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SEZ - Inconsistent GST law
By Anandram Sankar
Sep 07, 2019

IN my previous article I touched upon few points where SEZ Laws are inconsistent with GST Laws.

In this article, I have tried to cover all the points where there are inconsistencies and the issues faced by the SEZ entities.

The inconsistency between these Laws starts from the charging section of the Laws which is one of the most important provision in a Taxation Law. This resulted in inconsistency in other related provisions.

Let us discuss on the same in the table provided hereunder:

GST Law - provision Details of the GST Law provision SEZ Law - provision Details of the SEZ Law provision Remarks/Issues
IGST Sec.5 and Sec 7(5) Sec.5 provides for Levy of integrated tax on inter-state supply of goods / services
sec.7(5) provides that supply of goods or services by or to SEZ unit or developer would be treated as inter-state supply
Sec.30 of SEZ Act 2005 / Rule 47 of SEZ Rules 2006 / Sec. 3(7) of Customs Tariff Act, 1975 Levy of Customs duty on removal to DTA No clarity when the goods are removed/supplied from SEZ to DTA, whether IGST needs to be charged only once as part of customs duty in terms of Customs Tariff Act, 1975 (along with Basis customs duty and other duties) on removal of goods (or) IGST needs to be charged on inter-state supply of goods (or) IGST needs to be charged twice, once on the removal from SEZ and second on the supply of goods.
Further, IGST Law is applicable equally to inter-state supply of goods as well as services. Whereas SEZ Law requires IGST as part of customs duty on removal of goods to be paid under SEZ Act, but silent on supply of services.

An instruction about the manner of reporting the removal/supply from SEZ to DTA in GSTR1 would not be sufficient without a legal backing. It is pertinent to note that there is no provision/definition in SEZ Act 2005 or in Foreign Trade (D&R) Act (which governs import and export) to deem the clearance of goods by SEZ to DTA, as import.
The above fundamental difference / inconsistency between IGST and SEZ Law created inconsistencies in many provisions, as explained below. Inconsistencies in CGST Law between SEZ Laws are discussed first and followed by the inconsistencies in IGST Law
CGST Sec.7 Any transaction of goods or services made for "consideration" only qualifies to be "supply' (except the transactions listed under Schedule I) Sec.30/Rule 47 of SEZ Law Any goods removed from SEZ to DTA is subject to customs duty, irrespective of the fact that whether the transaction is made for consideration or not. Goods cleared to DTA without consideration such as free samples are also liable to Customs duty & IGST
CGST Sec.8 Composite supply or mixed supply: When two are more differents goods/services are supplied, the tax rates of principal supply in case of composite supply and tax rates of items which attracts highest tax rates, in case of mixed supply, as the case may be, is applicable Sec.30 of SEZ Act The rate of Customs duty as per Customs Tariff Act,1975 No concept of mixed or composite supply. Each identifiable item cleared has to be cleared basis its customs duty rates, in terms of Customs Tariff Act, 1975
CGST Sec.16 and other ITC related provisions and Sec.49 Though Input Tax Credit is available to SEZ entities also, there is no scope for utilization of the same. Sec.30 of SEZ Act Customs duty needs to be paid in cash. Set-off of ITC against duty liability is not possible Even an SEZ entity avails ITC on the tax paid on the inputs, utilization of the same for removal of goods is not possible, which leads to huge cash blockade.
CGST Sec.34 Issue of Credit notes and Debit notes for the difference in value or for return of defective goods Rule 47 of SEZ Rules Value of goods needs to be re-assessed Adjustment of short/excess payment of IGST is not possible. Differential IGST amount needs to be paid/claimed as refund by getting the Bill of Entry reassessed by the Customs officer.
CGST Sec.50 Interest on delayed payment of tax NA NA No provision under SEZ Law to charge interest on delayed payment of duty or IGST
CGST Sec.54 Refund of integrated tax paid on export of goods NA NA No provision to pay IGST through utilization of ITC, on export of goods and claim as refund in cash
Refund of inverted tax refund     No provision to claim inverted tax refund as the tax paid is paid as part of customs duty
CGST Sec.15 and Chap.XII (assessment) Value of goods supplied are to be assessed under GST Law Rule 47 of SEZ Rules & Sec.14 of Customs Act and the rules made thereunder Value of goods cleared from SEZ to DTA are to be assessed in accordance with the Customs Act/Rules Though the valuation provisions are similar in both the Laws, there are many dissimilarities also.
Further, there is no clarity, whether the CGST/SGST officers would have jurisdiction to assess the goods cleared by SEZ to DTA
Chap.XVII (Advance ruling) Provisions of Advance Ruling NA NA No clarity whether the rulings of Advance Ruling Authority are binding on SEZ units in respect of goods cleared by them to DTA
Chap.XIX Offences and Penalties Sec.21 read with notification dated 05.08.2016 Notifies offences under other Central Acts, as offence under SEZ Act, wherein the GST Act was not included No clarity, whether the act or omission which is punishable under GST Act is punishable when the same act or omission is made by an SEZ entity
Sec.143 Goods sent for job-work can be returned within one year (inputs) or 3 years (capital goods) respectively Rule 41 All goods are to be returned within 120 days Restricts SEZ units to bring their inputs sent for job-work within 120 days, though GST Law allows one year or 3 years, as the case may be
IGST Sec.10 Transaction made under Bill to & Ship to model (When the goods are delivered to one person on the direction of a third person, the location of such third person shall be deemed to the place of supply of such goods) Rule 27/Rule 30 Provides for procurement of goods from DTA supplier and the procedure to be followed by the DTA supplier When the goods are delivered to SEZ on the directions of a person in DTA, the place of supply of such goods would be the location of such DTA person. Such supplies do not qualify for a "zero rated supply". However, SEZ Laws do not recognize such a situation and there are no provisions in the SEZ Laws made therefor (For more details, refer article SEZ - Is it a different species?)
IGST Sec.12 (3)(b)&(c), (4)
& Sec. 7(5)
Sec.12 provides place of supply in respect of supply of services such as hotel/lodging/function halls, restaurants/catering services etc to SEZs, is the place where such services are rendered.
Whereas Sec 7(5) provides that supply to or by SEZ entities are treated as inter-state supply of goods
NA NA When such services are provided to SEZs or by SEZs, no clarity in the GST Law itself as to what is the place of supply (except circular issued by CBIC) for such cases. (for more details, refer article (Supply of services by SEZ entities to non-SEZ entities )
IGST Sec.16 (1)(b) Supply of all goods or services are treated as zero rated supply Rule 27/Rule 30 Goods or services received from DTA for the authorized operation of the SEZ unit or developer are exempt from payment of taxes/duties No clarity on the goods/services supplied by DTA to SEZ, which are not required or which are not approved by the competent authority as the goods/services required for the authorized operation of the SEZ units/developers but are required for their business purposes.

The points discussed above might not have covered all the inconsistent provisions between SEZ/GST Laws.

Sec.51 of SEZ Act has an overriding effect over the provisions of any Central Act which are inconsistent with SEZ Law. However, this may not help in all the circumstances which may lead to absurdity.

In addition to the issues/hard ships faced due to the said inconsistent provisions, lack of understanding of GST Laws by the field level officers posted on deputation in the SEZs, due to inadequate training in GST Laws, compounds the problems. All these, put the SEZ entities in a much dis-advantageous position when compared to DTA units. In a situation where the sun-set clause for IT exemption is nearing (Mar 2020), one has to re-think whether to set up a unit in SEZ.

(The author is working as a Tax Professional with a reputed Pharma Major and the views expressed are strictly personal.)