This note briefly sets out the impact of amendment to section 16 of IGST Act, 2017 which sets out the meaning of ‘zero rated supply’ under GST.
1) SECTION 16 OF IGST ACT, 2017 – PRE-FINANCE BILL, 2021
1.1 EXTRACT OF SECTION 16 OF IGST ACT, 2017
“16. (1) “zero rated supply” means any of the following supplies of goods or services or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit. …”
2) SECTION 16 OF IGST ACT, 2017 – AS PER FINANCE BILL, 2021
2.1 EXTRACT OF SECTION 16 OF IGST ACT, 2017 AFTER THE PROPOSED AMENDMENT
“16. (1) “zero rated supply” means any of the following supplies of goods or services or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit. …”
3) ANALYSIS
The Finance Bill, 2021 seeks to amend the IGST Act, 2017 to exclude, supplies made to SEZ units and/or SEZ Developers for any purpose other than its authorised operations from the scope of ‘zero rated supply’.
Though this change appears to be major, the effect of this would be rather limited, if the entire scenario of supplies made to SEZ units and/or SEZ Developers is examined.
Even while the section 16 of IGST Act, 2017 was silent on whether distinct treatment should be made to supplies to SEZ unit/SEZ developers for:
- authorised operations or,
- purposes other than authorised operations
the rules made under the GST laws was framed in a manner that implied that the supplies made to SEZ Developers/ SEZ units covers only those supplies used for authorised operations. This can be inferred by referring to the following rules:
- Second proviso to Rule 46 – Tax invoice
- Clause (a) and clause (b) of sub-rule (1) of rule 89 – application for refund of tax, interest, penalty, fees or any other amount
- Clause (e) of sub-rule (2) of rule 89 – application for refund of tax, interest, penalty, fees or any other amount – Documentary evidence
[Note: The extract of the aforementioned rules are reproduced under Annexure 1]
4) AMBIGUITIES ADDRESSED THROUGH THE AMENDMENT
The fact that there was no inherent condition inbuilt in section 16 of IGST Act to classify supplies to SEZ Developers/ SEZ units for purposes other than authorised operations from zero rated supply created ambiguity in the following areas:
4.1 Reversal of ITC under Section 17 of CGST Act on account of exempt supplies/non-business use
As per section 17(2) of CGST Act, 2017, zero rated supplies are included in taxable supplies for the purpose of ITC reversal computations. Prior to the change made to zero rated supplies, all supplies made to SEZ Developers/ SEZ units where being considered as ‘zero rated supplies’ by majority of the taxpayers.
The amendment sought by the Finance Bill, 2021 removes this ambiguity, or rather loophole, and ensures that only supplies to SEZ Developers/ SEZ units for its authorised operations enjoy the benefit of being included as taxable supply while computing ITC reversal on account of exempt supplies.
This is likely to increase the ITC reversal of taxpayers who are supplying exempted goods to SEZ Developers/ SEZ units
4.2 Endorsement on the invoice
The Tax invoice Rules required taxpayers to have a declaration on the invoices issued to SEZ units and SEZ Developers which state that the supply was meant for ‘Authorised operations’ of the SEZ unit or SEZ Developers.
Since supplies for purposes other than authorised operations are sought to be kept outside ‘zero rated supply’ as per the Finance Bill, 2021, the taxpayers can raise a general invoice without such declarations for supplies made to SEZ Developers/ SEZ units for any purpose other than Authorised operations. Though this stand may not be different from what might have been adopted by some taxpayers, the proposed amendment does bring more clarity to the issue.
5) AREAS WITHOUT CHANGES – AFTER AMENDMENT
It is also important to note that the proposed amendment has not made any changes to the following:
5.1 Nature of supply
The changes proposed by the Finance Bill, 2021 seeks to differentiate supplies to SEZ into:
- Supplies to SEZ unit / SEZ Developers for authorised operations
- Supplies to SEZ unit / SEZ Developers for any purposes other than authorised operations
The supplies for authorised operations would fall within the scope of ‘zero rated supply’ while the remaining would fall outside it. Those supplies made to SEZ unit/ SEZ developers for purposes other than authorised operations is envisaged to be treated on the same lines as a ‘normal supply’. However, due to the reason that
section 7(5)(c) of IGST Act, 2017 is not amended / proposed to be amended by Finance Bill, 2021, the supplies made to SEZ unit/ SEZ Developer would continue to be treated as an Interstate supply irrespective of the fact that the supply was for authorised operations or not.
This leads to a situation where the supplies to SEZ Developers/ SEZ units for purposes other than authorised operations would be treated as an Interstate supplies but not falling within ‘zero rated supplies’.
5.2 Refund
Refund for supplies made to SEZ was allowed only when they were made for authorised operations even prior to the Finance Bill, 2021. The Amendment sought by the Finance Bill, 2021 only make this clearer and firmer by inserting the restriction in the Act itself.
6) PERTINENT POINT TO BE BORNE IN MIND
6.1 Supplies made to SEZ Developers/ SEZ units treated as zero rated supplies by supplier but is not for authorised operations
The Finance Bill also envisages to remove the choice of the registered persons to opt between:
- zero rated supplies with payment of tax and,
- zero rated supplies without payment of tax (LUT)
unless notified separately.
The general mode available to taxpayers making supplies to SEZ Developers / SEZ units would be ‘without payment of tax under LUT’. In cases where the supplier considers the supplies made to an SEZ Developer/ SEZ unit to be a zero rated supply while the same is not used for authorised operations, this would lead to a case where the taxpayer has no choice but to pay the tax on such supplies along with interest.
In order to avoid any issues arising on account of the above, It is advisable to obtain a declaration from the SEZ Developer/ SEZ Unit stating that the supply is used for the authorised operations only. it is also advised to have an indemnity clause added to the terms of engagement between the supplier and the SEZ Developer/ SEZ Unit, if the supply is being is later found to be used for a purpose other than authorised operations.
7) CONCLUSION
- Supplies to SEZ units and SEZ developers for authorised operations as well as non-authorised operations would continue to be treated as interstate supply irrespective of the location of the supplier.
- IGST would be applicable in case the supply involved is taxable.
- The proposed amendment to section 16 of IGST Act, 2017 does not affect the refund availability/ procedure followed prior to the amendment.
- The CGST Rules in respect of refund presently restricts refund on account of supplies made to SEZ Developers/ SEZ units for any purpose other than authorised operations. This restriction is now sought to be incorporated in section 16 itself for better clarity.
- There used to be ambiguity on the treatment of supplies to SEZ unit/SEZ Developers for purposes other than Authorised operations during application of ITC reversals under section 17(1) and 17(2) of CGST Act.
- The proposed amendment seeks to exclude supplies to SEZ Developers/ SEZ units from ‘zero rated supply’. The taxable value for the purpose of ITC reversal mentioned above includes ‘zero rated supply’. Post amendment of section 16, ITC reversal should also be made in respect of exempt supplies made to SEZ Developers/ SEZ units, if the same are not made for authorised operations.
- There was a certain amount of ambiguity on the declaration to be mentioned in invoice to be issued for supplies made to SEZ Developers/ SEZ units for purposes other than authorised operations. Though the amendment to section 16 does not specifically deal with this issue, this amendment seems to imply that such supplies should be treated as normal supplies (subject to nature of supply being ‘Interstate’, since the section 7 of IGST Act, has not been amended) and there would not be any declaration mentioned in the invoice.