Across the Globe, various countries in their law of the land have provided for the establishment of Special Economic Zones (SEZs) which are physically located within the borders but financially and economically treated as establishment outside the territory of the country. In India government has provided approval for over 250 SEZs to operated and providing various benefits and exemptions for fundraising, taxation, labour laws, and other related compliances.
Few of the incentives which SEZ units or developers enjoy in India are hereunder:
- Duty-free import of developing and operating SEZ unit.
- Supplies to SEZ units are treated at par with Export as Zero Rated under GST.
- 100% tax exemption on export income under Section 10AA of Income Tax for the first 5 years, 50% for the next 5 years, and 50% of the ploughed back export profit for the next 5 years. (There is a sunset clause up to 31st March 2021)
- Prohibition of the formation of Labour Union.
- Single Window clearances from government authorities.
- State-specific exemption.
In this article we would like to highlight the following key concepts of applicability on SEZ under GST law:
- What is SEZ and SEZ Developer?
- Concept of Zero Rated Supply and change in the definition.
- Registration of SEZ units.
- Type of Supply to SEZ units.
- Supply for Authorized operations only.
- Letter of Undertaking and SEZ endorsement.
- Import of Goods and services from SEZ to DTA and tax implication.
- How to File GST returns in respect of the supply to SEZ units.
- Input Tax Credit in respect of the supply to SEZ units.
- Refund in respect of the supply to SEZ unit or developer.
What is SEZ and SEZ Developer (Definition):-
Section 2 (19 ) of the IGST Act, 2017 read with 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 read with Section 2 ( g ) of the SEZ Act, 2005 defines SEZ developer as “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;
Concept of Zero Rated Supply and change in the definition:-
Section 16 (1) of IGST Act 2017 defines Zero Rated Supply as :
“Zero-rated supply” means any of the following supplies of goods or services or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit for authorised operations. (As amended by Finance Act 2021)
It is the clear intention of the legislature to differentiate export from SEZ supply and therefore supply made to SEZ is neither export nor supply made from SEZ to Domestic Tariff Area (DTA) is Import.
DTA supplier has two options for supplying to SEZ:
- Under Letter of Undertaking(LUT) without payment of tax and claim refund of ITC; or
- On payment of IGST and claim refund of such tax paid under section 54 of CGST Act 2017
Registration of SEZ units:-
Registration provisions are similar to any other taxable supplier under GST but a separate registration shall be required by a person for an establishment in SEZ.
An SEZ unit can obtain single registration for all its SEZ units located in a single state whether located in single SEZ or multiple SEZ.
Type of Supply to SEZ units:-
As per Section 7 (5), (b) of the IGST Act, 2017 “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”.
So it is immaterial if the supplier and SEZ recipient are located in the same state and accordingly supply from a registered supplier to SEZ will always be treated as inter-state. For instance, if a DTA supplier in Pune supplying to an SEZ unit anywhere in Maharashtra will be treated as Inter-State Supply.
But this provision was contradicting other place of supply provisions like supply of services of hotel accommodation, conferencing, etc. since in which case POS will always be the location of the immovable property or where the conference is held. But government vide Circular No 48/22/2018-GST Dated 14-06-2018 clarified that services of accommodation, conferencing etc. provided to SEZ unit shall be treated as Inter-State if supplied to SEZ units.
Supply for Authorized operations only:-
It is very pertinent to note here that supply to SEZ shall only be treated as Zero-rated when it is for authorized operation for which approval was granted to SEZ unit by the authorities. Though it was not mentioned in the IGST Act earlier but the same been confirmed by the Finance Act 2021 by amending the definition of Zero rated supply as per section 16(1)(b) of the IGST Act.
The same was earlier confirmed by Authority for Advance Ruling Karnataka in their advance ruling dated 26-07-2018 in the case of Coffee Day Global Ltd. and 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]
Letter of Undertaking and SEZ endorsement:-
The supplier of goods and services shall have the option under Section 16(3)(a) of IGST Act 2017 to supply to SEZ without payment of IGST under Bond or Letter of undertaking. LUT can be applied by filing form RFD-11 on GST common portal separately for each financial year. Supplier should quote ARN of LUT filed on each invoice issued to SEZ unit or developer.
As per Rule 89 of CGST Rules 2017 and Rule 30 of the SEZ Rules 2006 it is important to obtain endorsement from the SEZ specified officer to establish that goods or services been obtained by SEZ unit or developer for its authorized operations. For applying the endorsement SEZ unit/developer needs to file DTA procurement form at https://www.sezonline-ndml.com/ and obtain endorsement within 45 days of supply.
In absence of SEZ endorsement, the GST officer can raise a demand on the supplier by treating it as a normal taxable Supply. Therefore it is very important for suppliers to push their SEZ customers to timely apply for endorsement.
Import of Goods and services from SEZ to DTA and tax implication:-
Goods removed from SEZ to DTA are liable to custom duty and integrated tax (IGST) according to provisions as stated in Section 30 of SEZ Act 2005 and Customs Tariff Act.
The SEZ unit or DTA customer shall file Bill of Entry while removing goods from SEZ and shall pay the respective Custom Duty and IGST to the department and DTA customer can avail input credit of IGST paid based on Bill of Entry and reflect the same in Table 4.A.1 Import of Goods in their GSTR3B Return. And SEZ unit will treat it as export and no GST will be charge on their invoice.
How to File GST returns in respect of supply to SEZ units:-
The supplier shall reflect its outward supply transaction with SEZ in their returns as below:
- GSTR1- in Column 6B Supplier made to SEZ unit or SEZ developer. It can be either with IGST or without IGST
- GSTR3B- in Column 3.1(b) – Outward Taxable Supplies ( zero-rated )
SEZ unit will show transactions in their return as below:
- Without cover of Bill of Entry: Transaction shall be reflected in GSTR1.
- With Bill of Entry: No reporting in GSTR1. The same shall be reflected by DTA recipient in their GSTR3B as Imports.
Input Tax Credit in respect of the supply to SEZ units:-
Since supply to SEZ unit or developer is treated as Zero Rated under GST which is not at par with exempt or non-gst supply and therefore the supplier shall be eligible to avail GST ITC on its inward supplies and can use the same for discharging GST liability against its taxable supply. If ITC on inward supply is more than tax liability of taxable supply then supplier is eligible to apply for refund under section 54(3) of CGST Act 2017 and the detailed process is explained below.
Refund in respect of supply to SEZ Unit or Developer:-
As provided in Section 54(3) of CGST Act and Section 16(3) of IGST Act, the supplier can make supply with or without payment of IGST and can claim refund of tax paid on inward supplies or in case supply to SEZ is with IGST then refund of IGST paid.
Refund application can be made on GST portal in Form RFD-0 1 within 2 years from the end of relevant financial year in which supply was made and below list of documents shall be annexed to the refund application:
- Copy of GSTR-2A of the relevant period.
- Statement of invoices (Annexure-B).
- Self-certified copies of invoices entered in.
- Annexure-B whose details are not found in GSTR-2A of the relevant period.
- SEZ endorsement from SEZ Specified officer.
- Declaration under third proviso to section 54(3).
- Statement 5 under rule 89(2)(d) and rule 89(2)(e).
- Statement 5A under rule 89(4).
- Declaration under rule 89(2)(f).
- Undertaking in relation to sections 16(2)(c) and section 42(2).
- CA certificate (if required by an officer).
- Self-declaration under rule 89(2)(l) if the amount claimed does not exceed two lakh rupees, certification under rule 89(2)(m) otherwise.
