Are SEZ Units outside India or within India? -the paradox continues
A close examination of the Service Tax notification No 9/09 explained above, would certainly rake up the controversial issue again.
The following provisions of SEZ Act or Rules give the Special Economic Zones (SEZ Units or Developers) a status of territories outside India;
Sec. 2(m) stipulates that supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; would constitute export
Sec 7. Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by (i) a Unit in a Special Economic Zone; or (ii) a Developer; shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule.
Sec 51. (1) provides that the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.
Sec 53. A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations.
Rule 31 The exemption from payment of service tax on taxable services under section 65 of the Finance Act, 1994 rendered to a Developer or a Unit (including a Unit under construction) by any service provider shall be available for the authorized operations in a Special Economic Zone.
Rule 47. Sales in Domestic Tariff Area - (1) A Unit may sell goods and services including rejects or wastes or scraps or remnants or broken diamonds or by- products arising during the manufacturing process or in connection therewith, in the Domestic Tariff Area on payment of Customs duties under section 30.
Now the New Notification:
This notification again highlights the inconsistency among Central Excise Act, Finance Act, 94 and SEZ Act as to the treatment of SEZs.
Though this notification removes controversy regarding usage of services within the zone, now the controversy would be built around the very usage of services in relation to authorized operations.
The Service Tax notification 9/09 make it necessary the payment of service tax by the SEZ unit or Developer on the services they procure from DTA and then claim refund This is against the provisions of the SEZ Act (Section 7) and SEZ Rules (Rule 31).
The notification again leaves a doubt whether supplies to SEZ unit or developer constitute an export (this is again against the definition of Export given in SEZ Act).
The notification at Proviso (e) mentions that : no CENVAT credit of service tax paid on the specified services used in relation to the authorised operations in the Special Economic Zone has been taken under the CENVAT Credit Rules, 2004;
How will Cenvat provisions apply to the Units in SEZ (as they are treated as outside India and movement of goods or services into or outside the zone are governed by Customs provisions) . Further, what will the unit do with the Cenvat credit so taken? Can they use such credit earned? On clearances to DTA , the SEZ units are required to pay Customs Duties and not excise duties. And even Section 3 of the Central Excise Act excludes SEZs from the liability tom pay excise duty.
Now SEZ units/Developer are required to obtain Service Tax Registration and they are brought under the control of Central Excise officers. And automatically the AG audit will also sneak in.
The notification mentions that sanction of refund is subject to the “satisfaction” of the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, shall, that the said services have been actually used in relation to the authorised operations in the Special Economic Zone, refund the service tax paid on the specified services used in relation to the authorised operations in the Special Economic Zone;.
This provision will again lead to controversy. For example a rent-a-cab service can be interpreted as not being used in relation to authorized operations
Why do we put in so great efforts to make our laws so complicated? It would have been better to exempt the services provided to SEZ units treating them as exports (if the government so wants they can restrict extension of the export benefits to supplies to SEZ)
And of course there is the GTA angle. SEZ Unit/Developer availing GTA services are required to pay service tax under Sec. 68(2) and claim refund.
The whole purpose of this notification seems to be to remove the earlier restriction that the services should be consumed in SEZ only. Now that they are exempt irrespective of their place of usage, inside SEZ or outside SEZ , a blanket exemption to exempt the service providers may result in misuse by the service providers. So this model has been worked out to ensure that the services are not exempt in the hands of the service provider. He has to pay service tax even for services rendered to SEZs.