We wish to draw your
attention to the recent letter issued by an Authorized Officer, SEZ to few SEZ
units which refers to Instruction No. 95 dated June 11, 2019 and states that
facilities like cafeteria, crèche, gymnasium and similar facilities do not enjoy
any exemptions, drawback, concessions or any other benefits under the SEZ Act
and requires the SEZ Units to report compliance with the said Instruction by
identifying goods / services used exclusively or commonly for setting-up /
operation of said facilities.
The
letter from the AO specifically identifies services like Renting / Housekeeping
or maintenance as services which could have been used for setting-up /
operation of the aforementioned facilities but does not provide any mechanism
to bifurcate the services which are common used for the aforementioned
facilities and for conducting regular operations of export of goods / services
and hence the value of such services / goods in question on which SEZ benefits
are intended to be denied can be very high.
Background
to the aforementioned letter
Instruction No. 95
dated 11/06/2019 was issued by Ministry
of Commerce & Industry, SEZ Division directing DCs’ and UACs’ to
approve setting up of cafeteria, crèche, gymnasium and similar facilities for
the exclusive use of the unit with a condition that:
a. No exemptions, drawback, concession or any other benefit should be
claimed under Section 7 or Section 26 of the SEZ Act for creating and
operating such facilities; and
b. NOC to be obtained from Developer and necessary NOC/clearances/approvals
from relevant authorities;
Per the
above instruction, a unit can establish a cafeteria, crèche, gymnasium and
similar facilities for the exclusive use of the unit as per proviso to Rule
11(5) of the SEZ Rules only with the permission of DC/UAC and NOC of
Developer and will not be entitled to any tax benefits for setting up such
facilities.
Impact
on SEZ Unit:
1.
Can set-up and operate the
facilities as above viz., cafeteria, crèche etc;
2.
Any inward supply of
services or goods which bear a direct nexus with the above facilities will not
be considered for upfront exemption of supply without payment of IGST to
the SEZ unit (Eg. Gym & canteen equipment, gym instructor,
canteen & gym supplies, manpower supplies, maintenance services, leasing of
space etc.);
3.
Operating such facilities
and deriving revenue out of such operation would be made taxable. Special care
to be taken:
a.
In case of employee
recoveries for such facilities;
b.
Recovery of common costs
between entities;
c.
Rendering services to third
parties which do not qualify to be ‘authorised operation’.
Impact on Developer:
1.
Benefit of tax exemption
(GST) on output service (viz. leasing services) to SEZ unit for above
facilities is not available and hence taxable;
2.
Developer to keep a track
of all such cases where he has given approval to set up such facility including
cases where he has allowed the units in the past to ensure taxes are charged in
each such case.
Our Comments
The Instruction is not in
line with the objectives as well as the regulations of the SEZ Law and accordingly an appropriate response
needs to be filed before the Authorized Officer on various grounds including
1.
Instruction not in sync
with the Rule 11 of the SEZ Rules;
2.
Instructions going beyond
the SEZ Act;
3.
Highlight that SEZ Act has
not been amended to confer GST Exemptions and hence claiming of benefits under
GST does not come under the purview of the said instruction.
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