Special Economic Zones under GST: Law, Litigation and a Long Policy Silence

Summary: India’s Special Economic Zones (SEZs) were established to promote exports, investment and employment through duty-free operations and a predictable regulatory framework. Although GST preserved zero rating for authorised supplies to SEZ units and developers, its implementation introduced procedural complications involving Letters of Undertaking, endorsements, refund applications, reverse charge liabilities and restrictions on input tax credit refunds. The article examines the interaction between the Special Economic Zones Act, 2005, the CGST Act and the IGST Act, including Sections 7 and 16 of the IGST Act, Section 54 of the CGST Act and Rule 89 of the CGST Rules. It discusses significant judicial decisions concerning refund eligibility of SEZ units, particularly Britannia Industries, SE Forge, Platinum Holdings, Wipro and Meghmani Organochem, alongside advance rulings on reverse charge in Portescap India and Waaree Energies. It also analyses the compensation cess controversy, the continued reliance on older GST circulars, the Baba Kalyani Committee recommendations, the proposed DESH legislation and the gradual withdrawal of direct tax incentives. Against the backdrop of the Union Budget 2026–27 and the 57th GST Council recommendations, the article identifies six reforms needed to improve certainty for SEZ units and domestic suppliers without introducing new export subsidies.

GST on SEZ Transactions: Zero Rating, Refunds, Reverse Charge and the Policy Silence Since 2018

Introduction

Special Economic Zones were conceived as islands of ease inside a sea of regulation. The idea was simple. Give the exporter a duty free enclave, a single window, a predictable tax regime and a promise that the State will not change the rules midway, and in return the exporter will bring investment, employment and foreign exchange. For a decade after the Special Economic Zones Act, 2005 came into force, the model worked reasonably well. Exports from SEZs grew year after year and a large share of India’s IT and pharmaceutical exports came to be routed through these zones.

Then GST arrived in July 2017. The new law did carry forward the core promise. Supplies to an SEZ unit or developer were declared zero rated, and imports into an SEZ remained free of integrated tax. But the fine print changed the lived experience of the SEZ dealer. Zero rating came wrapped in conditions, endorsements, letters of undertaking and refund applications. A supplier in the domestic tariff area who used to issue an ARE 1 and move on now had to prove authorised operations, obtain an endorsement from a specified officer and then chase a refund that could take months. The SEZ unit itself found that the department doubted its right to claim refund at all, and that reverse charge liabilities which the SEZ Act never contemplated were being pressed against it.

This article walks through the way the GST law treats SEZ transactions, the notifications and circulars that govern them, and the judicial pronouncements that have shaped the field. It then turns to a question that practitioners in Sri City, Visakhapatnam, Chennai and every other SEZ cluster have been asking for several years. Why has the Finance Ministry gone silent on SEZs since 2018? The Baba Kalyani committee submitted its report in November 2018. The income tax holiday for new units expired in March 2020. The DESH Bill of 2022 was introduced in the public discourse and then quietly shelved. On the GST side, barring one procedural notification in 2023 and the routine refund circulars, there has been no measure that could be called SEZ friendly. The article attempts to explain this silence and to set out what the sector needs.

The SEZ Act and the Way GST Law Receives It

The starting point is not the GST law at all. It is the Special Economic Zones Act, 2005. Section 2(za) of that Act defines a Special Economic Zone as a specifically delineated duty free enclave which is deemed to be a territory outside the customs territory of India for the purposes of undertaking authorised operations. Section 26 lists the fiscal concessions available to every developer and entrepreneur, including exemption from customs duty on goods imported into the zone and on goods exported from it, and exemption from central excise, service tax and central sales tax on goods and services procured from the domestic tariff area. Section 51 gives the Act overriding effect over anything inconsistent in any other law. The scheme of the Act rests on one phrase that keeps recurring in every GST dispute, and that phrase is authorised operations. A unit is permitted to carry on only those operations that the Development Commissioner has approved in its Letter of Approval, and every fiscal benefit flows to those operations alone.

The CGST Act does not attempt to define an SEZ afresh. Section 2(19) says that Special Economic Zone has the meaning assigned to it in clause (za) of section 2 of the SEZ Act, and section 2(20) does the same for the term Special Economic Zone developer, taking in both the developer and the co developer. The term SEZ unit is likewise borrowed. This is important. When a GST officer argues about what a zone is or what a unit is, the answer lies in the SEZ Act and the Letter of Approval, not in any GST notification.

The CGST Act then does two things of its own. The second proviso to section 25(1) requires a person having a unit in an SEZ or being an SEZ developer to apply for a separate registration, as distinct from his place of business located outside the zone in the same State. A company with a factory in the domestic tariff area at Gudur and a unit inside Sri City SEZ therefore carries two GSTINs in Andhra Pradesh, and the two are distinct persons for all purposes of the Act. Secondly, the Act leaves every substantive benefit to the IGST Act, which is where the real law on SEZ supplies is found.

