The introduction of GST by subsuming several legislations presented a comparatively simpler structure of taxation in India. However, four years after enactment, fundamental questions about its applicability and exemption continue to elude tax stakeholders, especially with respect to its implications on Special Economic Zones, Domestic Tariff Area, and Export Oriented Units. Considering the conundrum that has been caused due to the ambiguity in GST laws, it is crucial to comprehend the tax implications of the GST regime on different trading zones. Against this backdrop, the article presents an analysis of the implications of GST Law on Domestic Tariff Area, Special Economic Zones, and Export Oriented Units.
GST law, DTA, SEZ, EOU, Zero-rated supply
For the purposes of taxation in India, different trading zones have been created and categorized as the Special Economic Zones (SEZs), Domestic Tariff Area (DTA), and Export Oriented Units (EOUs). The Goods and Services Tax (GST) regime has assimilated a slew of taxes in its ambit which has resulted in a significant change in tax implications on these trading zones. However, the tax implications for the trading sector are not merely dependent on the GST regime in isolation. The Foreign Trade Policy and the Customs laws read along with the Integrated Goods and Services Tax (IGST) and Central Goods and Services Tax (CGST) Acts of 2017 lay down the complete legal framework for determining the tax implications of the trading industry. Against this backdrop, the first section of this article clarifies the demarcation among trading zones. The second section of the article analyses the implication of GST law on SEZs, DTA, and EOUs. Lastly, the article concludes with an evaluation of benefits and impact of ambiguities of current regime on stakeholders and economy.
DEMARCATION OF TRADING ZONES
SEZs, introduced for the promotion of exports from India, are geographically delimited areas within which governments facilitate industrial activity by providing tax relaxations and implementing economic policies that are different from those imposed on the rest of the country. SEZs are generally deemed to be foreign territory for the purposes of trade operations and duties and tariffs. In comparison, the DTA encompasses the whole of India (including the territorial waters and continental shelf) excluding the areas under the SEZs. EOUs are industrial zones established solely for export to other countries and the whole of the produce of EOUs is exported to a foreign land. The major difference between EOUs and SEZs is that the former can function at widely dispersed locations while the latter need to be set up at specific geographic locations.
Tax Implications on the Domestic Tariff Area
Every article that is imported to India is chargeable with Basic Customs Duty [BCD] , along with anti-dumping duty [ADD], safeguard duties , countervailing duties [CVD] (as and when applicable), and additional duty envisaged under Section 3 of the Customs Tariff Act of 1975.
However, CVD is no more leviable as it has been subsumed by the GST under the currently applicable tax regime. Presently, as per Section 3 of the Customs Tariff Act, any import into the country will attract the following provisions and will accordingly be liable to pay these taxes and duties:
- Additional Duties as determined under Section 3(1)-(6)
- Integrated GST as per Section 5 of the IGST Act read along with Section 3(8) of the Customs Tariff Act.
- GST Compensation Cess as per Section 8 of the Goods and Services Tax (Compensation to States) Cess Act of 2017 read conjointly with Section 3 of the Customs Tariff Act.
Resultantly, DTA, being part of the non-exempted taxable territory, will also attract these provisions and consequently any import from a foreign country into the DTA will be leviable with these taxes and duties.
Tax Implications on the Special Economic Zones
The SEZs were created to increase foreign trade by providing leniency in the application of legal, investment, labour, customs, and tax-related regulations. Under the Indian taxation regime, SEZs have to conform to two categories of compliances. The first category includes compliances with relevant provisions on indirect tax whereas the second category includes compliances under the SEZ Act of 2005.
A. IMPACT OF GST ON SUPPLIES FROM SEZ
For the purposes of imposition of IGST, clause 5 of Section 7 of the IGST Act states that any supply by or to an SEZ is considered an inter-state supply notwithstanding whether the location of the supplier and the place of supply of goods or services is in the same State or Union Territory . This means that supply from an SEZ to another SEZ would be considered as an inter-state supply and IGST would be payable accordingly (in addition to the applicable Customs duties including the ADD and safeguard duties ). The IGST applicable would be determined according to Section 5 of the IGST Act (i.e., payable IGST would be determined according to Section 15 of the CGST Act and Section 3 of the Customs Tariff Act).
However, an exception to this rule is a supply from an SEZ to the DTA. A perusal of territorial requirement in the definition of 'export and import' given under the IGST Act depicts that supply made to and from SEZ cannot be treated as export and import respectively. However, Section 30 of the SEZ Act which states that any supply 'from an SEZ to a DTA may be treated as an import' will have an overriding effect over other tax-related statutes. This means that along with IGST, customs duties including ADD, CVD, safeguard duties shall be paid by the person receiving the supplies in the DTA from the SEZ.
B. IMPACT OF GST ON SUPPLIES TO SEZ FROM ANOTHER SEZ
'Import' under Section 2(o) of the SEZ Act includes receiving a good or service by an SEZ Unit/Developer from another Unit/Developer in the same or a different SEZ. Similarly, any supply of goods or services by one SEZ Unit/Developer to another Unit/Developer in the same or another SEZ is considered as 'export'.
