GST on SEZ units and SEZ Developers: Key Points and Requirements

Summary: Special Economic Zones (SEZs) offer tax benefits to promote export growth, but GST treatment for these zones involves specific rules. SEZs are treated as foreign territories for taxation, with around 265 operational zones in India. Goods or services supplied to SEZs are zero-rated, meaning they are taxed at 0% GST, allowing suppliers to claim Input Tax Credit (ITC). Businesses can either supply under a Bond or Letter of Undertaking (LUT) or pay IGST and claim a refund. Conversely, SEZ supplies to the Domestic Tariff Area (DTA) are treated as exports, subject to customs duties and export documentation. Supplies between SEZs or outside India are also considered exports and fall outside GST. Proper invoicing, documentation, and compliance with e-way bill requirements are essential for managing these transactions. Understanding these GST nuances helps businesses operating in SEZs optimize their tax benefits and ensure smooth operations. Regular updates and expert consultations are recommended for staying compliant and leveraging tax advantages effectively.

Introduction: Special Economic Zones (SEZs) are crucial for promoting export-driven growth by providing businesses with tax benefits and other incentives. Under the Goods and Services Tax (GST) regime, SEZs receive distinct treatment, especially in how supplies to and from these zones are taxed. Understanding GST’s application on SEZ units is essential for businesses operating within these zones to leverage the tax benefits effectively.

Definitions

SEZ- As per the definition given in the Section 2 (za) of SEZ Act,2005, an SEZ or Special Economic Zone is an area within the borders of a country which is treated as a foreign land for the sake of taxation. For example: Noida Special Economic Zone or NSEZ and Gurgaon Info space.

Special Economic Zones or SEZs is a delineated duty-free area which is deemed as a foreign territory for the purpose of trade operations, duties and tariff. Around 265 SEZs are operational in the country. Out of this, 64% of the SEZs are located in five states namely, Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra.

DTA-Domestic Tariff Area (DTA) or Domestic Tariff Zone (DTZ) means an area within India that is outside the Special Economic Zones and EOU/EHTP/STP/BTP.

Zero rated Supply-Zero-rated supplies (which can be either goods or services) are supplies to which a tax rate of 0% applies, meaning that buyers do not pay any GST on them. Zero-rated supplies are generally considered taxable supplies. As taxable supplies, they are technically subject to GST, just at a rate of 0. This is distinct from an exempt supply, which is not subject to GST at all.

Now we would discuss GST Compliances over SEZ unit.

Transaction 1- Sale to SEZ by DTA

Under the GST framework, supplies of goods or services to SEZ units or developers are considered zero-rated. This means they are taxed at a 0% GST rate, allowing the supplier to claim Input Tax Credit (ITC) on inputs used in these supplies. Businesses supplying to SEZs can choose between two methods:

1. Supply under Bond or LUT: Suppliers can opt to make supplies to SEZ units without paying IGST by furnishing a Letter of Undertaking (LUT) or a bond and they can claim the refund of ITC paid on Input Goods.

2. Supply on Payment of IGST: Alternatively, suppliers can pay IGST at the time of supply and then claim a refund.

Transaction 2- Sale by SEZ to DTA

1. If an SEZ unit supplies goods or services to a Domestic Tariff Area, it’s considered an export to the DTA. In such cases, customs duties apply and the transaction is subject to export documentation and procedures.

Transaction 3- Supply by SEZ to another SEZ or out of India

1. It is to be considered as Exports. Goods or services that are moved out of the SEZ to another unit in the same SEZ or different SEZ; or goods/services moved from an SEZ to out of India are considered as Exports and are outside the purview of GST.

Invoicing and Documentation Requirements

For zero-rated supplies to SEZs, invoices must clearly state that the supply is meant for an SEZ unit or developer. The invoice should also indicate whether the supply is made under a bond/LUT or with payment of IGST. Proper documentation is crucial, including the inclusion of the LUT number or ARN in the invoice. This documentation is essential for compliance and for processing refunds efficiently.

E-Way Bill Compliance

Supplies to SEZs are treated as inter-state supplies, requiring the generation of e-way bills for the transportation of goods valued at over Rs. 50,000. SEZ suppliers must ensure compliance with e-way bill requirements to avoid penalties and delays​.

Conclusion

Understanding the nuances of GST as it applies to SEZ units is vital for businesses to maximize the benefits of operating within these zones. From ensuring proper documentation to navigating the complexities of refund claims and compliance, businesses must stay informed and proactive to maintain smooth operations within SEZs. Regular updates from the GST Council and tax authorities, along with consultations with tax experts, can help businesses stay on top of these challenges.

By leveraging the zero-rated supply mechanism effectively, SEZ units can enhance their competitiveness and contribute significantly to India’s export growth.

At the end, I have a question for the readers that “Can SEZ claim refund of the input of the GST charged by the DTA on goods/services supplied by him to SEZ without bond/LUT?”

I would be waiting for the your replies. You can connect with me at [email protected] or 8813817426.