One more point deserves mention because it is often missed, and it is the first symptom of the neglect this article is about. Section 26 of the SEZ Act was never amended to speak the language of GST. It still grants exemption from central excise, service tax and central sales tax, all of which were subsumed on 1 July 2017. Integrated tax finds no place in it. The SEZ Act and the GST law therefore sit side by side without a bridge between them, and every exemption that an SEZ enjoys under GST rests on notifications issued under the GST law rather than on the parent statute. The practical consequence surfaced in the Andhra Pradesh High Court in December 2023, when SEZ units importing coal through Visakhapatnam argued that the SEZ Act exempted them from GST compensation cess. The Court held that section 26(1)(a) speaks only of duty of customs, that the Compensation Cess Act is not listed in the First Schedule to the SEZ Act, and that no exemption from cess exists under the Customs Act or the GST law either. The units had to pay. Had section 26 been aligned with GST in 2017, as the Export Promotion Council for EOUs and SEZs had requested even before the rollout, this litigation would never have arisen.

Inter State Character and Zero Rating Under the IGST Act

Three provisions of the IGST Act carry the entire weight of SEZ taxation. The first is section 7(5)(b), which declares that supply of goods or services or both to or by a Special Economic Zone developer or a Special Economic Zone unit shall be treated to be a supply in the course of inter State trade or commerce. The proviso to section 8(1) and the proviso to section 8(2) say the same thing from the other side, by excluding such supplies from the definition of intra State supply. The result is that a supply from a Gudur dealer to a unit in Sri City, both within Andhra Pradesh, is an inter State supply chargeable to IGST and never to CGST and SGST. A supplier who charges CGST and SGST on such an invoice has paid tax under the wrong head and the SEZ unit cannot take credit of it. This is the single most common error we see in the books of small vendors who supply to SEZ units for the first time.

The second provision is section 16(1), which defines zero rated supply. Clause (a) covers export of goods or services. Clause (b) covers supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit. With effect from 1 October 2023 the words for authorised operations were inserted into clause (b) by the Finance Act, 2023, so that the statute itself now carries the condition that the circulars had been reading into it since 2018. Section 16(2) then provides that credit of input tax may be availed for making zero rated supplies notwithstanding that such supply may be an exempt supply. This is what makes zero rating different from exemption. An exempt supplier loses his credit. A zero rated supplier keeps it and gets it back.

The third provision is section 16(3), which lays down the two routes. A registered person making a zero rated supply may supply under bond or Letter of Undertaking without payment of integrated tax and claim refund of unutilised input tax credit, or he may supply on payment of integrated tax and claim refund of the tax so paid. Until 30 September 2023 both routes were open to every supplier as a matter of right. The Finance Act, 2021 substituted sub sections (3) and (4) so that the second route became available only to such class of persons and for such class of goods or services as the Government may notify. These amendments were brought into force from 1 October 2023 by Notification No. 27/2023 Central Tax dated 31 July 2023. On the same day the Government issued Notification No. 01/2023 Integrated Tax dated 31 July 2023 notifying all goods and services, other than tobacco, pan masala and a few other items, as eligible for export on payment of integrated tax. That notification spoke only of export. It forgot supplies to SEZ.

For the whole of October 2023 the position was that a DTA supplier could no longer supply to an SEZ unit on payment of IGST and claim refund, because no notification covered such supplies. The 52nd GST Council meeting of 7 October 2023 took note of the omission and the Board issued Notification No. 05/2023 Integrated Tax dated 26 October 2023, amending the July notification with retrospective effect from 1 October 2023 to cover supplies to a developer or a unit in a Special Economic Zone for authorised operations. The correction was welcome, but it is telling that the SEZ sector had to be remembered as an afterthought. It also shows how thin the margin is. One omitted phrase in a notification and an entire route of doing business was shut for a month.

There is a fourth provision that is sometimes overlooked. Section 5(1) of the IGST Act levies integrated tax on goods imported into India at the point of customs clearance, in accordance with section 3 of the Customs Tariff Act, 1975. Goods brought into an SEZ from abroad are imports under section 2(o) of the SEZ Act, and goods removed from an SEZ into the domestic tariff area are chargeable to customs duties under section 30 of the SEZ Act as if they were imported into India. The GST treatment of both movements therefore flows through the Customs law, which is why the exemption on imports into a zone is found in a Customs notification and the tax on DTA clearances from a zone is collected on a bill of entry filed by the DTA buyer.

Procedure for Supplies to an SEZ: LUT, Invoice, Endorsement and Refund

A DTA supplier who wishes to supply to an SEZ unit without payment of tax must first furnish a Letter of Undertaking in Form GST RFD 11. Notification No. 37/2017 Central Tax dated 4 October 2017 extended the LUT facility to all registered persons, except those prosecuted for evasion of tax exceeding two hundred and fifty lakh rupees, and Circular No. 8/8/2017 GST of the same date explained the procedure. The LUT is valid for a financial year and has to be renewed every April. A supplier who misses the renewal and continues to supply without tax exposes himself to a demand of IGST with interest, and the department does not treat the lapse as a technicality.

