GST, with the hope of billions to provide a better way to transact in a business and to eliminate the cascading effects under the previous tax system, it is the biggest tax reform in India ever. Although the system is very new to all and the taxpayers are not well-versed with the new indirect tax nomenclatures, we can expect that by the time it will go flawlessly. But, understanding the basics in detail about every aspect about GST is also important. So, today’s article is about how supply to Special Economic Zone (SEZ) takes place and what is the coverage of SEZ under GST regime.
GSTN New Functionality to Provide Filing Feature of LUT
Any enrolled individual claiming for the option to provide the goods and services for export or SEZs excluding any payment of the integrated tax needs to file before exporting the supply a Letter of Undertaking (LUT) if the person does not litigate for tax theft on the number of Rs 2.5 cr or more beneath the CGST act or IGST act or the in the previous law.
Taxation Principle of WTO to SEZ
World Trade Organization has standardized some principle to make a supply with Special Economic Zones across the world. Under the sanctioned rules, exports to such SEZ areas are exempted from VAT/GST and conversely, the imports from such areas are taxed at the same rate as the local production within the country. So, considering a zero-rated tax on exports is a principle of WTO which is related to destination based taxation rules and the VAT free items here is described as zero-rated where the manufacturer can recover the costs and overheads used to get resources. As GST also depends on a destination principle of WTO, the exports made within the country go outside of it termed as zero-rated and the cost and overheads spend on resources are refunded in name of input tax to manufacturers back. The OECD guidelines for multinational enterprises on the neutrality of VAT is responsible for consistent business conduct with applicable laws.
Goods Export to SEZ
Under GST Regime, the above-mentioned guidelines remain the same and destination based taxation persists as zero-rated and a described benefit stays for the exports to Special Economic Zones (SEZs). The extension for the stated benefit is up to processing zones of the SEZs, but the supplies from this SEZ Areas to Domestic Tariff Area (DTA) is liable to describe as a taxable trade under the scope of GST rules and regulations.
Free VAT Laws Described Under Section 16 of IGST ACT
- Zero-rated supplies are mentioned below regarding the goods and services or both, viz:
- a. Export of Goods/Services or both to SEZ developer or unit
- b. Supply of Goods/Services or both to SEZ developer or unit
- According to the provisions of sub-section (5) of section 17 of CGST Act, the credit of input tax can be claimed for such zero-rated supplies, despite the supply perhaps being an exempt supply
- A registered person under GST regime can claim the refunds in either case:
- a. A taxpayer can supply the goods or services or both, under a bond or a letter of undertaking, fulfilling the conditions and procedure must be as mentioned in above provisions, without paying IGST and can claim the refunds of unused input tax credit
- b. A taxpayer can supply the goods or services or both, fulfilling the conditions and procedure must be as mentioned in above provisions, with the payment of IGST and can claim the tax paid on the supply of the Goods or Services or both, according to the rules described under CGST Act.
From the reference of a definition defined under Special Economic Act, 2005 for Special Economic Zones and SEZ Developer, and also covered under Section 19 and 20 of Integrated Goods and Services Act(IGST), 2005. Some other special provisions are also described under IGST Act, 2005 pertaining procurement of Goods and Services on which taxes are not paid. GST law provides the refunds for taxes paid by the supplier for supplies made to a SEZ developer or SEZ unit-holder.
In accordance with Section 7(5), (b) of IGST Act, the supplies of Goods or Services or both to or by a developer or Unit Holder of SEZ will be termed as the supplies within the state and IGST would be chargeable with further refund mechanism. For an example, a taxpayer living in Bhuj supplies to Kandla SEZ in Gujarat, this supply must be termed as interstate supply and IGST will be charged, despite refund scheme is also eligible for the same procedure because the supply comes under as zero-rated supply.
The laws are quite clear that supplies made in reference to a bond or a letter of undertaking to SEZ areas will be taxed free and other supplies to this area will attract the IGST, which will be claimed further for refunds.
As per the section 54 of CGST Act, the three options are mentioned to supply to SEZ:
The Supplies Made With The Payment Of IGST
According to CGST laws, the supplies made with the payment of IGST to a SEZ Developer or SEZ Unitholder is liable for the payment of IGST at applicable rates. The export invoice will be generated in Indian currency with a proclamation that ‘SUPPLY MEANT FOR SEZ DEVELOPER/UNIT WITH PAYMENT OF INTEGRATED TAX’. The declaration made with the mentioned option will make the refund procedure fast. The IGST mentioned in the invoice is not charged from the customer, it is just for the acknowledgement purposes.