Section 25(1) of the Customs Act of 1962 empowers the Central Government to exempt goods of any specified description from the whole or any part of the duty of customs leviable thereon. Pursuant to this, all goods imported to an SEZ for authorized operations have been exempted from the integrated tax leviable under Section 3(7) of the Customs Tariff Act read with Section 5 of the IGST Act.
Similar powers have been conferred upon the Central Government under the IGST as has been provided under Section 25(1) of the Customs Act. In exercise of this, all services imported to an SEZ for authorized operations have been exempted from the whole of the integrated tax leviable thereon under Section 5 of the IGST Act. Therefore, the abovementioned duties and taxes are not leviable in case of an import of either goods or services into the SEZ.
Additionally, a conjoint reading of these provisions with the SEZ Act, exempts these scenarios concerning the SEZ from payment of BCD (leviable under Section 12 of the Customs Act read with Section 2 of the Customs Tariff Act) and Additional Duties as leviable under Section 3 of the Customs Tariff Act.
ZERO RATING AND SUPPLY FROM DTA TO SEZ
Zero-rating of a transaction implies an exemption from taxes on the entire value of the supply chain. Under the GST regime, [a] any export supply of goods or service or both ; and [b] any supply to an SEZ developer or a unit are considered as zero-rated supply while IGST applies on them. The presence of these two distinct categories in the statute implies that any supply to the SEZ by a DTA would be a zero-rated supply within Section 7 of the IGST Act and will not be treated as an export supply. It is therefore exempted from IGST obligations and therefore no tax or duty is leviable.
Under the GST regime, a supplier is given two options in case the supply has been made on the condition of ‘zero-rated supply’. In such a case, he can make supply with or without payment of integrated tax. If he chooses to supply without paying IGST then he can proceed by furnishing a bond/letter of undertaking and file a refund claim of corresponding Input Tax Credit (ITC). If he chooses to supply while paying IGST, he can do so and claim a refund as per Section 54 of the CGST Act. This denotes that subject to Section 17(5) of the CGST Act, for making zero-rated supplies, credit of input tax may be availed irrespective of whether such supply is an exempted supply . As contrary to the previous regime, it is an obligation of the supplier (and not of the Unit) to file for a refund. Thus, there is a shifting of onus to claim refund insofar as Section 54(3) of the CGST Act allows the refund of unutilized input tax credit in case of zero-rated supplies. This reduced the burden on Units and has resulted in the improvement of hassle-free trade.
Tax Implications on the Export Oriented Units
Initially, the EOUs were required to export 100% of their produce. However, with the change in the Foreign Trade Policy, this requirement for 100% export by EOUs has been relaxed to an extent. The EOUs are permitted to sell goods and services amounting to 50% of free on board of exports /or 50% of foreign exchange earned, where payment of such services is received in foreign exchange.
On the one hand, a supply of admissible goods from EOU to DTA is deemed as export. The EOUs can sell their products into the DTA subject to the fulfillment of the Net Foreign Exchange as required against them and subject to such other conditions which are prescribed under the FTP in this regard, e.g. the goods must be of nature as are freely importable into the DTA under the Foreign Trade Policy subject to the payment of chargeable customs duties and taxes (such as IGST). EOU has to pay the applicable GST on those supplies. In such cases, the EOU can either seek a GST refund or ask for an input tax credit on the GST paid while providing supplies to the DTA. EOU is only free from paying GST if they make zero-rated supplies, as described by Section 16 of the IGST Act.
In addition to this, the DTA sale by EOU units shall be subject to payment of excise duty, if applicable, compensation cess along with the reversal of duties of Custom leviable under the First Schedule to the Customs Tariff Act availed as an exemption, if any on the inputs utilized for the manufacturing of such finished goods. Further, an amount equal to ADD as per the Customs Tariff Act leviable at the time of import, shall be payable on the goods used for manufacturing or processing of the goods cleared into DTA from the unit.
On the other hand, when goods are supplied by one EOU to another EOU, the supply is regarded as if it were any other supply under GST law, and GST is payable on the same as it is on any other supply.
The above analysis elucidates the applicability of the charging and exemption provisions of GST law on DTA, SEZs, and EOUs. The minimalistic compliance requirement and relaxation in return filing procedure under GST regime has helped in promoting export, employment, and ease of doing business.
On the one hand, EOU units are treated like any other supplier under the law, and all of the terms of the GST law would apply to them. The only benefit accessible to EOU units is duty-free import, which entitles them to a BCD exemption.
On the other hand, the special status granted to SEZs under the SEZ Act as well as under GST laws benefits the unit and developer to great extent. The zero-rated supplies, reverse charge mechanism are a few transformations that have proved to be a boon for SEZs under the GST regime. Whereas DTA unit is exempted from CVD as it has been subsumed by the GST under the currently applicable tax regime.
However, GST laws have also brought forth several ambiguities. For instance, there is great ambiguity concerning the supply on which refund can be claimed. It is because refund claim of IGST paid or unutilized input tax credit can be claimed only for authorized operations and it becomes difficult to distinguish between the authorized and unauthorized operations. Further, as regards the reverse charge mechanism, it is unclear whether the refund can be claimed for the accumulated input tax credit for the services. Such ambiguities continue to baffle the stakeholders about the resultant applicability and exemptions. Therefore, for effectively securing the objective of GST law, the authorities should bring more clarification relating to such ambiguities.