The invoice must carry the endorsement prescribed by Rule 46 of the CGST Rules. For a supply without payment of tax the words are SUPPLY MEANT FOR SUPPLY TO SEZ UNIT OR SEZ DEVELOPER FOR AUTHORISED OPERATIONS UNDER BOND OR LETTER OF UNDERTAKING WITHOUT PAYMENT OF INTEGRATED TAX, and for a supply with payment of tax the corresponding words ON PAYMENT OF INTEGRATED TAX. The invoice must also show the name, address and GSTIN of the SEZ recipient and, where the supplier falls within the e invoicing threshold, supplies to SEZ units must be reported on the invoice registration portal with the supply type marked as SEZ with or without payment. Rule 30 of the SEZ Rules, 2006 requires the DTA supplier to file the invoice with the Authorised Officer of the zone, who endorses it after the goods are admitted, and the SEZ Online system now carries this transaction as a DTA procurement with the endorsed copy available for download.

The refund procedure is where the difficulty begins. The second proviso to Rule 89(1) of the CGST Rules says that in respect of supplies to a Special Economic Zone unit or developer the application for refund shall be filed by the supplier of goods after such goods have been admitted in full in the zone for authorised operations, as endorsed by the specified officer of the zone, and by the supplier of services along with such evidence regarding receipt of services for authorised operations as endorsed by the specified officer. Rule 89(2)(f) requires a declaration that the SEZ unit or developer has not availed input tax credit of the tax paid by the supplier. The supplier files Form GST RFD 01 with Statement 4 for refund of tax paid or Statement 5 and 5A for refund of accumulated credit, within two years from the relevant date, which under Explanation 2 to section 54 is the date of furnishing the return relating to such supplies.

Circular No. 125/44/2019 GST dated 18 November 2019, the master circular on refunds which superseded Circular No. 37/11/2018 GST dated 15 March 2018 and others, carries the detailed list of documents and reiterates the endorsement requirement. In practice, three problems recur. First, the endorsement from the specified officer is obtained months after the supply, because the officer endorses only after the goods are admitted and the unit has filed its own records, and in the meantime the supplier’s refund clock is running. Second, the authorised operations of a unit are listed in its Letter of Approval and in the uniform list of services approved by the Department of Commerce by its letter of 2 January 2018, and any supply that does not fall within that list is denied zero rating however closely it may relate to the unit’s business. Third, the department insists that the supplier alone can claim refund, which creates an impossible situation where the supplier has charged tax, the SEZ unit has paid it, and nobody is in a position to get it back. The Courts have had to step in on this last point, and the decisions are discussed later in this article.

For the SEZ unit itself the compliance is lighter but not absent. The unit files GSTR 1 and GSTR 3B like any other registered person, reports its zero rated exports and its taxable DTA supplies, and files GSTR 9 and GSTR 9C where the turnover threshold is crossed. Section 17(5) applies to it in full, so credit on motor vehicles, food and beverages and the other blocked categories is not available merely because the unit is in a zone. The unit also carries reverse charge liability under section 5(3) and 5(4) of the IGST Act, a subject that has generated more heat than it deserves and which is taken up in the next section.

Imports into the Zone, Imported Services and the Reverse Charge Question

Goods imported from abroad by an SEZ unit or developer for authorised operations are exempt from the whole of integrated tax and compensation cess leviable under section 3(7) and 3(9) of the Customs Tariff Act. Wait. That is what the sector assumed in July 2017, and it is only half true. Notification No. 64/2017 Customs dated 5 July 2017 exempts all goods imported by a unit or a developer in a Special Economic Zone for authorised operations from the whole of the integrated tax leviable under section 3(7). It says nothing about compensation cess. The Andhra Pradesh High Court decision on coal imports discussed earlier is the direct result of that silence. For the overwhelming majority of SEZ imports, which do not attract cess, the notification works and the unit files its bill of entry through SEZ Online without payment of IGST. For coal, motor vehicles, aerated waters and the other cess bearing goods, the unit pays cess on import and, since cess credit can be used only against cess liability on outward supply, which a zero rated exporter rarely has, the amount becomes a cost.

Services imported by an SEZ unit or developer for authorised operations are exempt under Notification No. 18/2017 Integrated Tax (Rate) dated 5 July 2017, issued under section 6(1) of the IGST Act. The notification is a single sentence. It exempts services imported by a unit or a developer in the Special Economic Zone for authorised operations from the whole of the integrated tax leviable under section 5. The companion Notification No. 17/2017 Integrated Tax (Rate) of the same date rescinded the earlier blanket exemption on all supplies to SEZ that had been issued in June 2017, so that domestic supplies to SEZ would flow through the zero rating and refund mechanism rather than through outright exemption. This was a deliberate choice. Exemption is simple and leaves no tax trail, but it breaks the credit chain for the DTA supplier. Zero rating preserves the chain but creates the refund bureaucracy described above. The Government chose the latter, and the sector has lived with the consequences since.

