No.  64/2017- Customs dated 5th July, 2017 has been issued by the Government of India, as follows:

" G.S.R.---- (E).- In exercise of the powers conferred by sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts all goods imported by a unit or a developer in the Special Economic Zone for authorised operations, from the whole of the integrated tax leviable thereon under sub-section (7) of section 3 of the Customs Tariff Act, 1975 (51 of 1975) read with section 5 of the Integrated Goods and Service Tax Act, 2017 (13 of 2017)."

(ii)                 In sub-section (1) of section 16 of the IGST Act, supplies, of goods or services or both, to SEZ unit or SEZ developer have been included in zero rated supplies and in the same section, provision for allowing refund, of amount of input tax credit and amount of tax, if any deposited on such supplies, has been made. such supplies covers following supplies:

(a)  Supply by DTA unit to SEZ unit or SEZ developer;

(b)  Supply made by unit or developer of one SEZ to any unit or developer of same SEZ;

(c)  Supply, made by unit or developer of one SEZ to unit or developer, to SEZ unit or SEZ developer of some other SEZ located either within the State of supplier or in some other State.

(iii)                In sub-section (1) of section 16 of the IGST Act, export of goods or services or both has been included in zero rated supplies and in the same section, provision for allowing refund, of amount of input tax credit and amount of tax, if any deposited on such supplies, has been made.

          In view of the discussion above, SEZ unit is liable for payment of CGST & SGST where it makes supply of goods or services or both to any person located outside the SEZ and within the State in which SEZ is located and SEZ unit or SEZ developer is required to pay IGST on supply of goods or services or both to any person, except SEZ unit or SEZ developer, where place of such supply falls in any other State.