SEZ- LATEST WRITE UP (E/N 17/2011)

What do you mean by SEZ (Special Economic Zone)? In simplest words, a Special Economic Zone (SEZ) is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws. "Nationwide" laws may be suspended inside a special economic zone. What are governing act and rules? Principally, SEZ is governed by SEZ Act, 2005 (alongwith related rules). What activities are allowed to SEZ unit? Principally, SEZ unit do manufacturing or service operations from SEZ. However, trading is also permissible. The operations, which a unit can perform from SEZ, are referred as Authorized Operations. Whether SEZ unit can carry out domestic operations also from SEZ? If yes, whether even domestic operations are free from tax burden? Yes, SEZ can carry out domestic operations from SEZ, e.g., SEZ unit can also sell goods manufactured by it into DTA. But, such goods are not kept free from tax burden (as keeping them tax free will put DTA Units into loss it will be unfair for them) rather such goods suffer import duty in hands of buyer. [Similarly, if SEZ unit perform some service in India, then such service will suffer ST liability in hands of SEZ unit] Following chart, will explain this: SEZ Unit manufacturing Excisable Goods in India

INDIA Yarn ------------- > Fabric

[Produced/mfd]

No ED Liability
[Excluded from Charging Sec 3 of CEA, 1944]

Export to USA
No ED

Sold In DTA

No ED [However, goods will suffer ID in hands of Buyer]

SEZ Unit providing taxable services INDIA ------------------- > Taxable Sr

[Sec 65(105)]

Provided in USA
ST not payable [Sec 66 read with Sec 64 of FA, 1994]

Provided In DTA
ST payable [Sec 66 read with Sec 64 of FA, 1994] [Unlike Excise, Sec 66 does not provide for exclusion of SEZ unit]

In principal, if a unit intends to carry on Authorized operations, then it shall not go for SEZ option. It shall operate from DTA only (no need to pay premium prices for property in SEZ). If a unit intends to do exports, then it shall set up its unit in SEZ (as various benefits including Income Tax exemption u/s 10-A shall be

available to SEZ Unit). It a unit intends to carry out both domestic as well as exports, then it shall set up separate units one DTA unit and another SEZ unit. Before we proceed with E/N 17/2011, let us fix in mind: An entity operating only from SEZ will be referred as STAND ALONE SEZ UNIT. A entity operating from SEZ as well as DTA will be referred as NON-STAND ALONE UNIT. What principally is E/N 17/2011? SEZ unit does export operations from SEZ. To facilitate them, supply of goods and services shall be made tax free. SO far as supply of goods is concerned, supply of goods by DTA unit to SEZ unit is treated as Export [CBEC Circular], and thus, supplier is entitled to supply them tax-free [either in terms of Rule 19 or Rule 18 of CER, 2002] There was lack of clarity as to status of supply of services by DTA unit to SEZ Unit. Now, E/N 17/2011 has been issued exempting such services from payment of ST. [Student shall note that unlike supply of goods in
excise, services provided to SEZ shall be exempted services and not export service]

What is special in E/N 17/2011? The manner of provisioning of exemption 17/2011 is unique in itself. Generally, any exemption can be granted in following 2 manners:
1 Manner of granting Exmp Direct Exemption [Upfront Exemption] Indirect Exemption [Exemption by refund route] Mode of operating exemption Service provider claim this exemption and thus, he does not charge ST in the bill- Sr receiver pay only service charges Service provider does not claim this exemption (rather, service receiver claim this exemption) and thus, Service provider charge ST in the bill- Sr receiver pays service charges along with STService provider pays ST to CGService receiver claims refund of ST from CG Most of ST exemptions are direct exemption E/N 17/2011 is indirect exemption.

2.