The reverse charge question arises from the collision between Notification No. 13/2017 Central Tax (Rate) and Notification No. 10/2017 Integrated Tax (Rate), both dated 28 June 2017, which make the recipient liable for tax on legal services, goods transport agency services, security services, sponsorship and the like, and section 16 of the IGST Act which says that supplies to an SEZ are zero rated. If an SEZ unit in Sri City engages an advocate from Chennai, is the unit liable to pay IGST under reverse charge, or is the advocate’s service a zero rated supply on which no tax is payable at all? The Maharashtra Authority for Advance Ruling in Portescap India Pvt Ltd (2020) took the first view and held that the unit must pay under reverse charge on renting of immovable property from the SEEPZ SEZ Authority and on other notified services. The Maharashtra Appellate Authority reversed that ruling by its order MAH/AAAR/DS RM/15/2022 23 dated 13 January 2023, holding that an SEZ unit is not liable to pay GST under reverse charge on services procured for its authorised operations, provided it furnishes a Letter of Undertaking or bond as a deemed supplier in terms of Notification No. 37/2017 Central Tax. The Gujarat Appellate Authority reached the same conclusion in Waaree Energies Ltd (2022) on goods transport, legal, security and bus hiring services received by a solar module unit in a zone. Both authorities drew support from a clarification given by the Ministry of Finance in December 2017 in the context of units in the International Financial Services Centre, and from the Telangana High Court’s decision in GMR Aerospace Engineering Ltd v Union of India (2019), which held under the service tax regime that so long as services are used for authorised operations the exemption under section 26 of the SEZ Act cannot be defeated by procedural conditions in an exemption notification.

The position that emerges is workable but fragile. An SEZ unit that furnishes a LUT can receive reverse charge services without paying tax. A unit that has not furnished a LUT, or whose LUT has lapsed, is exposed. And the whole structure rests on two appellate advance rulings, each binding only on the applicant and its jurisdictional officer, and on a departmental letter that is not a circular. Eight years into GST there is still no Board circular that tells an SEZ unit in plain words whether it is liable under reverse charge or not. That is not a drafting oversight. It is a policy choice to leave the question to litigation.

Supplies from the Zone into the Domestic Tariff Area

The movement in the other direction is governed by section 30 of the SEZ Act and Rule 47 of the SEZ Rules. Goods removed from a zone into the domestic tariff area are chargeable to customs duties, including the integrated tax under section 3(7) of the Customs Tariff Act, as if they were being imported into India. The DTA buyer files a bill of entry, pays basic customs duty and IGST, and takes credit of the IGST on the strength of that bill of entry under section 16(2)(a) of the CGST Act. The SEZ unit does not charge GST on the invoice for such a clearance and does not report it as a taxable outward supply in GSTR 1 in the ordinary way, though the GSTN portal and the SEZ Online system have gone through several iterations on how this transaction should appear in the returns. The clarification in the frequently asked questions released by the Board in 2017 and 2018 was that a supply by an SEZ unit to a DTA unit, where the DTA unit files the bill of entry and pays IGST, is not to be taxed again in the hands of the SEZ unit.

Services supplied by an SEZ unit to a DTA recipient are different. There is no bill of entry for a service. Section 7(5)(b) of the IGST Act makes the supply an inter State supply, the SEZ unit charges IGST on its invoice, and the DTA recipient takes credit in the usual way. An IT unit in a zone that renders software services to an Indian customer therefore invoices with IGST, and the fact that the unit is located in a duty free enclave gives it no relief on that supply. The zone’s benefits attach to what comes in for authorised operations and to what goes out as export, not to domestic business done from within the zone.

Two further points arise in practice. The first is valuation of DTA clearances of goods. Since the clearance is treated as an import, the value for customs purposes is determined under the Customs Valuation Rules, and where the SEZ unit and the DTA buyer are related persons the Special Valuation Branch procedure can be attracted. The second is the sale of scrap, rejects and used capital goods from a zone into the DTA, which is also an import and attracts duty on the depreciated or transaction value as the case may be, a point on which many units are caught unaware when they dispose of old machinery.

Finally, one relief that benefited exporters generally should be recorded. Rule 96(10) of the CGST Rules, which barred the IGST refund route for exporters who had availed certain import exemptions, was the subject of litigation for years. The Gujarat High Court in Cosmo Films Ltd (2020) upheld it but confined its retrospective reach, the Kerala High Court in Sance Laboratories Pvt Ltd (2024) struck it down as ultra vires section 16 of the IGST Act, and the Board ultimately omitted the sub rule, along with Rules 89(4A) and 89(4B), by Notification No. 20/2024 Central Tax dated 8 October 2024 with prospective effect. The relief was given to exporters as a class and was not an SEZ specific measure, but it removed one trap that DTA suppliers to zones had occasionally fallen into.

