The Goods and Services Tax regime has replaced the diverse indirect tax structure existing in the country prior to 1st July 2017, filling the various gaps and failings of the erstwhile system. However, the new regime is not without its shortcomings.

Supplies by an SEZ unit to a DTA – General Framework

Supplies made to and by a Special Economic Zone unit, or SEZ unit, are to be treated as an inter-state supply under the GST regime and the levy of IGST is attracted at the applicable rate. While the deeming fiction under the IGST law allows for the benefit of zero-rating to supplies made to an SEZ unit, the supplies made by an SEZ unit in the Domestic Tariff Area (DTA) are subject to the general rigours of the GST regime and no distinct provisions or procedures have been effected for the latter. Therein lies the problem.

Erstwhile tax implication v. Post-GST implications

As per the SEZ scheme under the Special Economic Zones Act, 2005 (SEZ Act) and the rules made thereunder, DTA clearances are to be treated as import into India and customs duties are to be paid by the importer on clearance of goods by filing Bill of Entry. Under the pre-GST regime, sale of goods by the SEZ unit attracted Sales tax in the hands of the SEZ unit and Customs duties, i.e. Basic Customs duty and CVD (SAD being exempt where goods suffered VAT), in the hands of the importer.

However, the SEZ Act is yet to be aligned with the provisions of GST statutes which provide that “import” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India”. In case of said imports, as per proviso to Section 5(1) of the IGST Act, tax shall be levied and collected as per the customs regime, i.e. IGST is payable by the importer on clearance. Since SEZ units are not a place outside for the purposes of the GST regime, procurement by a recipient in the DTA does not qualify as an “import” under the GST Act and therefore, the levy and collection under the Customs regime do not strictly apply to supplies by SEZ units.

Therefore, a literal reading of the provisions provides that:

Ø the SEZ unit making such inter-state supply would be liable to pay tax as any other supplier under the IGST law; and

Ø clearance of goods from the SEZ by the recipient in the DTA would invite duties of customs payable by the recipient in the DTA under the customs regime read with the SEZ scheme.

Is IGST payable twice?

At this juncture, it is pertinent to note that by the operation of the Taxation Laws (Amendment) Act, 2017, IGST has been included as a duty of customs under the Customs Tariff Act, 1975. Therefore, the question which arises is whether IGST would be payable twice in such a case? That is, is IGST payable once by the recipient on filing the Bill of Entry for clearance of goods to the DTA and thereafter also by the SEZ unit on its outward inter-state supply? The answer ought to be in the negative as a single transaction cannot possibly be taxed under the same levy twice; however, the Government is yet to throw any light on this critical issue.

Who is liable to pay?

Presuming the liability of IGST arises only once, the second question which arises is that who is liable to discharge said tax liability? The GST statutes and the rules made thereunder offer no clarity on whether IGST is to be paid by the SEZ unit or is to be paid by the recipient on clearance.

Possible solution

A reference can be made to Instruction No. 9 of Form GSTR-I, i.e. the format for filing return for outward supplies, which states: - “Any supply made by SEZ to DTA, without the cover of a bill of entry is required to be reported by SEZ unit in GSTR-1. The supplies made by SEZ on cover of a bill of entry shall be reported by DTA unit in its GSTR-2 as imports in GSTR- 2. The liability for payment of IGST in respect of supply of services would, be created from this Table.”

Going by the above instruction in Form GSTR-I, read along with the SEZ Act provisions, it is possible to take a view that the supply by the SEZ unit to the DTA is to be treated akin to import and unless the recipient is not required to file a Bill of Entry for any reason, IGST is payable by the recipient in the DTA on filing the Bill of Entry mandated under the SEZ scheme.

What the authorities Tweet

While the following have no legal validity, it may also be pertinent to mention the said replies made by the GST twitter handle against the Twitter Asks, in order to grasp the view taken by the authorities on such supplies:

S.no. Question/ Tweets received Replies
37. When goods are being imported from SEZ who will pay IGST? Such supply is treated as import and present procedure of payment of duty continues with the variation that IGST is levied in place of CVD.
38. Who will pay IGST when goods are procured from SEZ? Today importer is paying both BCD and CVD. Such supply is treated as import and present procedure of payment continues with the variation that IGST is levied in place of CVD.

Therefore, it can be seen that the general understanding of the authorities in this respect is to treat such supplies as import of goods and tax the same as per the customs regime.

Clarity required

At the close of the fourth month from the advent of the GST regime and amid unceasing efforts of the Government to clarify and simplify industry issues, the above two questions remain unanswered. A clarification to this effect would be a welcome relief to the SEZ community and their customers in the DTA.