SEZ units under GST
Growth of Special Economic Zones (SEZs) in India underwent substantial modification due to the implementation of the Goods and Services Tax (GST). Special Economic Zones operate as specific zones that provide exporter with boosts and foreign investment benefits while creating jobs through their liberal economic policies and tax benefits. SEZs continue to keep their competitive position through specific exemptions and advantages under the GST system. The article explains special economic zones (SEZ) units under GST.
What is an SEZ Unit?
Under the SEZ Act of 2005 a Special Economic Zone unit represents any enterprise which operates in an SEZ sector under the established guidelines. Such business operations within these units manufacture either goods or provide services mainly for export markets.
The operation of Indian SEZ units follows regulations established by SEZ Act of 2005 and SEZ Rules of 2006 and GST laws in their current forms.
- SEZ Act, 2005
- SEZ Rules, 2006
- GST laws (CGST Act, 2017 & IGST Act, 2017)
GST Registration for SEZ Units
- SEZ units need to acquire their own GST registration regardless of possessing an existing registration for activities in the Domestic Tariff Area.
- Each SEZ unit must register independently with the State government authority in the location where it operates.
Supply to and from SEZ Units under GST
1. Supply to SEZ (Inbound Supply)
- The IGST Act, through Section 16 designates all supplies to SEZ units as zero-rated shipments.
- There are two established methods to conduct such supplies.
Two GST registration possibilities exist including payment of IGST followed by refund claims or making the supply to an SEZ with no immediate IGST payments and using a Letter of Undertaking (LUT) or bond to continue operations.
Without payment of IGST under a Letter of Undertaking (LUT) or Bond.
Exm– The supplier located in Maharashtra delivers machinery products to the Gujarat-based SEZ unit. The supply belongs to the zero-rated category, which enables businesses to claim input tax credit for reimbursement.
Note- The supplier must place “Supply to SEZ Unit with/without payment of tax” on their invoices, together with filing GSTR-1 and GSTR-3B returns.
2. Supply from SEZ (Outbound Supply)
- An SEZ unit makes supplies to units that are within and outside the SEZ and also outside of the DTA, and tax treatment depends upon where the recipient is located.
- A supply made to a DTA unit becomes an import that is subject to applicable customs duties, together with IGST, according to DTA requirements.
- Every export transaction conducted by SEZs towards foreign countries qualifies as zero-rated supplies with the right to claim refunds.
Key Benefits for SEZ Units under GST
- The tax burden applied to goods and services that SEZ units obtain through valid operations stays zero.
- SEZs can obtain a refund when they have unused input tax credit that has accumulated from making zero-rated supplies.
- SEZ units retain the right to no IGST charges on imports when these goods or services serve authorised operations.
- Operational efficiency increases due to tax exclusion from domestic tax demands, which leads to better export market competitiveness.
Compliance Requirements
- SEZ units need to keep distinct ledger systems where they differentiate their SEZ operational data from activities done in their domestic location.
- The compulsory submissions include GST returns GSTR-1 and GSTR-3B, which must be done either monthly or quarterly.
- For proof of zero-rated supply, maintain the following documents: Bills of Entry together with tax invoices and LUT/Bond copies, as well as SEZ officer endorsement.
- Electronic applications for GST refunds demand submission on the GST portal together with necessary documentation.
Important Points to Remember
- The zero-rating condition applies only when SEZ receives authorised operations supplies.
- SEZ developers, as well as co-developers who receive supplies from other taxable persons, get the same GST exemptions.
- A lack of approval from the SEZ officer can result in the denial of zero-rating benefits.
- The SEZ unit cannot claim input tax credit on capital goods which have been depreciated under the Income Tax Act using tax components.
Recent Clarifications by CBIC
- Circular No. 48/22/2018-GST established that even when the supplier and SEZ unit have the same State location, supplies to SEZ must be classified as inter-State supplies.
- Every invoice issued to SEZs requires both the recipient SEZ GSTIN and the appropriate place of supply identification.
Documents Required for Zero-Rated Supplies
- A tax invoice shows that the supply is destined for the SEZ unit.
- The payment process requires either a Letter of Undertaking or Bond submission by suppliers who make transactions without Integrated Goods and Services Tax.
- SEZ officer’s endorsement on the invoice
- Proof of delivery to SEZ
- GST refund application in Form RFD-01 (if applicable)
Get Started with TaxDunia
The tax exemptions enjoyed by SEZ units under GST enable both export promotion and foreign investment attraction for India. The major cost advantage from zero-rated supplies depends on meeting procedural documentation requirements with prompt compliance. The full advantages of SEZ under GST require businesses to follow CBIC notifications and maintain open records while correctly categorising their inward and outward supplies.
