Ordinance to clear SEZ status under GST coming next week

The government will issue an Ordinance next week to clarify the tax-exempt status of units in special economic zones (SEZs) after the roll-out of the goods and services tax (GST).

An amendment will be made in the SEZ Act, 2005, to bring it in line with the GST architecture and is expected to help companies that have operations in more than one SEZ.

“We need to issue the Ordinance before the GST is in place from July 1,” said a senior government officer to Business Standard.

The official said though the dates for Parliament to convene on July 12 had been announced, the procedure would not conflict with legislative procedure. This is because the Ordinance is linked to the roll-out of the GST and so the government can argue it is necessary as an immediate legislative action.

At present, IT companies often serve their customers from multiple locations in more than one SEZ. It is a sound risk management policy but after the GST, the seller company will have two options unless the Ordinance comes in.

It can either bill the buyer with separate invoices from each location, or try to use a single invoice but then make each of its SEZ units raise internal invoices to a common billing location, which will then bill the customer. Tax experts like Rajiv Chugh, partner at Ernst and Young, said both the options were costly.

The government official said the Ordinance would make clear the tax-exempt nature of the SEZs. He also said the SEZ Act of 2005 predated the GST Acts and hence needed to be updated. This would ensure that companies will not need to register with each state government and file separate returns as separate cost entities.

Union Minister of State for Commerce Minister (independent charge) Nirmala Sitharaman has written to Finance Minister Arun Jaitley on spelling out the tax treatments SEZs and export-oriented units will have under the GST. At a seminar -- where she was present -- on the subject held at New Delhi-based Research and Information Systems for Developing Countries, it was pointed out that supplies to export-oriented units were exempt from central or state government taxes. It was argued that those exemptions should continue for at least three years, till the time the policies covering them were brought in line with the GST Acts and Rules. The Ordinance, by reiterating the tax-free nature of the SEZs, will ensure that supplies, including services, to them will remain exempt from the GST and will be treated as exports to a firm outside India. The import treatment has been streamlined by the government in the Integrated Goods and Services Tax Act.