Supply to SEZ Unit under GST-Detailed Analysis

A Special Economic Zones ( SEZs ) are established worldwide by each and every country. SEZs are located within a country’s national borders. There is 240 operational SEZs as on 31-12-2019 in India. The Government aims to establish SEZs are growth in trade, increased investments, job creations and attract FDI etc.. To encourage entrepreneurs to set up business in SEZs the Government launches various facilities in account of finance, relaxation in taxation, labour laws and in other legal compliances etc..

The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:

• Duty free import/domestic procurement of goods for development, operation and
• maintenance of SEZ units
• 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. (Sunset Clause for Units will become effective from 01.04.2020)
• Supplies to SEZ are zero rated under IGST Act, 2017.
• Other levies as imposed by the respective State Governments.
• Single window clearance for Central and State level approvals.

This article contains following concepts in regard of SEZ under GST.

1. Definitions of SEZ and SEZ Developer.

2. Nature of Supply made to SEZ or SEZ Developer.

3. Supply provisions under GST made to SEZ unit.

4. Supply of goods, which are not being covered under authorized operations as sanctioned to SEZ unit, shall not be done at zero rate.

5. Goods supplied from SEZ to DTA.

6. Clarification on whether IGST shall be applicable on supply of service made by SEZ unit to DTA

7. Registration provisions under GST for SEZ unit.

8. GST Returns in respect to transactions with SEZ unit or by the SEZ unit.

9. Refund Provisions for supply made to SEZ or supply made by SEZ.

Q 1. Definitions of SEZ and SEZ Developer.

Ans: Section 2 (19 ) of the IGST Act, 2017 defines SEZ – “Special Economic Zone” shall have the same meaning as assigned to it in clause (za) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);

Section 2 ( za ) of the SEZ Act, 2005 – “Special Economic Zone” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone.

Section 2 (19 ) of the IGST Act, 2017 defines SEZ Developer – “Special Economic Zone developer” shall have the same meaning as assigned to it in clause (g) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005) and includes an Authority as defined in clause (d) and a Co-Developer as defined in clause (f) of section 2 of the said Act;

Section 2 ( g ) of the SEZ Act, 2005 – “Developer” means a person who, or a State Government which, has been granted by the Central Government a letter of approval under sub-section (10) of section 3 and includes an Authority and a Co-Developer;

Q 2. Nature of Supply made to SEZ or SEZ Developer.

Ans:  Inter-State Supply –

Section 7 (5)(b) of the IGST Act, 2017 says – Supply of goods or services or both made to or by a Special Economic Zone developer or a Special Economic Zone unit shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.

According to the above said provisions supply made to or supply made by SEZ unit shall always be treated as inter-state supply. It is immaterial that both supplier and recipient may be of same state. For example a supplier of UP state makes supply to SEZ unit established in Noida SEZ, such supply shall be treated as inter-state supply even though both are of the same state UP.

It has been clarified, vide circular no. 48/22/2018-GST dated 14-06-2018, that services of accommodation, conferencing etc. provided by a Hotel in general shall be intra-state supply because place of supply according to section 12(3)(c) of the IGST Act shall be the place where the immovable property is situated. But if the same supply by the Hotel made to a SEZ unit then there is specific provisions under section 7(5)(b) of the IGST Act relating to supplies of goods or services or both made to a SEZ developer or a SEZ unit, which states that such supplies shall be treated as inter-state supplies. Therefore such supply made by the Hotel to the SEZ unit shall be inter-state supply according to specific provisions.

Q 3. Supply provisions under GST made to SEZ unit.  

Ans: Supply made to SEZ unit is neither export as well as supply made from SEZ unit is nor import under the provisions of GST.

There is basic concept for export and import is out of India. Definition of export under section 2 (5) of the IGST Act says “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India. Similarly definition of import under section 2 (10) of the IGST Act says “import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India. Since a SEZ unit is established within India, therefore, while consider provisions under GST in regard of export and import supply made to SEZ unit is neither export as well as  supply made from SEZ unit is nor import.

