Open Letter to Concerned Authorities Regarding Supplies to SEZ Units / SEZ Developers : Issues and Suggestions

Special Economic Zone (SEZ) is a specifically Demarcated geographic areas contained within a country’s national boundaries delineated duty-free enclave – deemed to be foreign territory – treated as if they are outside India for the purposes of trade operations and customs purpose for levy of duties and tariffs. Special Economic Zones (SEZ) are considered as growth engines that can boost manufacturing, augment exports and generate employment.

However the so called growth engines are grappled with growth impeding stop breakers in the name of confusing and contradictory provisions in GST. Let us discuss some of those here and I SN Panigrahi on behalf of SEZ Units making a humble request to the concerned authorities to consider those difficulties being faced by SEZ units and act promptly to address those issues and remove operational hudles.

Issue – 1 :  All Suppliers to SEZ Units / SEZ Developers Need to Compulsorily Register under GST

Supplies to SEZ Units / SEZ Developers is treated as Inter-State Transaction as per provisions of Sec 7(5) of IGST Act, 2017.  Therefore all such suppliers are Compulsorily Registration under GST irrespective of their Turnover as per Sec 24 of CGST Act.

Small suppliers like spares & component suppliers, oil & lubricant suppliers, stationary items suppliers, food suppliers, services of man power supply, engineering & annual maintenance services, production & labor contracts, sanitation services and other such small value suppliers are very reluctant to supply to SEZ Units / SEZ Developers because of Compulsory Register under GST. As a result SEZ units & SEZ developers are suffering a lot and their operations are hit adversely.

Suggestion :

Special Provisions shall be made to relax compulsory registration up to threshold limit of Rs 20 Lakhs (like for any other supplies) for suppliers to SEZ Units / SEZ Developers  

Issue – 2 : Supplier to execute LUT / Bond

As per Sec 16. (1)(b) of IGST Act, supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit is treated as Zero Rated. According to Sec 16. (3)(a) of IGST Act, and Rule 96 A (1) Any registered person availing the option to supply goods or services without payment of integrated tax shall furnish, prior to supply, a bond or a Letter of Undertaking in FORM GST RFD-11.

Therefore supplier to SEZ Units / SEZ Developers has to execute Bond / LUT. In most of the cases small suppliers may not be eligible for LUT (Notification No. 16/2017 – Central Tax dated 7th July, 2017, eligible categories for LUT are: Registered Person who has received a Minimum Foreign Inward Remittance of 10% of Export Turnover in the Preceding Financial Year – not less than Rs. one crore or A Status Holder as Specified in para 3.20 and 3.21 of the Foreign Trade Policy 2015-2020).

Alternatively suppliers may opt for Bond route. Executing Bond required backing of Bank Guarantee – not Exceeding 15% of Bond Amount. For furnishing BG require certain banking formalities and also some expenses which the suppliers may not be interested especially small suppliers and onetime suppliers. Also banks may not issue bank guarantees and take their sweet time to issue BG with one context or the other.

Therefore majority of small suppliers (of goods and services) are not willing to supply to SEZ Units / SEZ Developers for the reason that, they have to execute a Bank Guarantee and this is causing great hardship in procurement of goods and services required for the operations.

Suggestion :

Requirement of Executing LUT / Bond shall be scraped, instead a well System based control mechanism shall be instituted. Special provisions shall be made in the format of filling GSTR -1 return to capture all supplies to SEZ units & SEZ developers separately. At present this provision is not there in GST portal. Once the system captures all the required data of the supplier in GSTR -1 and matches the same with GSTR -2 of the recipient, the need for any LUT / Bond is redundant and therefore may dropped.

Issue – 3 : Supply on Payment of IGST – Blockage of Funds & No Clarity on Claiming Refund

As explained above in case the supplier is not interested to supply under Bond / LUT then he has the option of supply on payment of IGST, the supplier can claim refund as per provisions of Sec 16. (3) (b) of IGST Act. However this may result into blockage of funds and completing certain formalities. Moreover procedures for claiming refund of IGST in case of supplies of services to SEZ units / SEZ developers is not prescribed. (Rule 96(1) provided procedure for claiming refund of IGST in case of goods exported out of India and not in case of supplies to SEZ units / SEZ developers).

