Refund of taxes charged on supplies to SEZ – Statutory Provision

Refund of taxes charged on supplies to SEZ: Section 54 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017 lays down the procedure to be followed for claiming refund of IGST paid on supplies made to SEZ.

Refund of taxes charged on supplies to SEZ

Statutory Provision

Section 54 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017 lays down the procedure to be followed for claiming refund of IGST paid on supplies made to SEZ. The Rules provide that the refund application should be accompanied by endorsement from the specified officer of the zone that the goods have been admitted in full in the SEZ for authorized operations or services have been received in the zone for authorized operations.

Implementation Challenge

While the specified officer can definitely endorse the fact that goods have been admitted to SEZ (based on delivery of goods into the zone), how can the officer endorse if such goods have been admitted for authorized operations. Additionally, how will the specified officer endorse the receipt of services / use of such services for authorized operations given that the services are intangible and could have been entirely performed outside the SEZ.

Tax Effect

  • The vendor claiming refund of taxes charged on SEZ supplies need to obtain a declaration from SEZ that the unit / developer has not availed tax credit of the taxes paid by the supplier. Since the invoices are uploaded online and there is a possibility of the SEZ inadvertently claiming credit of taxes charged by vendor at the time of filing the GSTR 2. The refund will in this case be denied in the hands of the supplier due to non compliance by the SEZ;
  • Additionally, refund will be allowed only if the supplies are used for “authorized operations”. The supplier is unaware of the use of his supplies by the SEZ and hence the obligation cast of the supplier when the manner of utilization of goods / services is with SEZ can create an issue for suppliers;
  • SEZ having non SEZ business may seek exemption of employee related ineligible credits like say rent a cab services by stating that such supplies are for their SEZ business and the supplier will have no way to cross check this claim.

Possible Solution

  • No. D12/19/2013-SEZ dated January 2, 2018. Hence, it is suggested that vendor obtains the list of goods / services approved for authorized operations (apart from default list) before making any supplies to SEZ (whether without payment of tax or on payment of tax);
  • It would be important to note that in case of services which are not forming part of the default list of services mentioned in the aforementioned list, the vendor should charge IGST unless the SEZ obtains approval from the Unit Approval Committee for such additional services as being used for authorized operations;
  • With respect to employee related services, it would be relevant to note that Rule 70 of the SEZ Rules, 2003 requires SEZ units to issue ID cards to their employees in Form K. The supplier can insist on the copy of the ID card as an additional proof that the supplies executed by them have been used by the employees of SEZ.

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