The Circulars That Govern SEZ Transactions

The Board has issued surprisingly few circulars that deal with SEZ matters directly, and most of what exists was issued in the first eighteen months of GST. The one that practitioners rely on most is Circular No. 48/22/2018 GST dated 14 June 2018. It answered three questions. On the first, it clarified that services of short term accommodation, conferencing and banqueting provided to an SEZ developer or unit are inter State supplies under section 7(5)(b), because that clause overrides the place of supply rule in section 12(3)(c) which would otherwise have located the supply at the hotel. On the second, it clarified that the benefit of zero rating is available on event management, hotel accommodation, consumables and similar procurements only if they are received by the unit or developer for authorised operations as endorsed by the specified officer of the zone, and subject to section 17(5). On the third, which concerned fabric processors, it dealt with an inverted duty refund issue unrelated to zones. The circular was reproduced by State tax administrations across the country, including Karnataka, West Bengal and Tripura, and it remains the only Board document that explains what authorised operations means in the context of a supply.

Circular No. 8/8/2017 GST dated 4 October 2017 explained the LUT procedure after Notification No. 37/2017 Central Tax opened it to all registered persons, and specifically confirmed that supplies to SEZ units and developers are covered. Circular No. 17/17/2017 GST dated 15 November 2017 laid down the manual filing procedure for refund claims in the early months, including claims by suppliers to SEZ under both routes. Circular No. 37/11/2018 GST dated 15 March 2018 consolidated the refund clarifications, dealt with the endorsement requirement, the declaration under Rule 89(2)(f) and the computation of adjusted total turnover, and was itself superseded by Circular No. 125/44/2019 GST dated 18 November 2019 when refund processing moved fully online. Circular No. 125 remains the operative master circular, and its paragraphs on supplies to SEZ require the endorsement of the specified officer in the case of goods and the evidence of receipt for authorised operations in the case of services, both of which the supplier must upload with the refund application.

On the Commerce side, the Department of Commerce issued its letter dated 2 January 2018 prescribing a uniform list of services to be followed in all zones for the purpose of authorised operations, so that a service approved as an authorised operation in one zone would not be refused in another. The Department’s instructions on default authorised operations for developers serve a similar function for infrastructure procurements. These are not GST documents, but a GST officer deciding a refund claim will ask for them.

What is striking is what is not there. There is no Board circular on whether an SEZ unit itself can claim refund of accumulated credit, although the High Courts have decided the question repeatedly since 2020. There is no circular on reverse charge liability of SEZ units, although two Appellate Authorities for Advance Ruling have ruled on it and the Ministry gave an informal clarification in 2017. There is no circular on the treatment of supplies from an SEZ unit to another SEZ unit, or on job work sent from a zone into the DTA and back, or on the inter play between the SEZ Rules on temporary removal and the GST e way bill requirements. Each of these is handled by practice, by SEZ Online instruction, or by a Development Commissioner’s office, and each varies from zone to zone. The absence of guidance is not neutral. In a self assessment regime, every unresolved question becomes a show cause notice five years later.

What the Courts Have Said

The largest body of SEZ litigation under GST concerns a single question. Can an SEZ unit, which exports without payment of tax under a LUT and accumulates credit on the inputs and input services it has procured on payment of tax, claim refund of that credit under section 54(3)? The department’s answer has been a consistent no, on the reasoning that the second proviso to Rule 89(1) speaks only of the supplier, that Rule 89(2)(f) requires a declaration that the SEZ unit has not availed credit, and that an SEZ unit which was entitled to receive supplies without tax should not have paid tax in the first place. The Courts have rejected this reasoning every time it has been placed before them.

The line begins with Britannia Industries Ltd v Union of India, decided by the Gujarat High Court on 11 March 2020 in Special Civil Application No. 15473 of 2019 and reported in 2020 (9) TMI 294. The petitioner’s SEZ unit had received credit distributed by an Input Service Distributor and sought refund of the IGST so accumulated. The Court held that the proviso to Rule 89(1) contemplates a refund by the supplier only where the supplier is in a position to claim it, that in an ISD arrangement no supplier has any link with the SEZ unit, and that the unit was therefore entitled to refund of the credit lying in its electronic credit ledger. The Gujarat High Court followed Britannia in IPCA Laboratories Ltd (2022 (2) TMI 947) and again in SE Forge Ltd v Union of India, Special Civil Application No. 16056 of 2022 decided on 3 February 2023, where the petitioner was a manufacturer of wind turbine components in a zone and the refund was of ordinary credit on inputs rather than ISD credit. In SE Forge the Court said in terms that section 54 read with Rule 89 does not distinguish between an SEZ unit and any other registered person for the purpose of refund of unutilised credit.