Also it may be noteworthy to mention here that in the GST portal till now there is any provision to claim refund. (Perhaps yet to develop).

Provisions are made to expedite the refund process quickly and release 90% of refund within 7 Days and balance after verification within maximum period of 60 days as per Sec 54(6) & (7) of the CGST Act. Also provisions are made as per Notification No. 13/2017 – Central Tax, 28th June, 2017, to pay interest @ 6% if full refund is not granted within 60 days.

The myth and promise of major part of refund within 7 days actually shifts to around one month as the actual click time to process the claim starts after the filling of monthly return – GSTR -3 ie after 20th of the following month, which then the system recognizes and acknowledges for refund.


Since any system of first paying and then claiming refund is time and cost inefficient, and also encourage red tapism, such cases may avoided. Exemption in the first instance itself create a seamless and smooth process flow and therefore recommend to follow the suggestion in the issue 2, by allowing supplies to SEZ units / SEZ developers without payment of GST and without execution of Bond / LUT.

In case Tax paid supplies are received by SEZ units & SEZ developers, then these units should be allowed to take credit and claim refund. At present only the supplier is allowed to claim refund of IGST paid as per Sec 16(3) of IGST Act & Rule 89 of CGST Rules. It is suggested to allow the SEZ units / SEZ developers also to take credit and claim refund of tax paid inputs against disclaimer from the supplier. This flexibility of availing credit and claiming refund to either of the supplier or to the recipient against disclaimer from the other makes the scheme perfectly tax neutral for SEZ units / SEZ developers. This is beneficial in case these units suffer any tax on spot purchases or emergency purchases on payment of tax.

Issue – 4:Confusion over payments to Supplier of services in Convertible foreign exchange

As per Sec 2(6) (iv) of IGST Act, the payment for export of service shall be received by the supplier of service in convertible foreign exchange. Further as per Rule 96A (1) of CGST Rules in case the supplier of services is not Received Payment in Convertible Foreign Exchange, the supplier is liable to Pay Tax With Interest under Sec 50(1).

However vide Circular No. 5/5/2017 – GST, Dated the 11th August, 2017 it is clarified that acceptance of LUT instead of a bond for supplies of goods to Nepal or Bhutan or SEZ developer or SEZ unit will be permissible irrespective of whether the payments are made in Indian currency or convertible foreign exchange as long as they are in accordance with applicable RBI guidelines. It may also be noted that supply of services to SEZ developer or SEZ unit will also be permissible on the same lines.

Payment for supplies of most of the services to SEZ Units / SEZ Developers are always in Indian Rupee Payment and not in Not Convertible Foreign Exchange. Though it is clarified vide Circular No. 5/5/2017 – GST, the fundamental question shall arise whether such supplies be treated as Export of Services and Qualify for Refund of Taxes.

Suggestion :

The authorities should clarify explicitly about the payment as well as eligibility for refunds of credit. There should not be any condition of Payment in Convertible Foreign Exchange.

Issue – 5: Liability on SEZ developer or SEZ unit to pay on RCM – No Provision to Claim Refund

As per Sec 2(98) of CGST Act : reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier. Reverse charge payment liability arises in case of receipts of notified Goods and Services as per Sec 9(3) of CGST Act or receipt from Un-registered Person as per Sec 9(4) of CGST Act.

In many instances the liability to pay tax on reverse charge may arise like receipt of supplies from GTA, Legal (representative nature) services etc. Also purchases / availing services from un-registered like purchases (stationary and other such items) on travel by employees of SEZ developer or SEZ unit or stay in hotels, emergency or spot purchases on payment of tax etc.

It is not very clear whether SEZ developer or SEZ units also to pay on RCM? Then whether SEZ developer or SEZ unit can take credit of Tax paid on RCM? If taken credit, then how to claim refund of un-utilized credit?

However there is no specific provision in GST law regarding above.