But according to section 2 (m)(ii) of the SEZs Act, 2005 supplying goods, or providing services, from the Domestic Tariff Area (DTA) to a Unit or Developer shall be treated as export.It is notable point that though section 2 (m)(ii) of the SEZ Act,2005 states supply made from DTA to SEZ unit is export but such type of supply received to SEZ unit is not covered under the definition of import stated under section 2 (o) of the SEZ Act. As well as there is no provision under definition clause of export ( section 2 (m) of the the SEZ Act ) about supply made from SEZ to DTA shall be treated as export.

Import means by this section 2 (o) of the SEZ Act is –

(i) bringing goods or receiving services, in a Special Economic Zone, by a Unit or Developer from a place outside India by land, sea or air or by any other mode, whether physical or otherwise; or

(ii) receiving goods, or services by, Unit or Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone.

Zero Rated Supply

The Legislature enacts special provisions that supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit shall be treated as supply of zero rated. ( section 16 (1)(b) of the IGST Act, 2017)

There is two types of zero rated supplies, one is supply of export of goods or services or both  and other is supply made to SEZ developer or SEZ unit. If the Legislature treats supply made to SEZ unit as export supply then he will not make separate entry of supply made to SEZ unit to be treated as zero rated supply. Thus it is ample clear that supply made to the SEZ unit shall not be treated as export supply under the GST though such supply shall be treated as zero rated supply.

Zero Rated Supply with payment of tax or without payment of tax.

If supply has become within the terms of “zero rated supply” then the supplier has option that he may do zero rated supply with payment of integrated tax or without payment of integrated tax. If the supplier opts to supply without payment of tax then he shall have to furnish Bond or Letter of Undertaking (LUT) before making zero rated supply without payment of tax. ( section 16(3) IGST Act, 2017)

Q 4. Supply of goods, which are not being covered under authorized operations as sanctioned to SEZ unit, shall not be done at zero rate.

Ans: The same proposition has been decided in advance ruling in the name of Coffee Day Global Ltd;  AAR-Karnataka dated 26-07-2018. Relevant paras of the ruling are provided as under:

• The applicants’ contention is that any supply of goods or services to SEZ units is zero-rated and interprets that the phrase ‘any supply’ would cover everything, including beverages and ingredients for beverages. [Para 8.2]
• The applicant has used the term ‘any supply’. It is found that this term is not used anywhere in the statute. The word ‘any’ has been used only once in section 16(1) of IGST Act, 2017. It reads ‘(1) ‘zero-rated supply’ means any of the following supplies of goods or services or both, namely:- …’. This sentence is followed by two options (a) and (b) and there is an ‘or’ between them. The word ‘any’ refers to either (a) or (b). Had the word ‘any’ been placed at the beginning of the sentence in (b) to read ‘any supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone Unit’ then the contention of the applicant would have been worth consideration. The statute has not used this word in (b). Therefore the interpretation of the applicant is not correct. [Para 8.3]
• In this regard, the provisions of section 4(2) and section 15(9) of the SEZ Act, 2005 are referred to which provide that each SEZ Unit is allowed to carry out predefined activities (termed as ‘authorised operations’) to be eligible to avail the benefits of being in the Special Zone. The activities to be carried out have, therefore, to be strictly in consonance with the authorized operations certified by the proper office of the SEZ. Though the IGST Act, in section 16(1)(b) does not categorically say that the supplies of goods and services should be for authorized operations, it is implicit therein when it says that the supplies are for the SEZ Developer or SEZ Unit. Therefore the litmus test for any supply to be termed as zero-rated supply is to ascertain essentially whether it is for authorized operations or not. [Para 8.4]

Q 5. Goods supplied from SEZ to DTA.

Ans: DTA’s full form is Domestic Tarrif Area. DTA has been defined under section 2 (i) of the SEZ Acts, 2005 as – “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.