The procedure will go like that:
- For an example, An entity X Pvt. Ltd. supplies the Goods (whose purchase price is Rs. 2 lakh) for Rs. 3 lakh to an entity Y Pvt. Ltd located in Kandla SEZ. The applicable IGST will be charged at 18%. The invoice will look like:
- The selling price of the supply: Rs. 3 lakh
- Applicable IGST at 18%: Rs. 54,000
- Invoice will consist total value: Rs.3.54 lakh
Now, the entity X Pvt. Ltd. will release the tax liability of Rs. 54,000 by using Input Credit of Rs. 36,000 which is available on an account and cash payment of remaining Rs. 18,000. So, the entity X will get a refund of Rs. 54,000, and subtracting Rs. 18,000 from the whole, a refund will be Rs. 36,000 which is the real net worth of input tax credit.
| 1. For Purchase
Purchase A/cDr.200000 SGST Credit A/c Dr.18000 CGST Credit A/c Dr.18000 To Party A/c 236000 |
2. For Sale to SEZ
Y Ltd. A/c Dr.300000 IGST Refund Receivable A/c Dr. 54000 To Sales 300000 To IGST Liability A/c 54000 |
| 3. For Payment of IGST
IGST Liability A/c Dr.54000 To SGST Credit A/c 18000 To CGST Credit A/c 18000 To Bank A/c 18000 |
4. On Receipt of Refund
Bank A/c Dr.54000 To IGST Refund Receivable A/c 54000 |
The Supplies Made Under A Bond
The concept of a Bond is derived from Excise Laws and it is very new for traders covered previously under VAT Laws or Services Laws. As per the Laws, there will not be any such payment of tax liability for the supply made to SEZ and the declaration will be clearer in invoice such as ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT OF INTEGRATED TAX’. The option is very relevant as the supplier will be able to use Input Tax Credit for any other domestic supply. The option gives relief to the suppliers as they make a supply containing a Bond and not require to pay IGST and claim the refund. An indemnity bond in the format of GST RFD-11 on non-judicial stamp paper will work between the supplier of SEZ and the Government in reference to the president of India. A supplier is not required to furnish such a Bond(named Running Bond) for each supply made to SEZ, hereinbefore the bond will be valid for 12 months.
A Bond will be carried along with a Bank Guarantee as a security and Jurisdictional officer will be responsible for the amount to be kept as bank security with respect to the track record of the supplier. The Bank guarantee amount does not exceed 15% of the Bond amount, in any case. The Bond will be acceptable by Assistant Commissioner or Judicial Deputy and this will make the easy flow and more compliance regarding the supply. A Bank guarantee becomes feasible to recover the damage to revenue in case breach or failure of the B.G. The form GST RFD-11 will be furnished by the Jurisdictional officer or Assistant Commissioner manually.
What is Zero Rated Supply turnover?
- Zero-rated supply turnover is the value of total supplies made on account of exports out of India including SEZ units for the month or the time period for which the refund has been sought for. This is the value of supplies in the tax period mentioned in the GSTR 3B including all the supplies made out of India including SEZ.
The Supplies Made Under A Letter Of Undertaking
Due to the hurdles faced by a supplier under option-2 as he needs an issuance of Bank Guarantee with the fixed amount and commission. It blocks the fixed deposit with the bank. To resolve such problems, there is another option which allows a supplier to give a letter of undertaking for the purpose of supplies to SEZ.
A LUT is also acceptable by Assistant Commissioner or Judicial Deputy. The validity period for such a LUT will be 12 months and it can be duplicated for each year. In case of any breach of the LUT, there can be a need to furnish B.G., else a supplier can carry LUT for hurdle-less supplies.
In accordance with notification No.16/2017 of Central Tax, the conditions are specified for intended person to release LUT. In following condition LUT can be furnished in place of a Bond:
- As per the paragraph 5 of the Foreign Trade Policy 2015-2020, a prescribed status holder can avail a LUT
- The taxpayer who has got the foreign inward remittances which is at least 10% of the export turnover (which is not less than Rs. 1 Crore) in the previous financial year, and the person should not be prosecuted as per CGST Act, 2017(12 of 2017) or any laws claiming tax evasion of Rs. 2.5 Crore.
The exporters and suppliers who make supplies to SEZ, apart from the mentioned notification are only liable to issue a Bond, not a LUT.
