FTWZ

Taxability of Services provided from the Special Economic Zone/Free Trade Warehousing Zone from the GST perspective would be prone to litigation.  This is due to the absence of specific exemption from GST on services provided from the Special Economic Zone/Free Trade Warehousing Zone.

Special physical concessions have been extended to special Economic Zone in Section 26 of the Special Economic Zones Act, 2005. 

 Section 26 (1)(b) grants exemption from any duty of customs under the Customs Act 1962 or Customs Tariff Act 1975 or any other law for the time being in force on goods exported from, or services provided from a Special Economic Zone or from a unit to any place outside India.

Definition of service contained in the Special Economic Zone Act, 2005 is completely different from the definition contained in the Central Goods and Service Tax Act 2017. 

As per Special Economic Zones Act 2005 as long as an activity covered under the General Agreement on Trade in Services Annexed as IB to the agreement made in the World Trade Organisation concluded on 15th April 1994 or any other service as may be prescribed by the Central Government and earn foreign exchange would be treated as a service. 

The definition of export of service contained in the Special Economic Zone Act 2005 is also completely different from the definition of Export of Service contained in the Integrated Goods and Service Tax Act 2017. 

As per the SEZ Act 2005, a service will be treated as exported as long as the service is provided from an SEZ in India to a recipient located outside India. 

Export as per the definition also includes supplying services from a Domestic Tariff Area to an SEZ unit or a developer or supplying services within SEZ zone by one unit to another. 

Whereas under GST the definition of service is very wide and the definition of export of service would mean supply of any services where the service provider is located in India, the recipient is located outside India, the place of supply is outside India and fee for the service is received in convertible foreign currency. 

Thus, an additional condition relating to place of supply has to be fulfilled for a service to be treated as an export of service under GST law, whereas that condition is not required to be met under SEZ Act, 2005 for a service rendered from an SEZ zone to be treated as exported. 

The absence of specific provision for GST exemption in Section 26 of the SEZ Act, 2005 would unnecessarily result in litigation as the GST authorities may want to treat services provided from an SEZ zone on par with services rendered from Domestic Tariff Area and deny an exemption for the services rendered from an SEZ zone if the place of supply condition is not met. 

This would be in spite of clear provision under Section 51 of the SEZ Act, 2005 which states that the provisions of the SEZ 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. 

Therefore, it follows that the inconsistency in treating export of service/definition of service between SEZ Act and the IGST Act 2017 is answered by Section 51 of the SEZ Act, 2005 mentioned above. 

Nevertheless, department in the past under Service Tax has issued Show Cause Notices demanding Service Tax on Cargo Handling and Warehousing Services provided to foreign customers from FTWZ not-withstanding that such services meet the definition of service and export of service as contained in SEZ Act, 2005 which governs the activities of FTWZ. 

This is because the department took a stand that Cargo Handling & Warehousing services are rendered in India and therefore taxable not-withstanding that the customer is located outside India and the fee for the same is received in convertible foreign currency. 

The divisional bench of Central Excise & Service Tax Appellate Tribunal Chennai had an occasion to deal with this issue extensively in the case of Broekman Logistics India Pvt Ltd as reported in Final Order No. 40356/2020 and ultimately held the matter in favour of the company holding that no Service Tax is payable on cargo handling & warehousing services from an FTWZ. 

Another bench of Central Excise & Service Tax Appellate Tribunal held in the case of Cybercom Datamatics Information Solutions Ltd as reported in 2018-TIOL-410-CESTAT-MUM took a similar view.

However, several notices issued on the same issue to many other assesses operating out of FTWZ is still pending adjudication. 

At least under GST the assesses should not be left to interpreting by taking shelter under the definition of service, export of service and Section 26(1)(b) of the SEZ Act 2005 to claim rightful exemption. 

Instead, Government should consider amending Section 26 of the SEZ Act, 2005 to provide a specific exemption to services rendered from an SEZ to foreign customers where a fee for the same is received in foreign currency is exempt.   This would encourage more service providers to come to FTWZ and encourage inbound investments into India. 

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