TaxTMI 
TaxTMI 
TaxTMI 
Introduction: Each and every section in all tax laws are framed based on the intention of the legislature and this section is not an exception. However, it is highly unfortunate that this section is often misused by field formation with the sole objective to issue show cause notice raising arbitrary demands by borrowing a procedural requirement from SEZ Rules. Hence it was felt that there is a need to educate all tax professionals as well as tax officials with the message that a section should be interpreted in line with the intent and not as per the whims and fancies of the tax official, as such practice leads to quashing the order at a later date by the jurisdictional high courts.
Section 16 (1): In simple words all supplies towards physical exports as well as supplies to SEZ developer or SEZ unit by a DTA Unit are treated as zero rated supplies which facilitates such supplies without payment of any GST. This is applicable for supply of goods as well as services. This section was kept as above during 01/07/2017 till 30/09/2023. The law was amended with effect from 01/10/2023 to the effect that supplies to SEZ are treated as zero rated supply when the goods are services are supplied for authorized operations.
The message is that all physical exports of goods as well as services are zero rated always whereas, any SEZ supply is zero rated up to 30/09/2023 irrespective of whether such supplies are for authorized operations or not. However, there is a new requirement on SEZ supplies with effect from 01/10/2023 to ensure that such supplies to SEZ are for authorized operations. As the amendment made to section 16 (1) (b) with effect from 01/10/2023 is only prospective, the above views hold good, despite the fact that GST officials take a different view.
Section 16 (2): This sub section has been drafted in such a manner that the field formations have no scope to apply sub sections 1, 2, 3 and 4 of Section 17 of the CGST Act to deprive the GST exemption on zero rated supplies. The message derived from this sub section is that only sub section 5 of section 17 is to be considered and not all other sub sections for the purpose of denial of ITC. The ultimate message is loud and clear that all supplies towards exports as well as SEZ are exempt from GST but ITC is fully available with the one and only restriction as contained in 17(5) of the CGST act.
Section 16 (3): This sub section has to be applied for the period up to 30/09/2023 separately as this sub section was substituted with effect from 01/10/2023. Accordingly, for the period during 01/07/2017 till 30/09/2023, the exporter or DTA supplier had two options. The first one was to supply under bond or letter of undertaking and supply without payment of GST treating as zero rated supply and seek refund of unutilized ITC. The second option was to pay applicable IGST and seek full refund of such IGST on exports or SEZ supplies. Incidentally, it may be noted that these are options available to the supplier and the supplier was free to choose any one as per his requirements. However, it was also possible to avoid refund route and utilize the ITC against taxable supplies, if any.
This sub section was substituted on 01/10/2023 and now there is a requirement for the suppliers who seek refund of unutilized ITC to seek the refund in line with the provisions contained in section 54 of the CGST Act, 2017. The proviso to this sub section mandates that in case the export proceeds are not realized within the stipulated time as provided under foreign exchange management act, the refund amount has to be deposited with the Government with interest as per section 50 of the CGST act.
Section 16 (4): This is only enabling sub section giving powers to issue notifications on a class of persons making zero rated supplies with payment of IGST or a class of goods or services as the case may be. The amendment to section 16(4)(ii) with effect from 01/11/2024 is insignificant as it is only a reference to section 54 of the CGST act.
Section 16(5): This sub section was inserted with prospective effect on 01/11/2024 which stipulates that no refund is allowed when the goods supplied are subjected to export duty. It may be noted that Export duty in India is a tax levied on specific goods shipped out of the country, managed by the Central Board of indirect Taxes and Custom (CBIC) under the Customs Tariff Act, primarily used to conserve domestic resources (like iron ore) or meet local demand, rather than for revenue, as India generally promotes exports; it's a form of customs duty calculated on the goods' value, with rates varying by product, but GST makes most Indian exports zero-rated.
This is an attempt to explain the section in a lucid manner for the benefit of all concerned.
As this issue of over dependence on the requirement to obtain endorsement from SEZ officer as a condition mandatory to treat zero rated supply by the GST officials result in huge demand which are ultimately either set aside or even quashed when such issue reaches the jurisdictional high courts, the next article is on connected case law.