Special Economic Zone (SEZ) Under GST

Introduction :- Special Economic Zone (SEZ) is a specifically established duty free enclave, which shall be deemed to be a foreign territory for the purposes of trade operations and duties and tariffs. SEZs are located within a country’s national borders, and their aims include increased trade balance, employment, increased investment, job creation and effective administration.

Special Economic Zones (SEZs) Scheme in India was conceived in 1999 by then Commerce and Industries Minister during a visit to Special Economic Zones in China. The scheme was announced at the time of annual review of EXIM Policy effective from 1.4.2000. The basic idea is to establish the zones as areas where export production could take place free from all roles and regulations governing imports and exports and to give them operational flexibility.

Special Econiomic Zone (SEZ)  Act :- SEZ Act was prior to GST Act and still some of the  provisions in SEZ Act are relevant in respect of GST which are brought out in succeeding paragraphs.

As per section 2(m) of SEZ Act, supplying goods, or providing services, from the Domestic Tariff Area to a unit or Developer is ‘export’

Domestic Tariff Area” means the whole of India (including the territorial waters and continental shelf) but does not include the areas of the Special Economic Zones. section 2(i) of SEZ Act,

SEZ unit or developer can undertake ‘Authorized operations’ which are specified in the letter of approval issued by Development Commissioner of SEZ [section 25(9) of SEZ Act].

Authorized operations include setting up, operation, maintenance and expansion of Unit. Goods for construction of building for setting up unit can be included in letter of approval. Any question as to whether any goods are required for authorized operation or not shall be decided by Development Commissioner – MC&I (DC) Instruction No. 3/2006 (F No. 5/1/2006-EPZ) dated 24-3-2006.

Thus, all services provided to carry on authorized operations by SEZ are exempt. These include setting up, operation, maintenance and expansion of SEZ unit.

Requirement for Registration under GST :A person having a unit in a Special Economic Zone or being a Special Economic Zone developer shall have to apply for a separate registration, as distinct from his place of business located outside the Special Economic Zone in the same State or Union territory ( second proviso to section 25(1) of CGST Act, inserted vide CGST (Amendment) Act, 2018 w.e.f. 1-2-2019)

Services imported by SEZ unit or developer for authorized operations  – Services imported by SEZ unit or developer for authorized operations are exempt from GST – Notification No. 18/2017-IT (Rate) dated 5-7-2017.

Supplies to DTA unit by SEZ ; As per section 2(m) of SEZ Act, supplying goods to DTA is ‘export’ . In case , SEZ supplies goods to DTA unit, the DTA unit is required to file Bill of Entry and pay applicable customs duty, which also includes IGST. DTA unit paying tax can be compared to reverse charge i.e. the tax is to be paid either by the recipient of goods and /or  services .

Exemption to SEZ from Goods Transport Services  by Railways Ministry of Railways has clarified vide Railway Board Letter No. TCR/1078/2017/37 dated 28-3-2018 that Railways shall not charge GST on freight charges in case of supply of service of transport of goods to SEZ Unit. Railways will file LUT with tax department.

SEZ unit should apply at Railway office with copy of letter of approval and other relevant documents and declaration that SEZ status is current. Then Zonal Railways will advise its concerned office for implementation of the exemption rule.

Supplies of  Hospitality Services by SEZ – It is held by AAR Gujarat in  Sapthagiri Hospitality (P.) Ltd., In re [2018] that supplies of hospitality services like accommodation and food made by Special Economic Zone (SEZ) co-developer from non-processing zone to its clients located in SEZ for authorized operations will be treated as zero rated supplies.

However, it is liable to pay GST on supplies made to clients located outside territory of SEZ .

Liability to pay GST under Reverse Charge :SEZ unit will be liable to pay GST under reverse charge, wherever applicable.(FAQ issued by CBI&C on 15-12-2018,)

GST TAXIBILITY FOR SERVICES TO SEZ

Supply by DTA unit to SEZ are Zero Rated  : Supplies to SEZ unit and SEZ developer are zero rated. DTA unit can supply goods to SEZ unit or SEZ Developer on payment of GST under section 16(3)(b) of IGST Act or without payment of tax under section 16(3)(a) of IGST Act ( AAR – West Bengal in re  Garuda Power P Ltd. 2018).

Supply of Services to SEZ Unit / SEZ Developer related to immovable property   As per section 7(5)(b) of IGST Act, supply of goods or services or both to SEZ unit or SEZ Developer is inter-State supply. This is specific provision and hence will prevail over general provision as contained in section 12(3)(c) of IGST Act, which states that in case of supply of short term accommodation or event management services, place of supply is where immovable property is located. Hence, in case of supply of such services, IGST will be payable and not CGST and SGST/UTGST.

Further, if such supply is for authorized operations, these will be zero rated supplies. The zero rated supply can be made under LUT/bond without payment of GST or on payment of IGST. IGST will be refunded if paid or input tax credit refund can be obtained if supplied under LUT/Bond.

 Endorsement of specified officer of SEZ will be required that these services are for authorized operations – CBI&C circular No. 48/22/2018-GST dated 14-6-2018

Services not included in Authorized operations are not Zero Rated   – The services supplied which are included in authorized operations of SEZ are considered as zero rated . Services not included in authorized operations are not a zero rated supplies.

Services deemed to be consumed within SEZ even if provided out of SEZ  -In Vision Pro Event Management v. CCE (2019) ,it was held that event management service provided to SEZ is deemed to be consumed in SEZ even if provided outside SEZ.

Food supplied to SEZ or employees of SEZ is not Zero rated supply  – It was held by AAR Maharashtra In re Coffee Day Global Ltd., that supply of beverages using coffee vending machines are not certified as authorized operations by proper officer of SEZ and hence are not ‘zero rated supply’. This view has been confirmed in appeal in Merit Hospitality Services P Ltd. In re (2018) (AAAR – Maharashtra).

Service to SEZ through  Intermediary are not Zero rated  – The service is considered as zero rated  only if directly provided to SEZ/SEZ unit and not when service is provided to intermediary who, in turn, provides service to SEZ or SEZ unit.

E-way Bill requirement for Services to SEZ in same State – Supply of goods from DTA unit to SEZ is defined as ‘inter-State supply’. However, if such supply is in same State, e-way bill is not required ,if such movement has been exempted from provisions of e-way bill by concerned State Government under rule 138(14)(d) of CGST Rules ( CBI&C circular No. 47/21/2018-GST dated 8-6-2018).

Refund for  Supply of goods to SEZ – In respect of supplies of goods to a Special Economic Zone unit or a Special Economic Zone developer, the application for refund shall be filed by the 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 ( third proviso (a) to Rule 89(1) of CGST and SGST Rules, 2017.)

Refund for Supply of services to SEZ – In respect of supplies of services to a Special Economic Zone unit or a Special Economic Zone developer, the application for refund shall be filed by the supplier of services along with such evidence regarding receipt of services for authorized operations as endorsed by the specified officer of the Zone – third proviso (b) to Rule 89(1) of CGST and SGST Rules, 2017.

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