SEZ Migration to GST: Statutory Provision, Tax Effect, Possible Solution

SEZ Migration to GST: It is of paramount importance to understand the meaning of goods in any taxing statute related to goods. The meaning of goods is not the same for all the statutes. Many statutes have defined the term ‘goods’ in different manner. The levy of tax on goods is very old whereas levy of tax on services is very recent. Though the goods have been subjected to tax since ages, even today it is not free from litigation.

Statutory Provision

  • 1st proviso to Rule 8 of the Central Goods and Services Rules, 2017 provides that a SEZ unit / developer shall make a registration application for registration as a business vertical which will be separate from other units located outside the SEZ;
  • Application for registration under GST is required to be filed in Form GST REG 01. Sl No 12 and 13 of the Form requires the applicant to confirm if they are applying for registration as an SEZ unit / Developer and also asks for the details of the SEZ approval;
  • Section 7 of the Integrated Goods and Services Tax Act, 2017 provides that all the supplies of goods and services to SEZ would be treated as inter- State supplies and accordingly the same will be liable to IGST based on Section 5(1) of the IGST Act, 2017;
  • A supplier to SEZ is required to provide the GST Number of the customer while filing the returns of Outward Supply in Form GSTR 1. If the GST Number of the customer is registered as SEZ on the GST Portal, then based on the provisions of Section 7 of the IGST Act, 2017, the portal automatically treats the supply as inter state even though the supplier and the SEZ are located in the same State.

Implementation Challenge

  • The tax payers registered under the pre GST laws (Excise, VAT, Service Tax etc) were required to migrate into GST between January 2017 and March 2017 and obtain the GST Number;
  • The requirement of obtaining a separate business vertical registration was introduced in the Rules which were available in the public domain only in the month of June 2017. Further, the requirements in table 12 and table 13 where not available at the time of migration from the pre GST laws into GST and accordingly all the SEZ registrants were migrated as “Regular” registrants in GST;
  • The GST Portal recognized this issue – Self or based on recommendations received from various quarters based on which mails were received by certain SEZ from the GST Helpdesk to confirm if they were SEZ and if they would like to convert their registration type to “SEZ”. SEZ’s have responded to this mail but the registration type appearing on the portal has not been changed from “Regular” to “SEZ”.

Tax Effect

  • In case the supplier supplies the goods or services to SEZ on payment of tax then based on the provisions of Section 7 of the IGST Act, 2017, they are required to charge IGST and not CGST + SGST. However, since the GST portal does not recognize the customer as “SEZ” but recognizes it as a “Regular” tax payer, the supplier is unable to file the return by disclosing tax applicable as IGST.

Possible Solution

  • The supplier can chose Place of Supply as “097 – Other ” while uploading the returns based on which the type of supply will change from “Intra State” to “Inter State” on the basis that SEZ are territory outside India. However, this option has been provided to report transactions covered under Section 7(5)(c) ie Supply of Goods or services or both in the taxable territory, not being an intra state supply and not covered elsewhere in this Section and accordingly this work around would be incorrect;
  • Additionally, the SEZ will not be able to claim credit of the taxes charged since the place of supply is different from the location of the registration. This restriction of no credit when place of supply is different from the location of the registration is not provided for in the GST Law but is based on the limited experience of filing return of inward supplies in Form GSTR 2 where the portal did not allow for claiming of CGST portion of the Hotel Accommodation Charges when the location of the supply (being location of the hotel) was different from the location of the recipient (being place of registration of the recipient);
  • In the recently concluded meeting of GST officials at the office of one of the Industrial Associations in Maharashtra, it was informed that SEZ can approach their jurisdictional officers and inform them about the registration problem. The officers would in turn be required to contact GSTIN to update them on the issue and get the same resolved. We are not sure if this solution will work;
  • Recent update dated March 19, 2018 – News and Updates tab on the GST Portal provides that “taxpayers who have not migrated as SEZ, can send their request to become SEZ on the email reset.sezflag@gst.gov.in and attach the copy of Letter of Approval as SEZ unit / developer”

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