What is the manner of operation of E/N 17/2011? The manner of provisioning of exemption 17/2011 is unique in itself. Principally, it is an indirect exemption (i.e., SEZ first pays ST, then claims the refund from CG). Still, in respect of services wholly consumed in SEZ, SEZ has option to get the service ST free. Summarizing:
1 Status of service received by SEZ Wholly Consumed in SEZ Mode of operating exemption Direct Exemption [Upfront Exemption] Indirect Exemption [Exemption by refund route] What SEZ shall do? Declaration in Form A-1 is required to be produced, to a service provider, to claim upfront exemption SEZ shall claim refund of ST paid. The admissible refund shall be: (i) 100% (if SEZ is a stand-alone unit) (ii) Proportionate to Export Turnover of SEZ (if SEZ is a non-standalone SEZ and service is shared service with DTA unit)

2.

Other cases (i.e., when service is not wholly consumed in SEZ)

Let us see legal text of the notification:

E/N 17/2011- ST 1. Any taxable service, received by a Unit located in a SEZ or Developer of SEZ for the authorised operations,

shall be wholly exempt from ST.

2. The exemption contained in this notification shall be subject to the following conditions, namely: (a) The exemption shall be provided by way of refund of ST paid on the specified services received for the authorized operations in a SEZ:

Provided that where the specified services received and used for authorized operations are wholly consumed within the SEZ, the provider of such services or the receiver of such services on reverse charge basis, as the case may be, has the option not to pay ST ab initio instead of the Unit or Developer claiming exemption by way of refund in terms of this notification. Explanation.- For the purposes of this notification, the expression WHOLLY CONSUMED refer to following taxable services, received by a Developer or Unit of a SEZ, for the authorized operations, namely:
i) ii) iii) Services listed in Rule 3(i) of Export of Service Rules, 2005 Services listed in Rule 3(ii) of Export of Service Rules, 2005 Other Services when used in relation to immovable property situated within SEZ when wholly performed within SEZ when provided to Developer or SEZ unit who does not own or carry on any business other (i.e., when SEZ is a standthan the operations in SEZ SEZ
alone SEZ)

(b) for the purpose of claiming exemption, the Developer or Unit of SEZ shall obtain a list of taxable services as are required for the authorised operations approved by the Approval Committee (hereinafter referred to as the specified services) of the concerned SEZ; (c) the Developer or Unit of SEZ who does not own or carry out any business other than SEZ operations, shall furnish a declaration to that effect in Form A-1, verified by the Specified Officer of the SEZ, in addition to obtaining list under condition (b) above, for the purpose of claiming exemption; (d) Where the specified services received by Unit or Developer, are not wholly consumed within SEZ, i.e., shared between authorized operations in SEZ Unit and Domestic Tariff Area(DTA) Unit, Refund shall be restricted to the extent of the ratio of export turnover to the total turnover for the given period to which the claim relates, i.e.,
Max Refund = ST paid on specified services used for SEZ Authorized operations shared with DTA unit for the period Export Turnover of SEZ unit for the period Total Turnover for the period

Explanation.- For the purposes of condition (d),(1) "Total Turnover" means the sum total of the value of,(i) all output services and exempted services provided, including the value of services exported; (ii) all excisable and non-excisable goods cleared, including the value of the goods exported; (iii) bought out goods sold, during the period to which the invoices pertain and the exporter claims the facility of refund under this notification. (2) "TURNOVER OF SEZ UNIT" shall mean the sum total of the value of final products and output services exported during the period of which the invoices pertain and the exporter claims the facility of refund under this notification;

(e) Any Developer or Unit of SEZ claiming the exemption shall declare that the specified services on which exemption and/ or refund is claimed to have been actually used for the authorized operations; (f) The Developer or unit of SEZ claiming the exemption, by way of refund has actually paid the amount indicated in the invoice, bill or as the case may be, challan, including the service tax payable, to the person liable to pay the said tax or the amount of service tax payable under reverse charge, as the case may be, under the provisions of the Finance Act; (g) No CENVAT credit of service tax paid on the specified services used for the authorized operations in a SEZ has been taken under the Cenvat Credit Rules, 2004; 3. The following PROCEDURE should be adopted for claiming the benefit of the exemption contained in this notification, namely:

(a) The Developer or Unit of a SEZ, who has paid the service tax under sections 66 of the Finance Act, shall avail the exemption by filling a claim for refund of service tax paid on specified services used for the authorised operations; (b) the Developer or Unit of a SEZ who is registered as an assessee under the Central Excise Act, 1944 or the rules made there under, or the said Finance Act or the rules made there under, shall file the CLAIM for refund to AC/DC, having jurisdiction over the SEZ or registered office or the head office of the Developer or Unit, as the case may be, in Form A-2; (c) The Developer or Unit of a SEZ who is not so registered under the provisions referred to in clause (b), shall, before filing a claim for refund under this notification, file a DECLARATION with the AC/DC, having jurisdiction over the SEZ or registered office or the head office of the Developer or Unit, as the case may be, in Form A-3; (d) AC/DC, shall, after due verification, allot a service tax code number to the Developer or Unit of SEZ, referred to in clause (c), within 7 days from the date of receipt of the said declaration, in Form A-3; (e) Claim for refund shall be filed, within 1 year from the end of the month in which actual payment of ST was made by such developer or unit to the registered service provider or such extended period AC/DC, shall permit; (f) the refund claim shall be accompanied by specified documents.

Diagrammatically: Specified services received by SEZ Unit for authorized operations in SEZ Wholly consumed in SEZ
[Within the meaning of Expl in Condition 2(a)] [Exemption by refund route]

Other cases

Upfront exemption [SP will not charge ST in invoice] Stand-alone SEZ

100% Refund

Non-stand Alone SEZ Shared Service

100% Refund

Not shared Service

Proportionate refund

Following clarifications by CBEC are also worth noting in this respect: Circular No 142/11/2011 - ST., Dated: May 18, 2011 QUESTIONS 1. (i) In the notification, what is the treatment for service tax paid on taxable services which do not fall in the category of wholly consumed services, and also are not shared services? Is refund available? (ii) Whether in the case of category (iii) services referred in paragraph 2(a) of the notification, proportionate refund applies to only shared services i.e. services that are used both for SEZ (Special Economic Zone) authorised operations as well CLARIFICATIONS In Paragraph 2, conditions attached to this exemption are prescribed. In terms of paragraph 2(a), refund route is the default option for all who intend to claim the exemption granted by the notification in its first paragraph. However, an exception is provided in the form of ab initio (upfront) exemption, to the wholly consumed services. Services which fall outside the definition of wholly consumed services can be categorized as those which are used exclusively by the SEZ Unit/Developer, for the authorized operations in SEZ or shared with DTA operations. Para 2(d) of the notification is applicable to refund arising from SHARED SERVICES only. Thus exemption to services exclusively used for the authorised operations of SEZ Unit/Developer, will continue to be available by way of refund, as specified in paragraph 2(a) itself, subject to other conditions.

as DTA (Domestic Area) operations? 2.

Tariff

Meaning of the expression who does not own or carry on any business other than the operations in the SEZ appearing in paragraph 2(a)(iii) of the notification, which creates a difference between standalone and nonstandalone SEZ Unit/Developer, may be clarified. Meaning of the expression total turnover found in paragraph 2(d) of the notification is not clear: whether it refers to turnover of SEZ Unit or the entity (including DTA and SEZ Unit). This may be clarified. Whether proportionate amount of service tax paid on shared services that have not been refunded after applying the formula in paragraph 2(d), shall be available to the DTA Units of the entity as cenvat credit?

The expression refers to an entity which is carrying out business operations in SEZ and also DTA. Merely having an office in the DTA for purpose of liaison/business promotion, does not restrict a SEZ Unit from availing benefit extended to a standalone unit.

3.

Total turnover includes turnover of DTA Unit and also export turnover of SEZ Unit. This is the way to calculate proportionate refund.

4.

Yes. Available.