The law has certain provisions related to the refund of unutilized input tax credit (ITC) on the supply of services to Special Economic Zones (SEZ).
- These provisions are mentioned in Section 26 of the Special Economic Zones Act, 2005, which states that units or developers in SEZ are exempt from paying any duties or taxes on goods or services procured from the Domestic Tariff Area (DTA) for authorized operations.
- Furthermore, Rule 30 of the Special Economic Zones Rules, 2006 mandates obtaining an endorsement for goods or services.
- Section 16(3) of the Integrated Goods and Services Tax (IGST) Act, 2017 enables registered individuals making zero-rated supplies to claim a refund of unutilized input tax credit on the supply of goods or services or both, without payment of integrated tax, under bond or Letter of Undertaking, according to Section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
- However, this refund is subject to specific conditions, safeguards, and procedures prescribed by the law. These provisions are put in place to govern the refund of unutilized ITC on the supply of services to SEZ, ensuring that it is done in compliance with the relevant laws and regulations.
- Section 16(1) of the IGST Act, 2017 outlines what a zero-rated supply constitutes. It includes the export of goods or services or both and the supply of goods or services or both for authorized operations to a Special Economic Zone developer or unit.
- Section 54(3) of the Central Goods and Services Tax (CGST) Act, 2017 specifies that a registered individual can claim a refund of any unutilized input tax credit in only two cases: zero-rated supplies made without payment of tax and where the credit has accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies (except for nil rated or fully exempt supplies) as notified by the Government on the recommendations of the Council.
- In addition, according to Section 54(4) of the CGST Act, 2017, the applicant seeking a refund must provide documentary evidence as prescribed to establish that a refund is due to them.
- These provisions outline the specific circumstances under which a registered individual can claim a refund of unutilized input tax credit and the necessary documentation required to support the refund claim. It ensures that the refund process is transparent and in compliance with the relevant laws and regulations.
- The second proviso to Rule 89(1) of the CGST Rules, 2017 specifies the process for filing a refund application in the case of supplies made to a Special Economic Zone (SEZ) unit or developer.
- According to the proviso, the application for refund shall be filed by the supplier of goods only after the goods have been fully admitted into the SEZ for authorized operations, as endorsed by the specified officer of the Zone.
- Similarly, the supplier of services must provide evidence regarding the receipt of services for authorized operations as endorsed by the specified officer of the Zone, along with the application for refund.
- The Explanation to Rule 89(1) clarifies that the “specified officer” refers to an officer defined under Rule 2 of the Special Economic Zone Rules, 2006, who is authorized to endorse the goods or services as required for claiming the refund.
- These provisions aim to streamline the refund process for supplies made to SEZ units or developers and ensure that the refund is granted only for authorized operations carried out within the SEZ.
- It also emphasizes the importance of proper documentation and endorsement by the specified officer to establish the validity of the refund claim.
The process for obtaining endorsement from the specified officer of the Special Economic Zone (SEZ) for receipt of services related to authorized operations, as required under the second proviso to Rule 89(1)
- To claim a refund of unutilized input tax credit (ITC) on the supply of services to Special Economic Zones (SEZ), it is necessary to obtain an endorsement from the specified officer of the SEZ regarding the receipt of services for authorized operations, as required under the second proviso to Rule 89(1) of the CGST Rules.
- While a functionality to facilitate the endorsement of procurement of goods by SEZ from the Domestic Tariff Area (DTA) was already available on the SEZ Online system, there was no such system to get endorsements regarding receipt of services. This became a hurdle in obtaining refunds for unutilized ITC.
- To address this issue, a new module called the “DTA Service Procurement Form (DSPF)” was introduced in October 2019.
- This module allows SEZ units and developers to record and submit details of all invoices pertaining to services availed from DTA suppliers as “Zero Rated Supply for Authorised Operations” on the SEZ Online system.
Working of Module
- The SEZ Online system now allows Units/Developers/Co-developers to submit details of service invoices received from DTA suppliers in a given month. Multiple invoices from different DTA suppliers can be uploaded in a single transaction and submitted to the DC Office for endorsement.
- The system also provides an upload macro which can be downloaded from (www.sezonline-ndml.com/Downloads/Manual & File Format / DTA Service Procurement Form /Version 1.0).
Features of DSPF Form
- You can upload multiple invoices issued by different DTA suppliers in a single transaction to SEZ Online system and submit it for review and endorsement by the DC Office.
- The entire process, including uploading DSPF and endorsement by SEZ officers, is conducted online, and an acknowledgement is sent to the registered email ID of the DTA service provider once the services procured by the SEZ unit are approved.
- An Excel template is available to fill in the necessary details, which must be attached with the DSPF form. After submission, the form is forwarded to the Authorised Officer (AO) for review and approval.
- The AO can either approve the form or refer it to the Specified Officer (SO) for review and approval.
Issues with DSPF
- SEZ online system, in a notice dated September 5th, 2019, mandated the submission of details of all service procurements through the DSPF form as a mandatory process for service procurement from October 2019.
- However, there is ambiguity regarding endorsement for services procured before October 2019. As per member feedback, it seems that certain jurisdictions are requiring units to provide DSPF endorsement for services availed between July 2017 and September 2019.
Issues in providing documents for approval of DSPF
- The implementation of DSPF has allowed SEZ units to obtain endorsement for services procured for authorized SEZ operations. However, these units receive a large number of invoices for services procured without GST payment.
- Additionally, a variety of documents and details are required to be submitted when applying through DSPF, such as the LUT number, tax invoice copy, invoice payment details, supplier information, and mapping of services with the authorized list of services issued by SEZ authority.
- However, suppliers often fail to provide LUT number details, leading to the need for rigorous follow-ups by SEZ units to obtain them.
- Furthermore, it is time-consuming for units to retrieve supplier invoice payment details from bank payment and ERP for each payment.
- If payment has not been made to the supplier, the unit cannot apply for DSPF, adding to their compliance burden.