The department carried the point to the Supreme Court. In Union of India v Meghmani Organochem Ltd, SLP (Civil) No. 1239 of 2025, decided on 22 September 2025, the Gujarat High Court had followed Britannia to restore a refund of Rs 65,05,135 to a Dahej SEZ unit that the Appellate Authority had reversed. The Additional Solicitor General argued that only the supplier could claim. The Supreme Court, noting the peculiar facts and the amount involved, declined to interfere and dismissed the petition, while keeping the question of law open. The Court also recorded that the earlier challenge to Britannia itself had failed on the ground of low tax effect. The practical effect is that the Gujarat line stands undisturbed, and that an Appellate Authority which refuses to follow it, as the Vadodara authority did in Meghmani, acts contrary to binding precedent.

The Madras High Court has taken the same view through a different route. In Platinum Holdings Pvt Ltd v Additional Commissioner of GST and Central Excise, reported in 2021 (47) GSTL 30 (Mad), the Court held that Rule 89(1) does not restrict refund applications to suppliers alone and that the reference to a supplier in the second proviso describes one category of applicant without excluding others. That reasoning was followed in Urjita Electronics Pvt Ltd v Joint Commissioner (2025 (29) Centax 360) and, in 2026, in McKinsey Global Services India Pvt Ltd v Joint Commissioner and in Wipro Ltd v Assistant Commissioner, W.P. Nos. 44793, 44796 and 44798 of 2025 and connected matters, where Senthilkumar Ramamoorthy J held that the proviso to Rule 89(1) is addressed to direct untaxed supplies into a zone, to prevent a double refund, and has no application to the zero rated export supplies that an SEZ unit itself makes to overseas customers. The Court further held that the declaration under Rule 89(2)(f) is inapplicable where the supplies in question were not made directly to the SEZ unit.

On reverse charge, the two Appellate Authority rulings in Portescap India Pvt Ltd (Maharashtra, 13 January 2023) and Waaree Energies Ltd (Gujarat, 2022) have been discussed above. They rest on GMR Aerospace Engineering Ltd v Union of India, reported in 2019 (8) TMI 748, where the Telangana High Court held that the service tax exemption to SEZ units flows from section 26 of the SEZ Act read with section 51, and that a unit which uses the services for authorised operations cannot be denied the exemption for failure to comply with conditions found only in the exemption notification. The same reasoning has been applied by the Tribunal under the service tax regime in a long line of cases, and it is the foundation on which the GST reverse charge position of SEZ units now rests.

On zero rating of specific supplies, the Karnataka Authority for Advance Ruling in Carnation Hotels Pvt Ltd (2019) held that accommodation services provided to an SEZ unit for its authorised operations are inter State supplies under section 7(5)(b) and may be invoiced without tax under LUT, applying Circular No. 48. Rulings in other States on canteen services, employee transport and similar procurements have gone both ways depending on whether the particular service appears in the unit’s approved list, which only underlines how much turns on the paperwork of the Development Commissioner’s office rather than on the tax statute.

On the limits of the SEZ Act itself, the Andhra Pradesh High Court’s December 2023 decision on compensation cess, discussed earlier, is the most significant recent authority. It is a reminder that the SEZ Act is a self contained code and that an exemption not found in its text or its First Schedule cannot be read into it by reference to the policy of the zone scheme. The decision is correct as a matter of construction, and it is precisely because it is correct that the remedy lies with the legislature and not with the Courts.

The Silence Since 2018

Now to the question with which this article began. Count the SEZ specific measures issued by the Ministry of Finance on the GST side since the middle of 2018. Circular No. 48 in June 2018. Circular No. 125 in November 2019, which was a general refund circular with SEZ paragraphs carried over from 2018. The amendments to section 16 of the IGST Act in 2021 and 2023, which narrowed the pay and refund route and inserted the words for authorised operations, and which in their first notification of July 2023 left SEZ supplies out altogether until Notification No. 05/2023 Integrated Tax put them back in October. That is the entire list. In the same period the Board issued well over two hundred circulars and several hundred notifications on every other subject under the sun. A sector that accounts for more than a fifth of the country’s total exports did not merit a single circular of its own in eight years.

The silence is not confined to GST. The Baba Kalyani committee was constituted by the Department of Commerce in June 2018 and submitted its report in November 2018. It recommended renaming zones as Employment and Economic Enclaves, delinking incentives from export performance to make them WTO compatible, allowing sale into the domestic market on payment of duty forgone on inputs, granting infrastructure status to zones, setting up dispute resolution through commercial courts and arbitration, and framing separate rules for manufacturing and services zones. Almost none of this has been implemented. The committee’s report sits on the Department of Commerce website as a record of what might have been.