Suggestion :

There should be special provisions to exempt SEZ developer or SEZ unit to pay on RCM for the notified goods or services under Sec 9(3) of CGST Act

Also provisions shall be made to allow credit of taxes if any paid and further allow to claim refund.

Issue – 6 : Reimbursement to a Pure Agent – How to Claim Credit & Get Refunds

Generally in course of business transactions specially while exporting or importing a SEZ unit may engage services of Customs Broker or CHA who clears the consignment acting as a Pure Agent on behalf of the principal – SEZ unit.

A pure agent is one who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply.

Suppose a Customs Broker issues an invoice for reimbursement of some of the expenses incurred by him on behalf of SEZ Unit like Port fees, Port charges, dock dues, transport charges etc.  Those reimbursable bills in the name of SEZ unit may consist of tax paid invoices.

Now the question arises how to claim credit and how to get refund of those un-utilized credits?

Suggestion :

Clear provisions in shall be made to claim credit and to get refund of those un-utilized credits

Issue – 7 : Proof of Receipt of Goods to be Endorsed by Authorized Officer

A proviso to Rule 89 of CGST Rules, regarding Application for refund of tax states as follows :


Provided further that in respect of supplies to a Special Economic Zone unit or a

Special Economic Zone developer, the application for refund shall be filed by the –

(a) supplier of goods after such goods have been admitted in full in the Special

Economic Zone for authorized operations, as endorsed by the specified officer of the Zone;

(b) supplier of services along with such evidence regarding receipt of services for authorised operations as endorsed by the specified officer of the Zone:

Provided also that in respect of supplies regarded as deemed exports, the application shall be filed by the recipient of deemed export supplies:

From the above it is clear that the provision trying to bring back “Inspection Raj” which was buried long back.

When the entire GST system is working on trust based self-declaration / self-assessment with proper system based controls, making such entry checks and physical controls are blocking the speed and smoothness of operations. More over shortage of enough officers also hampering the operations. Above all whenever physical checks are introduced with certain powers to the authorities that leads to misuse of authority and encourage corruption.

Suggestion :

Since in the GST regime all types of transactions and submissions are digitalized, there should not be any paper based documentation. Forms like ARE -1  / re-warehousing proof are dropped. So the requirement of endorsed by the specified officer should also be dropped. Instead system based checks & controls shall be made to prevent any misuse or fraud.

Issue – 8 : Receipts only for Authorized Operations

As per proviso to Rule 89 of CGST Rules (as reproduced above in the previous issue) the phrases “authorized operations” are used. However nowhere in the GST law such authorized operations are prescribed leading to confusion of what constitutes such operations. In the earlier regime vide service tax Notification No. 12/2013 on 1 July 2013, “authorized operations are stated. In GST such provision is missing.

Suggestion :

To avoid any confusion over the issue Government should notify such “authorized operations”

Issue – 9 Job-Work procedure – SEZ Rules & GST Provisions are not in Align :

The procedure for job work under SEZ Rules and GST Law are not aligned. For example as prescribed in Rule 41 & 51(4) of SEZ Rules 2006 “The goods shall be brought back to the Special Economic Zone within one hundred and twenty days from the date of taking the goods out of the Special Economic Zone or within such extended period as may be permitted by the Specified Officer;

and as per provisions of Sec 143. (1) (a) bring back inputs, after completion of job work or otherwise, or capital goods, other than moulds and dies, jigs and fixtures, or tools, within one year and three years,  respectively, of their being sent out, to any of his place of business, without payment of tax;

In two different applicable laws, there are two different versions and the SEZ unit are in a fix, could not understand which law is applicable to them. 

Similarly as per Rule 22 of the SEZ Rules, 2006, an SEZ unit has to furnish a bond-cum-legal undertaking equal to the amount of effective duties leviable on import. Whereas in Sec 143(1) of CGST Act, any inputs or capital goods, may be sent  without payment of tax, to a job worker for job work. Further as per Rule 45.(1) of CGST Rules (Conditions and restrictions in respect of inputs and capital goods sent to the job worker) prescribed a challan. Here furnish a bond-cum-legal undertaking is not specified.

