Representation requesting for continuation of GST zero rated benefit for units in SEZ under DESH Bill

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Representation requesting for continuation of GST zero rated benefit for units in SEZ under DESH Bill

Tejasvi

@tejasvi

December 27, 2022

Public Policy

416

Special Economic Zones (SEZs) are viewed as engines of industrial and economic growth and play a critical role in the regional development of economies across the globe. SEZs have been developed by more than 140 economies around the world, almost three quarters of developing economies and almost all transition economies. Their number has grown rapidly in recent years, and at least 500 more are in the pipeline.

India was one of the first countries in Asia to recognise the effectiveness of the Export Processing Zone model in promoting exports, with Asia's first Export Promotion Zone (EPZ) set up in Kandla in 1965. The government, thereafter in 2000, announced the SEZ scheme with a view to attract foreign investments in India. SEZs were envisioned as tax-free enclaves within India's territorial borders, with varying regulations, fiscal incentives and access to better and more efficient infrastructure.

One major reason for growth of IT Industry in SEZs was availability of fiscal concessions and duty benefits under the Special Economic Zones Act, 2005 (SEZ Act) and rules thereunder. However, over a period, due to phasing out of tax concessions available to SEZ units, the number of units operating in SEZs have reduced significantly. In 2011, the government withdrew the exemption from Dividend Distribution Tax, while in 2012, the Minimum Alternate Tax exemption was withdrawn. Further, with the sunset of income tax holiday for SEZ units in March 2020, India’s software exporters may lose its competitive edge. Hence, there is a need for Government of India to re-look at extending a beneficial tax regime to set up operations in the development hubs.

Under S.26 of SEZ Act, both the SEZ developer as well as the SEZ Unit are eligible for "zero-rated" facility on procurement of goods / services for authorised operations (both import and domestic). With the implementation of GST in India, the same facility was extended under S.16(1) of Integrated Goods and Services Tax Act, 2017 (IGST Act) which provides for "zero-rated supply" to SEZ Developers and SEZ units. However, as per a media recent article in a leading business newspaper, we understand that facility of zero-rating may not be made available to units under the proposed Development of Enterprises and Services Hub Bill, 2022 (DESH Bill), including the existing SEZ units that will come under the ambit of DESH. This will result in hardships for the SEZ units.

SEZs are eligible for "zero rated" facility under the existing SEZ Act/Rules, even though there is a mechanism to file refund application. However, under the refund route, it generally takes 12-18 months for a unit/ entity to fulfil the requirements of law for claiming and receiving the refund. Elimination of "zero-rated supply" under the DESH bill would significantly increase working capital requirements and, as a result, the cost of finance for all exports from existing SEZs.

Hence, we have made a submission to Department of Commerce requesting them to continue with the current provisions which provide for "zero-rated supply to SEZ units and developers" under the proposed DESH Bill. This will provide relief to the taxpayers and will ensure certainty.

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Tejasvi

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