On the direct tax side the dismantling began earlier and was deliberate. Minimum alternate tax was imposed on SEZ units and developers from the financial year 2011 to 2012 and dividend distribution tax on SEZ developers from June 2011. The Finance Act, 2016 inserted a sunset clause into section 10AA so that no unit commencing manufacture or services after 31 March 2020 would get the deduction, with a short extension during the pandemic for units that already held a Letter of Approval. In September 2019 the Government introduced section 115BAB offering a fifteen per cent rate to any new manufacturing company anywhere in India. The SEZ tax holiday thereby lost its meaning. A new manufacturing unit in the domestic tariff area now pays less than an SEZ unit that has exhausted its holiday period, and the SEZ unit still carries the export obligation and the restrictions on domestic sale.

Then came the World Trade Organisation. On 31 October 2019 a dispute panel in the case brought by the United States against India held that the SEZ scheme, along with the Export Oriented Unit scheme, the Merchandise Exports from India Scheme and others, was a prohibited export subsidy under the Agreement on Subsidies and Countervailing Measures, and recommended that the measures be withdrawn within ninety to one hundred and eighty days. India appealed in November 2019. The Appellate Body has not been functioning since December 2019 because the United States has blocked appointments to it, so the appeal is pending in a void and the panel report has never been adopted. This has given the Government a reason to do nothing. Any new fiscal benefit for SEZs would be an easy target in a future dispute, and so the policy has been to let the old benefits lapse and to replace export linked incentives with production linked incentives, which were launched from 2020 onwards and are considered compliant.

The replacement legislation went the same way. In the Budget speech of 1 February 2022 the Finance Minister announced that the SEZ Act would be replaced by a new law under which States would become partners in Development of Enterprise and Service Hubs. The Development of Enterprises and Services Hubs Bill, 2022 was drafted, a Cabinet note was prepared, and the Bill was expected in the Monsoon Session of 2022. It was not introduced. It was again expected in 2023, and again in the Monsoon Session of 2025 after the Commerce Ministry sought Cabinet approval. As of today it has not been introduced in Parliament. The reasons reported in the press have ranged from the Finance Ministry’s reluctance to allow domestic sales on concessional duty, to disagreement on whether the new hubs should have any customs duty benefit at all. Meanwhile the Department of Commerce has done what it can through piecemeal amendments to the SEZ Rules, 2006. In June 2025 it reduced the minimum land requirement for semiconductor and electronic component zones from fifty hectares to ten, relaxed the encumbrance free land norm, permitted free of cost goods to be counted in net foreign exchange and allowed such units to sell in the domestic market on payment of duty. Further amendments to the Rules were notified in 2026. These are real and useful, but they are rules under an Act whose fiscal chapter has been hollowed out.

The numbers help to explain the complacency. Exports from SEZs reached about Rs 16.89 lakh crore in the financial year 2025 to 2026 against Rs 15.11 lakh crore in the previous year, there were 368 notified zones as of February 2026, employment stood at about 31.73 lakh persons and cumulative investment at about Rs 7.86 lakh crore as of December 2025. When the sector grows at double digits without any new incentive, the argument for giving one becomes hard to make inside North Block. But the growth is concentrated. A large share of goods exports comes from a handful of petroleum and refining zones in Gujarat and from pharmaceuticals, and a large share of services exports from the information technology zones of Bengaluru, Hyderabad, Chennai and Pune. The manufacturing SEZ in a district town, the kind that Sri City was meant to be, has not had the same run, and it is these units and their DTA suppliers who bear the refund delays and the reverse charge uncertainty described in this article.

There is also a structural reason. The SEZ Act is administered by the Department of Commerce. GST is administered by the Department of Revenue and, beyond it, by the GST Council on which the States sit. Between 2017 and 2022 the Council’s energy went into compensation, rate rationalisation, returns and e invoicing. Between 2022 and 2025 it went into the tribunal, the online gaming dispute and the rate overhaul of September 2025. Nobody on the Council represents the SEZ sector. The Export Promotion Council for EOUs and SEZs makes its representations to the Department of Commerce, which forwards them to Revenue, which places them before the Law Committee, which has other priorities. The sector’s problems are real but they are nobody’s problems in particular, and that is the most reliable recipe for inaction in any government.

Fairness requires one qualification. The last twelve months have shown the first signs of attention. The Union Budget for 2026 to 2027 proposed a one time concessional framework under which eligible manufacturing units in zones may sell a portion of their output in the domestic tariff area at reduced duty, a measure drawn directly from the Baba Kalyani report. The 57th GST Council meeting of 8 October 2026 recommended an explanation to section 16(1) of the IGST Act so that goods sold to an overseas buyer but delivered to that buyer in an SEZ or a Free Trade Warehousing Zone will be treated as supplies to the zone for zero rating, provided payment is received in convertible foreign exchange or in rupees where the Reserve Bank permits. The same meeting recommended removing the restriction in Rule 89(4)(C), introduced by Notification No. 16/2020 Central Tax dated 23 March 2020, which capped the value of zero rated supplies of goods at one and a half times the value of like goods sold domestically and which the Karnataka High Court had already struck down in Tonbo Imaging India Pvt Ltd (2023). These are welcome. They are also, as of this writing, recommendations and Budget proposals rather than law, and none of them touches the refund rights of SEZ units, the reverse charge question, the compensation cess gap or the alignment of section 26 of the SEZ Act with GST. The silence has been broken, but only just.