These contradictory versions are creating confusions to SEZ units

Suggestion :

It is suggested that Govt. may immediately issue corresponding Notifications / Circulars in align with each other and in the good interests of the SEZ units.

Issue – 10 Execution of Bond / Letter of Undertaking by SEZ units/developer

As per Sec 16. (3) of IGST Act &  Rule 96A (1) of CGST Rules, a registered person making zero rated (export) supply shall execute a bond or Letter of Undertaking. Further as per Rule 96A (6) of CGST Rules,  the provisions of sub rule (1) shall apply, mutatis mutandis, in respect of zero-rated supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit without payment of integrated tax.”

That means all exporters including SEZ units / SEZ developers, have to execute bond or Letter of Undertaking. Whereas under SEZ Act and Rules (46. Procedure for Export) wherein no such requirement has been prescribed.

Suggestion :

It is suggested that Govt. may immediately issue clarification in this regard. Also it is suggested that SEZ Units and Developers may be treated on par with Status Holder as specified in para 3.20 and 3.21 of the Foreign Trade Policy 2015-2020, for the purpose of submission of LUT.

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More Under Goods and Services Tax



    I have done my RFD-01A from Nov-2017 to Feb-2018 for the FY 2017 to 2018. I have filed everything online for my goods which are under SEZ provision as IGST zero. So please clarify me inorder to get the refund of my input tax is it mandatory to submit offline also or not required. If so how can i get my refund.

    Thankyou in advance

  2. Rushi says:

    In case of Inward supply of Goods, the SEZ barrier would recongnise the inward entry of goods in SEZ by way of endorsement. However, what shall be procedure of ‘Endorsement of Service Invoice’?
    Your kind suggestion is needful.

  3. JIGNESH says:

    i cannot fill details of invoices for supply to sez units zero rated supply for which i have already paid IGST. for july. cannot select that option. any suggestions?

  4. Sathya says:

    Absolutely correct , it is very difficult to complete the process of bond for small units , it needs BG for which board resolution , declaration in stamp paper, application etc etc

  5. Dipak Mistry says:

    Adding to your letter ;
    There is no data exchange between GSTIN and NSDL as of now. unit who sale the goods to DTA unit have to pay IGST from GST portal and there bill of entry is generated on NSDL. There is system in NSDL where we can pay IGST and same get reflected against of GSTIN of unit.

  6. CA VJ Mankodi says:

    This is regarding lodging servicrs to SEZ unit. If the accomodation is located outsifr theSEZ area, the place of supply of service will be the location of guest house and hence CGST and SGST will be levied and not IGST.



  8. K.Chandra Sekhar says:

    Dear Panigrahiji,
    Nice article discussing the conflicting provisions or procedures explit on comparison of two Acts and or the rules made thereunder.

  9. Suresh says:

    We are providing accommodation service.
    SEZ unit company staffs staying in our lodge. The payment settled by SEZ unit company. Can we raise the invoice without IGST under LUT/Bond.

  10. G.Kishore Kumar says:

    Dear Mr.Panigrahi,

    Very good article and highlighted the difficult and confusion faced by SEZ unit and the supplier to SEZ.
    One more point I would like to tell you, for supply of goods into SEZ, receipt details has to be entered in SEZ online which will be signed and approved by the Authorized Officer acknowledging the receipts of the goods. But in case of Services receipt there is no provision to enter in SEZ online to enter and there is no clarity for Authorised Officer on which documents he has to certify. Pre-GST there was A1 and A2 Form now there is no such Form post GST.



    i have a suggestion sir
    supply of small exporters – ( software exporters ) under gst they should also compulsorily register as the transactions are in the nature of interstate
    so they should deposit certain amounts to bank for submitting bond – it is a problem facing many small exporters – kindly suggest some simple provisions as against bond

  12. Jayesh M Lakhpatwala says:

    we applied for GST NO. on 17-07-17 but registration done on 08-08-17 hence can i show July-17 Sales & purchase or we have shows Aug-17 Sales & purchase in GST Portal but in GST Portal we can do only Aug-17 GST return.

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January 2023