CA Hema Pandey

Updated on February 9th, 2024

Special Economic Zone (SEZ) under GST are granted with various benefits by government. They are exempted from most taxes, given tax holidays, allowed various deductions.

What is Special Economic zone (SEZ) Under GST?

Special Economic Zone (SEZ) is a place located within the borders of country and devoted for business.  

It enjoys various tax benefits as this zone is specialised in business which is important for the growth of country.  

Therefore, government also tries to boost this zone which will in return boost the development of nation.

Special Economic Zone is given various benefits by the government which other areas do not have.

Under GST also, Special economic zone (SEZ) has been given a special privilege in terms of tax payment. 


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Treatment of supply to Special Economic Zone (SEZ) under GST

Import or Export of goods/services is treated as Inter-state supply under GST.

SEZ is treated as a foreign territory in India, and any goods supplied to and from SEZ is considered as Import or Export Though the unit located in SEZ is within India, but it is treated as Inter-state.

Even the trade between two SEZ is also treated as Import or Export And therefore, IGST is leviable on such supply.

Supply of Goods or Services or both to SEZ is treated as “Zero Rated Supply” under GST.

Supply of Goods or Services or both by SEZ to Domestic Tariff Area (DTA) is treated as Import by DTA and Customs Duty is to be paid by recipient of supply.  

After so many advantages provided to SEZ, there are some serious issues faced by SEZ under GST

Let us discuss this one by one:  

Special Economic Zone GST

ITC refund on inward supplies:

SEZ units can make inward supplies in two ways as follows:

  • Without payment of IGST (With LUT) 
  • With payment of IGST (Without LUT) and claiming Input Tax Credit 

The suppliers of SEZ unit/developer are required to issue LUT so they don’t need to collect GST.  

However, if they don’t issue LUT, they have to collect IGST and then SEZ unit/developer can avail refund of such Input Tax Credit under GST.

Many of the suppliers do not issue LUT and thus collect IGST from SEZ.

Then the SEZ unit and developer were required to claim GST refund.

And thus, the compliances increase for SEZ unit/ developer. Also their working capital gets blocked.

Illustration :

Suppose, if a SEZ unit, purchased goods from DTA supplier worth Rs 100000/- (without LUT) and paid GST at 18% on that i.e., 18000/-

Now, since SEZ can claim refund of it, it will apply for it.

In this situation it may have to wait for some time and the working capital will be blocked for that period.

Zero-Rated supply for restricted operations: 

Supply to SEZ is Zero-Rated supply. But this provision is only for authorised operations.

For non-authorised operations, the suppliers are under confusion that whether to charge GST or not.

As per section 16 of IGST Act, all the supplies made to SEZ are Zero-rated, and GST is not chargeable to that.

However, as per various rulings and circular issued in June-2018, it was clarified that for operations that are not authorised, are liable for IGST.

Various supplies such as Banquet services, Event Management services, Service of accommodation to SEZ employees, supply of goods for employee consumption, etc. are covered, which are out of the purview of authorised supplies to SEZ.

On such supplies, it is not clear that whether these are Zero-Rated Supply or not.

As per IGST Act, any supplies made to SEZ are Zero-Rated and as per rulings, these types of services are leviable to GST.

So, the suppliers are still under confusion in case of such services.

Supply of goods to DTA on instruction of SEZ:

When supplies are made at one place under instruction of person belonging to another place, it is known as Bill-to-Ship-to transaction.  

Here bill is raised to person giving instruction, and supply is made to another person on instruction of such person.  

Therefore, these types of transactions are Zero-rated supply and no GST is leviable if LUT is issued.  

And if no LUT is issued, then the supply is liable to IGST on which refund can be claimed.  

However, under some transactions, issue is arising that GST will be leviable as the supply is not made to SEZ unit or developer.  

Thus, it is not clear that whether to charge GST or not on such transaction

Illustration :

If Head office is located in SEZ and factory where goods are to be supplied is located in DTA, the supplier will be instructed to ship goods to factory at DTA on the instruction of SEZ. 

Since bill is to be raised to SEZ Head office, no GST is leviable, However, goods are to be shipped to DTA, and hence GST is to be charged.  

Therefore, the supplier is confused as the bill is to be raised to SEZ and how can he charge IGST to SEZ.  

This point is still under confusion that what step to be taken in such scenario.

The suppliers are looking toward government for the solution in this regard.

Registration obtained under incorrect head:

There were many SEZ developer who selected as regular tax payer rather than SEZ tax payer,   There are numerous benefits for SEZ under GST which others can not claim.

In this case, if you register yourself as regular tax-payer, you will remain deprived of such benefits despite of being eligible for them.  

GST department, in this case, came up with a solution to send an e-mail to rectify it on the mail id with scanned LOA to obtain registration as SEZ unit or Developer.  

There are many such applications filed by SEZ unit/developer to change their type, but no action taken by the department.  

Government should add another field for such type of rectification.  

Otherwise, if it takes so much time to rectify it, then after rectification, all the benefits which were due will be demanded by SEZ units, and it will take more time.  

GST department may have to bear interest cost in case of refunds, if any, made to the SEZ unit/ developer.

Reverse Charge Liability:

There is a list of supply under which discharging GST compliances and payment of GST lies with recipient.  It is known as “Reverse Charge”.

For example, GTA services, Legal services, Sponsorship services, etc.  

There is a confusion that whether GST is to be paid on such services or not.

As supply to SEZ unit/developer is Zero-rated.  For this, GST council should come up with some clarification.

As we saw that despite of so many benefits, SEZ is facing so many issues under GST. 

GST is a wide law which covers all the aspects and areas of Indirect taxation.

But there are various drawbacks which are unattended and which needs to be sorted out. This is it from my side.

I hope this article was helpful to you You can write your feedback in Comment section

Thank You.

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CA Hema Pandey

About the author

Hema is a Chartered Accountant who is having about Eight years of experience in taxation and accounting. She is in practicing as a Chartered Accountant since 2020. She is a writer by passion and thus shares her experience and knowledge through her articles at various platform.

Predominantly her area of interest is GST. Since GST is a very new concept for India, every practitioner is looking for clarity in this area. She likes to share her experience with everyone and therefore tries to put them in form of articles.
Apart from this, she is also well-worsed in Financial market.

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