What the Sector Needs from the Finance Ministry and the Council

None of what follows requires a new fiscal incentive, and none of it would trouble a WTO panel. These are measures of certainty, and certainty costs the exchequer nothing.

1. Clarify the Refund Rights of SEZ Units

The first is a circular, or better an amendment to Rule 89, that says in plain words that an SEZ unit making zero rated exports may claim refund of unutilised input tax credit under section 54(3) in the same manner as any other registered person, and that the second proviso to Rule 89(1) applies only to a DTA supplier claiming refund in respect of a direct supply into a zone. The Gujarat and Madras High Courts have said this repeatedly since 2020 and the Supreme Court has declined to disturb it. Every rejection order that still cites the proviso against an SEZ unit is an appeal waiting to happen, a writ petition after that, and a cost to the public exchequer in interest under section 56 when the refund is finally paid.

2. Issue a Circular on Reverse Charge

The second is a circular on reverse charge. The Board should state whether an SEZ unit that has furnished a Letter of Undertaking is liable to pay tax under section 5(3) and 5(4) of the IGST Act on services received for its authorised operations. The two Appellate Authority rulings and the 2017 departmental letter point one way. Field formations in several States still issue notices pointing the other way. One paragraph from the GST Policy Wing would end the matter.

3. Address Compensation Cess on SEZ Imports

The third is the compensation cess exemption on imports into zones. Notification No. 64/2017 Customs exempted integrated tax and nothing else. The Andhra Pradesh High Court has held, correctly, that the SEZ Act does not cover cess. The remedy is a two line amendment to the notification, or an entry in the First Schedule to the SEZ Act, and it should carry retrospective effect from 1 July 2017 so that the units that fought and lost are not worse off than those that never paid.

4. Remove the Endorsement Bottleneck

The fourth is the endorsement bottleneck. The specified officer’s endorsement under Rule 89(1) should be generated by SEZ Online automatically on admission of the goods and should be available to the DTA supplier on the GST portal through an interface between the two systems, in the way that shipping bill data already flows from ICEGATE. A supplier should not have to walk into a Development Commissioner’s office to collect a signature so that he can file a refund claim on a portal.

5. Align Section 26 of the SEZ Act with GST

The fifth is the alignment of section 26 of the SEZ Act with GST. The section still exempts excise duty, service tax and central sales tax. It should exempt integrated tax, compensation cess and any cess levied under the Customs Tariff Act on imports into a zone, so that the exemption stands on the parent statute with the overriding force of section 51 and does not depend on the survival of a notification.

6. Reform Domestic Tariff Area Sales

The sixth is the one measure that does involve policy rather than drafting, and it is the one the Budget for 2026 to 2027 has begun to address. A manufacturing unit in a zone should be free to sell into the domestic market on payment of the duty forgone on its imported inputs, as the Baba Kalyani committee recommended, and the GST treatment of such a sale should be settled in the same breath so that the unit knows whether it is to charge IGST on an invoice or whether the buyer is to file a bill of entry. A reform announced in the Budget and left for the Rules to work out two years later is not a reform that an investor can plan around.

Conclusion

The GST law did not abolish the SEZ scheme. It kept the zero rating, kept the import exemption and kept the inter State character of every transaction with a zone. What it did was to convert a regime of exemption into a regime of refund, and a regime of refund lives or dies on procedure. Procedure is where the SEZ dealer has been left alone since 2018. The refund that depends on an endorsement nobody is in a hurry to give. The reverse charge liability that two appellate authorities say does not exist and a hundred range officers say does. The compensation cess that a Customs notification forgot. The parent Act that still speaks of excise and service tax nine years after both ceased to exist. Each of these is small. Together they are the reason a DTA vendor in Gudur hesitates before quoting to a unit in Sri City, and the reason the unit in Sri City wonders whether it would have been better off outside the zone.

The Courts have done what Courts can. Britannia, SE Forge, Platinum Holdings, Wipro, Portescap, GMR Aerospace and the rest have, between them, answered most of the questions that the Board has declined to answer. But a High Court judgment binds the department in one State and persuades it in the others, and a dismissed special leave petition that keeps the question of law open is an invitation to litigate again. The sector does not need another judgment. It needs the Finance Ministry to read the judgments it already has and write them into a circular.

The Budget of February 2026 and the Council meeting of October 2026 suggest that someone in Government has started to look at zones again. That is good. It would be better if the looking produced, before the next Budget, the half dozen measures of certainty set out above. None of them is a subsidy. None of them would offend any trade agreement. All of them would tell the thirty one lakh people who work in India’s zones, and the thousands of small suppliers who serve them, that the enclave the Parliament created in 2005 still means what it was meant to mean.