Everything You Need to Know About Special Economic Zones (SEZ) Under GST
Learn about Special Economic Zones (SEZ) under GST, including registration requirements, tax implications for supplies to and from SEZ units, refund mechanisms, reverse charge implications, and the interaction between the SEZ Act and GST laws.
Introduction
Special Economic Zones (SEZs) were introduced as part of India’s export promotion strategy under the SEZ Act 2005. Unique regulations govern these designated areas to promote foreign exchange inflow, employment generation, and industrial growth. SEZs enjoy various fiscal and tax benefits, including zero rating under GST. However, the interplay between the SEZ Act and GST has introduced several complexities, which this blog aims to simplify.
Key Aspects of SEZs Under GST
1. Registration
Entities operating in Domestic Tariff Areas (DTA) and SEZs in the same state must obtain separate GST registrations. Under Section 25 of the CGST Act, this requirement ensures that inter-unit supplies, even without consideration, are taxable. However, it increases compliance responsibilities, including return filings and audits.
2. Taxability of Supplies by DTA Units to SEZ Units
Supplies made by DTA units to SEZ units are classified as inter-state supplies under Section 7 of the IGST Act and are subject to IGST. However, to ease compliance, such supplies are treated as zero-rated supplies under Section 16 of the IGST Act.
Suppliers can:
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Supply goods or services without payment of IGST under a Bond or Letter of Undertaking (LUT) and claim a refund of unutilized ITC.
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Supply goods or services on payment of IGST and claim a refund of the taxes paid.
3. Refund Mechanism
(i) Supplies for Authorized Operations
Refund claims are valid only for supplies made for authorized operations. Though not explicitly stated in the IGST Act, this condition has been upheld in rulings like M/s Coffee Day Global Limited (KAR ADRG 13/2018).
(ii) Supplies Under the "Bill to Ship to" Model
When goods are billed to an SEZ but shipped to a DTA, claiming a refund becomes challenging as goods do not physically enter the SEZ. In such cases, charging IGST rather than treating it as zero-rated can simplify compliance.
4. Taxability of Supplies by SEZ Units
To DTA Units: Supplies by SEZ units to DTA units are treated as imports into India, subject to customs duties and IGST. However, ambiguity exists regarding who should pay the IGST—the SEZ supplier or the DTA recipient.
To Outside India: Supplies to international clients are treated as zero-rated supplies under Section 16(1)(a) of the IGST Act, allowing refunds of taxes paid or ITC.
5. Imports by SEZ Units
Imports by SEZ units for authorized operations are exempt from GST under Notification No. 64/2017-Customs and Notification No. 18/2017-Integrated Tax (Rate). This exemption applies to goods and services.
6. Reverse Charge Mechanism (RCM)
For services attracting RCM (e.g., legal services), SEZ units must discharge the tax liability and claim a refund under the zero-rated mechanism. This creates additional compliance burdens for SEZ entities.
7. Challenges and Recommendations
While SEZs benefit from zero-rating on inward supplies, issues arise due to:
To address these challenges, further clarifications and streamlined procedures from the government would be highly beneficial.
FAQs
What are the 5 Special Economic Zones in India?
India has numerous SEZs, including prominent ones like:
What is the Special Economic Zone System?
The SEZ system is a policy framework to promote exports, attract foreign investments, and generate employment. SEZs offer businesses operating within their boundaries tax benefits, simplified compliance, and infrastructure support.
Which is the First SEZ in India?
Established in 1965, Kandla SEZ in Gujarat is the first and one of the most successful SEZs in India.
What Were the First 4 Special Economic Zones?
The initial SEZs in India include:
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Kandla SEZ (Gujarat)
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SEEPZ SEZ (Mumbai)
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Falta SEZ (West Bengal)
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Chennai SEZ (Tamil Nadu)
Conclusion
SEZs are instrumental in driving India’s economic growth. The zero-rating provisions under GST significantly benefit SEZs, enabling them to operate cost-effectively. However, complexities such as the distinction between authorized and non-authorized operations and the dual tax treatment of SEZ supplies necessitate greater clarity. Businesses operating in SEZs can navigate these challenges with the help of professional advisory services.
Contact ADCA (Anil D’Souza and Associates) —a trusted chartered accountancy firm in Bangalore for expert assistance in GST compliance and SEZ-related matters.
Finding it difficult to understand GST? We are here to help. Contact ADCA - One of the reputed GST Consultants In Bangalore - for the complete assistance.
