By Anandram Sankar
SEEING the way the SEZ Laws are administered and the wide gap and inconsistencies between the GST Laws and SEZ Laws, it appears that the question has to be answered in affirmative.
While we celebrate the completion of two years of GST implementation, Government is yet to make amendments in the SEZ Laws comprehensively to align with GST Laws and remove the inconsistencies between these two Laws. Few amendments made in SEZ Laws in the month of September 2018 addressed few concerns but are not adequate. The SEZ Laws framed more than a decade ago, were framed keeping in mind only the provisions of Central Excise Law and the sea change that happened in the indirect tax regime due to introduction of GST Law has not been properly addressed in the SEZ Laws.
The important reason for the issues faced by the SEZ entities due to inconsistencies is that, under the Central Excise regime, SEZ entities need not get registered under the Central Excise Law and are not required to comply with the Central Excise Law, as SEZ Law was independent and administered by the Development Commissioner, Department of Commerce, Ministry of Commerce and Industry. However, under the GST regime, SEZ entities are required to take registration under the GST Laws and are required to comply with the provisions of GST Laws also in addition to SEZ Laws.
One of the basic and important provisions of GST Laws which is either inconsistent or not defined or envisaged under SEZ Laws, is the term “Supply”
Supply: The term “supply” defined under Sec.7 of CGST Act is not defined or used anywhere in the SEZ Laws. This creates confusion for the SEZ entities, both as the recipient/buyer of goods or services and as supplier of the same.
In this article, we will discuss about the issues faced by SEZ entities as a recipient/buyer of goods or services due to lack of proper understanding of the term ‘supply’ in the context of SEZ Laws.
Let us examine a situation where the SEZ entity procures goods or services from a DTA entity. Rule 27 of SEZ Rules, 2006 provides for import or procurement of goods and services by the SEZ entities.
Here the issue is whether the word ‘procurement’ means just a receipt of goods or getting the title of goods and the possession of goods transferred. If the word ‘procurement’ means just a receipt of goods, it need not be a ‘supply’ in terms of Sec.7 of CGST Act. It can be just a delivery of goods, where the actual recipient (defined under Sec.2 (93) of CGST Act) of the goods can be a third person. In such cases, in terms of Sec.10 of IGST Act, 2017, the place of supply of such goods, is the place of business of such third person. Depending on the location of such third person and the place of supplier, the type of supply is decided – whether it is an intra-state or inter-state supply and accordingly the GST is charged.
This kind of transaction happens in a bill-to & ship-to model, wherein there are two transactions involved. In the first transaction, the supplier (say A) a DTA entity delivers the goods to a person (say B), a SEZ entity and raises bill on person (say C), another DTA entity, and all the three parties are located in the same state X. Subsequently, in the second transaction, the person C raises bill on the SEZ entity B, either for the same goods alone or for the same goods along with the additional goods or services supplied directly by the person C.
The word ‘procurement’ is not defined under SEZ Laws. Procurement generally means, according to Cambridge English Dictionary to obtain something after an effort. According to Black’s Law Dictionary, procurement means The entire process of purchasing goods that includes the purchasing decision, the selection of the goods, and the payment made by the buyer to purchase the goods. It appears that the word ‘procurement’ provided under the Rule 27 supra means not just a receipt of goods, but the entire process of purchasing the goods, which includes making the payment of consideration for such goods also.
Hence, mere receipt of goods by the SEZ entity does not tantamount to supply in the hands of supplier which entitles him to claim zero rated supply on the goods or services supplied and all the elements of procurement including making payment requires to be completed to qualify a transaction as ‘supply’. Thus the second transaction in the above example i.e the person C raises bill on SEZ entity qualifies for ‘supply’ to SEZ and the supplier C is entitled to avail the benefits of ‘Zero rated supply’.
This kind of situation typically arises, in a works contract such as construction, building, fabrication etc. (as defined in Sec.2(119) of CGST Act) done by a civil contractor, a DTA entity, to a SEZ entity, where the contractor orders the goods from a DTA supplier of goods and gets the goods delivered at the site/location of SEZ entity, where such works contract service is being provided. By consuming such goods delivered at SEZ location, the civil contractor carries out the construction / building activity. For such activity, which is a composite supply of goods and services and treated as service in terms of entry 6 (a) of Schedule II of CGST Act, the contractor needs to raise bill on the SEZ entity. Such composite supply of works contract provided by the contractor to the SEZ entity qualifies for a zero rated supply and the contractor is entitled for the benefits of Zero rated supply.
In the above transaction, the DTA supplier of goods is not entitled for zero rated benefits and such supply is not a zero rated supply, as the DTA supplier and the SEZ entity does not have any contractual relationship and the goods are delivered at the SEZ location, by the DTA supplier, on account of the civil contractor, who ordered the goods. However, the procedures followed at the SEZs create more confusion.
Every goods entering the SEZ is required to be allowed by the SEZ officer and details of such goods are to be entered in an online system called SEZonlinesystem. Officer allowing such goods will endorse the invoice and approve the entry made in respect of such goods in the online system also. Such endorsement in the invoice, is treated as proof of delivery of the goods at SEZ, for the DTA entity, to claim benefits of zero rated supply.
During the Central Excise regime, in a similar situation, goods were delivered at the SEZ location, under ARE-1 directly from the Central Excise registered manufacturer, irrespective of the fact whether the manufacturer is the actual seller of such goods to the SEZ entity, as traders also can source the goods directly from the manufacturer’s factory and get it delivered at the SEZ location, thereby Central Excise duty exemption was claimed on such goods. The rationale behind this, in the Central Excise regime, delivery of the goods at SEZ location being the criteria for claiming excise duty exemption and the ownership and title of the goods have no significance. Such goods were allowed by the officers by endorsing the ARE-1s and such transactions were recorded in the online system also.
Due to practice of decade-old procedures, there is a lack of clarity with the field level officers and with the SEZ entities to record such receipt of goods in the SEZonline system, which are not actually “supplies” to the SEZ entities. If proof of delivery endorsed by SEZ officers are issued for such transaction, it will lead to serious anomalies since such transactions are not in the nature of supply and do not qualify as zero rated supplies. This will also lead to double claim of zero rated supply benefits by both the DTA supplier and the contractor for the same goods.
There are few other situations also, where similar issues are faced by the SEZ entities, such as goods received by the SEZ entites as part of Annual maintenance contract, where the principal supply is a service.
We have seen in the foregoing paragraphs, the issues faced by the SEZ entities as the receiver/buyer of the goods or services, due to lack of clarity of the meaning of the term ‘supply’. On the other hand, few transactions are much more complex to understand and requires clarity by way of proper amendments in the SEZ Rules (not just by a Circular or Instruction), when the goods or services are supplied by the SEZ entities to DTA entities.
Therefore, Government has to understand the dire need to amend the SEZ Laws to align it with the GST Laws to avoid litigations.