Requirement of Legal undertaking in SEZ – Statutory Provision

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Requirement of Legal undertaking in SEZ under GST: The students are expected to gear up to enhance their perceptive knowledge and involve in capacity building initiatives. They must make the best use of this opportunity to augment their professional ambit in future under indirect taxes. GST is subject to constant refinement through new rules and updated Notifications as well as Circulars.

Requirement of Legal undertaking in SEZ under GST

Statutory Provision

Section 16(1) of the IGST Act, 2017 provides that supplies to SEZ units and developers will be treated as zero rated. Further Section 16(3) of the IGST Act, 2017 provides that the supplier will have two options to claim refund for supplies made to SEZ units and developers..

  • Option 1 – Refund of unutilized credits provided supplies are made under bond / Legal Undertaking
  • Option 2 – Refund of IGST charged on supplies made.

Rule 96A(1) r/w Rule 96A(6) of the CGST Rules, 2017 provides that any person availing the option to supply goods / services to SEZ without payment of IGST shall furnish, prior to such supply, a bond / legal undertaking binding himself to pay the tax along with interest if the payment for such services is not received within 1 year + 15 days from the date of invoice or if the goods are not exported within 3 months + 15 days from the date of the invoice.

Implementation Challenge

  • Section 16(3) of the IGST Act, 2017 provides for execution of Bond / Legal Undertaking only in a case where the supplier to SEZ intends to supply goods / services without payment of tax and claim refund of the unutilized input tax credit;
  • However, Section 96A(1) r/w Rule 96A(6) of the CGST Rules, 2017 which deals with refund of taxes provides for execution of LUT in case of supplies to SEZ without payment of duty even when the supplier does not file claim for refund of unutilized input tax credit.

Tax Effect

  • Based on the CGST Rules, the tax payer is required to execute LUT / Bond for the purpose of supplies to SEZ, though there is no requirement under the Act;
  • Execution of LUT / Bond comes with an indirect compliance of annual renewal (which is again coming out of various circulars and the online application form for LUT available on the GST portal and from the law) and also requires the supplier to ensure that supplies of services are realized or goods are exported within prescribed time;
  • In case the supplier is unable to meet the prescribed time line for export of goods or realize the export proceeds in case of services, then as per Rule 96A(3) of the CGST Rules, 2017, the facility of the LUT / Bond would be withdrawn and the tax payable on such supplies would be recovered with interest;
  • Additionally, Rule 96A(4) provides that the facility of LUT / Bond will be restored upon payment of tax dues and interest. This would mean that in case the supplier has missed tracking payment of say a particular invoice which was outstanding for more than a year and realizes the same only after say 3 years then his facility of LUT / Bond is withdrawn at the expiry of the 1st year and all the exports made by him in the next two years will be liable to GST. This could prove dangerous to suppliers of SEZ.

Possible Solution

  • Execution of LUT / Bond has been held to be procedural even in the excise laws where there was a requirement to furnish a Legal Undertaking for export of goods without payment of excise duty on manufactured goods. The same principle can be applied here;
  • Circular No. 37/11/2018-GST dated March 15, 2018 in the context of refund of unutilized input tax credit with respect to export of goods without payment of IGST provides relaxation in case of delay in furnishing of LUT and provides that “The delay in furnishing of LUT in such cases may be condoned and the facility for export under LUT may be allowed on ex post facto basis taking into account the facts and circumstances of each case”

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