It has been stated that supply made from SEZ unit to DTA is not import then why custom provisions are applied when goods removed from SEZ to DTA. But there are specific provisions under section 30 of the SEZ Act, 2005 about removal of goods from SEZ to DTA on which basis transaction of removal of goods from SEZ to DTA may be treated as import.  This section is reproduced as under:

Section 30 of SEZs Act, 2005 says that Subject to the conditions specified in the rules made by the Central Government in this behalf:-

(a) any goods removed from a Special Economic Zone to the Domestic Tariff Area shall be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975, where applicable, as leviable on such goods when imported; and

(b) the rate of duty and tariff valuation, if any, applicable to goods removed from a Special Economic Zone shall be at the rate and tariff valuation in force as on the date of such removal, and where such date is not ascertainable, on the date of payment of duty.

The Custom Department is empowered to charge IGST as is leviable under section 5 of the IGST Act, 2017. In this respect section 3 (7) of The Customs Tariff Act is reproduced as under:

Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding forty per cent. as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8).

Thus goods removed from SEZ to DTA are liable to custom duty and integrated tax (IGST) according to provisions as stated in SEZ Act and Customs Tarrif Act.

Supply of Services or Goods which are not routed from Custom Department from SEZ to DTA are liable to tax.

 Q 6. Clarification on whether IGST shall be applicable on supply of service made by SEZ unit to DTA –

Ans: The questions raised in advance ruling before the authority of Gujrat were that

The hotel being located in non-processing zone of Dahez Special Economic Zone whether liable to pay GST on all the services provided by it to the clients located in SEZ which inter alia included supply of services by way of providing accommodation services, supplying food and beverages and supplying services ancillary to providing accommodation services? and under extreme circumstances, if the hotel is required to provide accommodation services to a visitor other than a visitor located in SEZ, whether GST is required to be paid?

The GAAR, ruled that the supplies made by appellant a SEZ Co-developer, from their hotel located in non-processing zone of Dahez SpecialEconomic Zone to the clients located in Special Economic Zone for authorized operations will be treated as zero rated supplies under the provisions of section 16(1) of Integrated Goods and Service Tax Act, 2017 read with section 2(m) of SEZ Act, 2005. The applicant is liable to pay GST on the services from their hotel located in non-processing zone of Dahez Special Economic Zone to the clients located outside the territory of Special Economic Zone under the provisions of section 5(1) of Integrated Goods and Service Tax Act, 2017.

This matter went before the AAAR of Gujrat. The Authority held in this case as under:-

The appellant’s view was that services being provided in relation to immovable property which is located in the area of SEZ therefore, IGST should not be applicable on the services provided in SEZ to persons other than SEZ units as the said services are received within the SEZ, which is deemed to be territory outside India. He relied upon provisions of 53 (1) of the SEZ Act, 2005. He also submitted that Section 51 of the SEZ Act, 2005 provides that the provisions of SEZ Act will have effect notwithstanding anything inconsistent therewith in any other law.

The Authority held in following paras –

Para 9.4 – The said understanding of the appellant does not appear to be correct. In fact, the sub-section (1) of Section 53 of the SEZ Act, 2005 provides a deeming fiction whereby the Special Economic Zone shall be deemed to be a territory outside the customs territory of India and that too for the specific purposes of undertaking the authorized operations. The term “customs territory” cannot be equated to the territory of India. Further, the interpretation advanced by the appellant would lead to a situation where a Special Economic Zone would not be subject to any laws of India whatsoever. The entire SEZ Act, 2005 would be rendered redundant since it is stated to extend to the whole of India. Section 51 of the SEZ Act, 2005 provides for overriding effect in case there is anything inconsistent contained in any other law. However, no inconsistency between the provisions of the SEZ Act, 2005 and IGST Act, 2017 or CGST Act, 2017/GGST Act, 2017 has been pointed out by the appellant.

Para 9.5 – Therefore, the reliance placed by the appellant on Section 53 and 51 of the SEZ Act, 2005 in support of contention that their activity in SEZ is not liable to IGST, is not acceptable.

Thus it is very much clear that all provisions of GST law shall be applied upon SEZ unit except which shall have been specified otherwise in SEZ Act and/or in other Custom Act.

