For a while now, questions have been mounting as to whether the Free Trading and Warehousing Zones (‘FTWZs’) conceived under the Special Economic Zones Act, 2005 (‘SEZ Act’) can be treated as a ‘bonded warehouse’ as defined under the Customs Act, 1962 (‘Customs Act’). This question is pertinent, as it is standard practice in trade for goods to be bought and sold within FTWZ premises, often changing multiple hands, before they are either exported therefrom or cleared to the Domestic Tariff Area (‘DTA’).
If the answer to the question above is yes, such transactions would not be liable to IGST until they are cleared to the DTA. There have been divergent rulings on this issue by multiple Authorities for Advance Ruling (‘AAR’).
For instance, the AAR, Tamil Nadu in the case of Haworth India - 2023 (79) GSTL 493 answered the question in the negative, holding that these transactions would attract IGST. However, a diametrically opposite view was taken in Panasonic Life Solutions India - 2024 (8) TMI 695, as upheld by the Appellate Authority for Advance Ruling (‘AAAR’), Tamil Nadu in 2024 (12) TMI 1220, to the effect such transactions shall not attract IGST. The AAR, Telangana in AIE Fiber Resource and Trading (India) - 2021 (12) TMI 1265 also answered the question in the affirmative, holding that such transactions are not liable to IGST.
While these decisions are confined in application to the respective assessees, it seems like the question of law at large may finally be put to rest, in the light of retrospective amendments proposed by the GST Council in its 55th Meeting dated 21 December 2024, seeking to provide that these transactions will not be liable to IGST.
The conflict
Section 7(5)(b) of the IGST Act, 2017, provides that ‘supply’ made by or to an SEZ Unit attracts IGST. As per Section 2(n) of the SEZ Act, an FTWZ Unit is an SEZ Unit. Thus, a view was possible that transactions occurring between these FTWZ Units (whether or not in the same SEZ) were liable to payment of IGST.
Section 2(21) of the IGST Act, 2017 borrows the definition of ‘supply’ as under the CGST Act, 2017. Schedule III of the CGST Act, 2017 enumerates transactions that are treated neither as a supply of goods or of services. As per paragraph 8(a) therein, supply of ‘warehoused goods’ to any person before clearance for home consumption (i.e., before clearance to the DTA) is not treated as supply under GST law. FTWZs are ultimately enclaves where mainly trading and warehousing activities are carried on.
Thus, a question arose as to whether supply made within FTWZs would be liable to payment of IGST by virtue of Section 7(5)(b) of the IGST Act, or be exempt by virtue of paragraph 8(a) of Schedule – III of the CGST Act.
From a perspective of strict interpretation, there are a few challenges in stating that these transactions are exempt supplies:
- Explanation 2 to Schedule III of the CGST Act, 2017 states that the words ‘warehoused goods’ shall have the same meaning as assigned to in the Customs Act;
- Section 2(44) of the Customs Act defines ‘warehoused goods’ as ‘goods deposited in a warehouse’. Further, Section 2(43) defines ‘Warehouse’ to mean either a public, or private, or special warehouse as contemplated by the Customs Act;
- an FTWZ Unit does not fall within any of these definitions, failing express registration under the appropriate provisions of the Customs Act with a license to that effect being issued by Customs authorities. In such a case however, there would be no need to wrestle with the definitions described above.
For all the above reasons, the AAR, Tamil Nadu held in Haworth India (supra) that an FTWZ is not a ‘bonded warehouse’ and thus, transactions occurring within would not be exempt from the purview of supply but attract applicable IGST.
However, it is interesting to examine the reasoning of the AAAR, Tamil Nadu in Panasonic Life Solutions India (supra) in holding that such transactions are not liable to IGST. These are broadly captured below:
- As per Rule 22 of the SEZ Rules, 2006 (‘SEZ Rules’), every SEZ is required to execute Bond-cum-Legal Undertaking (‘BLUT’) in Form ‘H’ of the SEZ Act and submit the same with Customs authorities to avail the benefit of duty-free import contemplated in Section 26 of the SEZ Act.
- The above procedure is necessary since the exemptions under Section 26 of the SEZ Act relate to the duty charged by Section 12 of the Customs Act. Thus, the fact that the BLUT form is accepted and signed by Customs authorities is evidence that the procedural requirements under the SEZ Act and the Customs Act travel together without any inconsistency.
- The allotment of eight-digit warehouse code for Customs Bonded warehouses is also extended to warehouses under SEZ/FTWZ as well, lending support to the synchronicity between the two legislations stated above.
- While the limited definition of ‘Warehouse’ under the Customs Act poses challenges, it is quite natural that the definition would be designed to serve the purpose of the Customs Act and not any other Act or situation. This is precisely the reason that Section 51 of the SEZ Act provides for overriding effect over any other law, addressing any anomalies in this regard.
- The form of BOE filed for importing goods into an FTWZ is in any case a Bill of Entry for Warehousing as per the recitals in the form of such BOE itself.
- Thus, an FTWZ being a bonded premises providing warehousing facility, is much in parity with bonded warehouses under the Customs Act. This warrants treatment of FTWZs at par with bonded warehouses.
While the ruling in Panasonic Life Solutions adopts a purposive approach to conclude that such supplies are exempt, adopting a strict construction may raise eyebrows, as the question of law at large remains unsettled.
Resolution
The GST Council in its 55th meeting held on 21 December 2024 has proposed amendments to Schedule-III of the CGST Act to insert paragraph 8(aa), clarifying expressly that transactions occurring within FTWZs prior to clearance to the DTA shall be exempt supplies. Further, this change, if incorporated into the statute is to operate retrospectively from 1 July 2017.
Thus, this is a welcome move providing clarity and boosts ease of doing business, since assessees will now have certainty over whether these standard trade practices are liable to IGST.
[The authors are Executive Partner and Senior Associate, respectively, in Customs practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]
