Since the implementation of GST on July 1st 2017, all goods supplied to and by any Special Economic Zone (SEZ) unit now comes under inter- state supply of goods. Any transfer of goods under the interstate supply has to pay IGST at the rate that is applicable on the concerned supply.
Any supplies made by a Domestic tariff area to a SEZ enjoys a benefit of zero rate supply as of under GST. However GST’S applicable rate is levied on any supplies made by SEZ to DTA. Also any DTA unit that comes under composition scheme will not stand eligible to make any supplies to SEZ, as all supplies to SEZ are made under inter-state supply, and as per guidelines any dealer in composition scheme is not allowed to make inter-state supply.
This article will therefore explain and understand the application of GST on supplies made to and made by SEZ.
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WHAT IS SEZ AS OF UNDER GST?
As stated by the provisions of section 2 (19) of IGST Act, Special Economic Zone is supposed to have the meaning as given to if in the clause (za) section 2 of the SEZ Act, 2005.
According to the provision of the Special Economic Zones Act, 2005; SEZ or ‘Special Economic Zone’ states that each SEZ notified under the sub-section (4) of section 3 and sub-section (1) of section 4 that includes Free trade and Warehousing Zone and also an existing SEZ.
WHAT IS DTA (Domestic Tariff Area)?
According to the under section 2(i) DTA includes the whole of India other than previously specified area of the Special Economic Zones.
What are policies for Supply to SEZ?
Any good or service made available to SEZ is considered as zero rated supplies under the policy of GST.
The section 16 (1) of the IGST Act, 2017 contains all the relevant provisions about the zero rated supplies :
Zero rated supplies, either goods or services or both are stated under namely as:
a) the export of services, goods – either separately or both
b) Supply to any SEZ developer or a unit of goods, services or both, as required or demanded
To make zero rated supplies, according to provision of section 16 (2) of IGST Act, Input Tax Credit is available.
GST provides following two options on supply of goods or services to any SEZ unit:
• Making supplies to SEZ units without paying IGST
•Making supplies to SEZ units paying IGST.
To make supplies to SEZ units without paying IGST, a supplier is supposed to carry out the concerned supply under Letter of Undertaking (LUT) or a bond.
SUPPLYING UNDER GST BOND
To carry out supply of goods or services to SEZ units without the payment of IGST and under bond, following points are to be kept in mind:
• The input tax credit can be used, by the supplier executing the bond, for any domestic supply.
• The supplier should have an indemnity bond in format of GST RFD – 11 on a non judicial stamp paper.
• While executing the bond, a bank guarantee form is required.
• The bank guarantee should not exceed 15% of what the bond amount is
• the bond will be accepted by the Assistant Commissioner or Deputy Commissioner.
The supplier in such case has to mention on the top of invoice that ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT OF INTEGRATED TAX’.
Supply under LUT
The eligibility criteria for submitting of LUT in place of bond according to the notification no. 16/2017 of central tax is to cover the following registered person :
• A status holder as specified in paragraph 5 of the Foreign Trade Policy 2015-2020; or
• taxpayer 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.
LUT is accepted by an Assistant commissioner or Deputy Commissioner and is valid for a period of12 months. There is no need of bank guarantee in a LUT unless there is a breach of the LUT, therefore making it an easier and more comfortable option for the supplier.
Also the input tax credit can be used against any other domestic supplies by the supplier. The supplier is supposed to mention on the top of the invoice that ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER LUT WITHOUT PAYMENT OF INTEGRATED TAX’ if not to delay or complicate the process.
Online filing of LUT has been enabled since February of 2018, after its initial unavailability as an online process.
Supply to SEZ with Payment of IGST
Supply of goods or services by a supplier can be done with payment to SEZ unit by IGST. The supplier should clearly mention on the top of the invoice that ‘SUPPLY MEANT FOR SEZ UNIT / SEZ DEVELOPER WITH PAYMENT OF INTEGRATED TAX’.
Suppliers who fail to execute LUT for some reasons have the option of making supply through payment of IGST as per provisions of section 16 (3) of the IGST Act. This IGST charge can be claimed as refund at the end of the supplier. If in any case the suppliers are not in a position to claim the refund of the IGST they can demand or ask the SEZ unit to refund back the IGST amount paid by them.
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