Q 7. Registration provisions for SEZ unit.

Ans: Registration provisions under GST Law shall be applicable to SEZ unit the same provisions as applicable to the regular tax payer.

The separate registration shall be required by a person for establishment in SEZ. The SEZ unit located in a State is treated as a business vertical distinct from other units located in the State outside the SEZ [first proviso to Rule 8 of the CGST Rules, 2017 read with Section 25 of the CGST Act, 2017]. Hence, separate registration is required to be obtained for the unit located in SEZ.

A single registration can be taken for all SEZ units within a State, whether located in one SEZ or more than one SEZ.

Q 8. GST Returns in respect to transactions with SEZ unit or by the SEZ unit

Ans: The Regular Tax Payer shall have to make following entries in GST returns –

GSTR 3B – Columm 3.1(b) – Outward Taxable Supplies ( zero rated )

GSTR-1 – Column 6B ( Supplies made to SEZ unit or SEZ Developer ) specified with B2B Supply sheet. Invoice Type shall either be SEZ supplies with payment or SEZ supplies without payment.

GSTR- by SEZ unit – Instruction no.9 appended to GSTR 1 – Any supply made by SEZ to DTA, without the cover of a bill of entry is required to be reported by SEZ unit in GSTR-1. The supplies made by SEZ on cover of a bill of entry shall be reported by DTA unit in its GSTR-2 as imports in GSTR-2. The liability for payment of IGST in respect of supply of services would, be created from this Table.

Q 9. Refund Provisions for supply made to SEZ or supply made by SEZ

Ans: The Supplier being a Registered Person is eligible to claim refund towards zero rated supplies by section 16 (3) of the IGST Act. The section is reproduced as under:-

A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:—

(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or

(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.

According to annexure “A” appended to circular 125/44/2019 followings list of all statements/ declarations/undertakings/certificates and other supporting documents to be provided along with the refund application. Its, refund relating to supplies made to SEZ unit, are reproduced as under:

S.No.	Type of Refund	Declaration/Statement/ Undertaking Certificates to be filled online	Supporting documents to be additionally uploaded
3	Refund of Unutilized ITC on account of Supplies made to SEZ units/developer without payment of tax	Declaration under third proviso to section 54(3)	Copy of GSTR-2A of the relevant period
		Statement 5 under rule 89(2)(d) and rule 89(2)(e)	Statement of invoices (Annexure-B)
		Statement 5A under rule 89(4)	Self-certified copies of invoices entered in Annexure-B whose details are not found in GSTR-2A of the relevant period
		Declaration under rule 89(2)(f)	Endorsement(s) from the specified officer of the SEZ regarding receipt of  goods/ services for authorized operations under second proviso to ule 89(1)
		Undertaking in relation to sections 16(2)(c) and section 42(2)
		Self-declaration under rule 89(2)(l) if amount claimed does not exceed two lakh rupees, certification under rule 89(2)(m) otherwise
4	Refund of tax paid on supplies made to SEZ units/ developer with payment of tax	Declaration under second and third proviso to section 54(3)	Endorsement(s) from the specified officer of the SEZ regarding receipt of goods/ services for uthorized operations under second proviso to rule 89(1)
		Declaration under rule 89(2)(f)	Self-certified copies of invoices entered in Annexure-A whose details are not found in GSTR-2A of the relevant period
		Statement 4 under rule 89(2)(d) and rule 89(2)(e)	Self-declaration regarding non-prosecution under sub-rule (1) of rule 91 of the CGST Rules for availing provisional refund
		Undertaking in relation to sections 16(2)(c) and section 42(2)
		Self-declaration under rule 89(2)(l) if amount claimed does not exceed two lakh rupees, certification under rule 89(2)(m) otherwise

A reader may read full article on refund available at Tax Guru site i.e. https://taxguru.in/goods-and-service-tax/refund-gst-detailed-analysis.html

To reach to me for any suggestion, rectification, amendment and/or further clarification in regard of this article my email address is [email protected].