GST

Meaning of SEZ and GST Implications on SEZ Units

Because the implications of GST and the e-way bill affect everyone, special economic zones (SEZ) are also included in its scope. In this blog, we are discussing the implications of GST on units operating in SEZs in India.

What is an SEZ?

SEZ definition under the law

According to section 2 (za) of the Special Economic Zones Act, 2005, a “Special Economic Zone” is defined as any Special Economic Zone that has been notified under the proviso to sub-section (4) of section 3 & sub-section (1) of section 4 (including a Free Trade and Warehousing Zone) and includes an existing Special Economic Zone.

A Special Economic Zone (SEZ) is a geographically bound zone where the economic regulations relating to export and import are more flexible than in other regions of the country, according to the legal definition. A unit may be established within an SEZ for the manufacture of commodities and other activities such as processing, assembling, trading, repairing, reconditioning, and the manufacture of gold/silver, platinum jewellery, among others. SEZs are deemed to be outside of India’s customs territory.

The term SEZ may further include the following:

• Export processing zones (EPZ)
• Free ports
• Free trade zones (FTZ)
• Bonded logistics parks (BLP)
• Urban enterprise zones
• Free zones or Free economic zones (FZ/ FEZ)
• Industrial parks/ industrial estates (IE)

Objectives of SEZ

Some of the key objectives of SEZ are as follows:

• Promotion of exports of goods and services in order to boost foreign trade
• Increase in Foreign Investment
• Domestic Job creation
• Effective and Efficient Administration and Compliance Procedures
• Improved Infrastructure Facilities

Various attractive financial policies have been established to encourage entrepreneurs to establish units in these Special Economic Zones. Promotional offers and ease of investment, taxation, trading, quotas, customs, and labour regulations are examples of these policies. Furthermore, units established in these zones are eligible for special tax breaks.

Incentives to SEZ units

Below are some of the incentives and facilities available to SEZ units or SEZ developers:

• Customs or excise duty exemption for the creation & development of SEZs for authorized operations approved by the Board of Approval.
• Section 80-IAB of the Income Tax Act, 1961 provides an income tax exemption on income derived from the business of SEZ development for a period of ten years in a period of fifteen years.
• Exemption from the charge of minimum alternate tax under Section 115 JB of the Income Tax Act, 1961
• Exemption from the charge of dividend distribution tax under Section 115O of the Income Tax Act, 1961
• Exemption from Central Sales Tax (CST)
• Exemption from Service Tax (in accordance with Section 7, Section 26, and Second Schedule of the SEZ Act)

SEZ treated as foreign territory

A Special Economic Zone (SEZ)^[1] is an area where firms can pay lower taxes and have fewer legal complications. Although it is only found within a nation’s sovereign borders, it is classified as a foreign territory for tax purposes.

SEZs are not regarded as being a part of India. Based on this, it is clear that any supply to or by a Special Economic Zone developer or Special Economic Zone unit is considered an interstate supply under GST, and the Integrated Goods and Services Tax (IGST) will apply.

Thus, since it is not considered part of India, an SEZ will be subject to the Integrated Goods and Services Tax (IGST).

Zero-rated supplies under GST

From a compliance perspective, an SEZ is obliged to adhere to two sets of regulations. First, there are compliances governed by the SEZ Act of 2005, such as the production of periodic progress reports, and secondly, there are compliances required under indirect tax rules.

On the one hand, under the GST regimen, registration rules require SEZs to register separately because they are considered to be a separate business vertical. This, it appears, has increased the compliance and record-keeping burden on sectors with multiple SEZ units. Industry, on the other hand, has also applauded the decision of GST lawmakers to keep all supplies made to an SEZ as “zero-rated.”

While all exports of goods and services, as well as supplies of goods and services to an SEZ, are subject to IGST, these supplies will be classified as zero-rated under GST.

Meaning of import and export

The supplies to or from special economic zones have a little different treatment than the regular supplies. They are classified as a foreign territory for tax purposes, which is why they are treated dissimilarly. In simple words, even if they are in the same country, they will be treated differently and will be viewed as a foreign territory.

Because SEZs are deemed to be in a foreign area, the transactions with them can be classified as exports or imports.

Export refers to the movement of goods or services out of a Special Economic Zone (SEZ) via any mode of transportation, as well as the transfer of goods or services from one SEZ unit to another.

Import refers to the transportation of products or services into a Special Economic Zone, as well as the receipt of goods or services from one unit by another unit situated in another SEZ.

In other terms, it can be said that imports include all goods and services delivered to an SEZ in India from non-SEZ locations. Similarly, all goods and services delivered by an SEZ to non-SEZ areas are considered to be exports.

Tax advantage to SEZ units or developers under GST

When it comes to levying taxes, being in an SEZ can be beneficial to some extent. Any provision or supply of products or services, or both, to a developer or unit located in a Special Economic Zone (SEZ), shall be regarded as a zero-rated supply.

As a result, these supplies are subject to a zero per cent GST rate. To put it another manner, supplies into SEZ are GST-exempt and are counted as exports. As a result, suppliers of commodities to SEZs are able to:

• Supply under bond or LUT without payment of IGST and claim a credit of ITC; or
• Supply on payment of IGST and claim a refund of taxes paid.

In other words, suppliers making any supply to SEZ will have two options: charge no Integrated GST (IGST) to SEZ and deliver on a bond/ letter of undertaking, then file a refund claim for the appropriate Input Tax Credit (ITC); or charge IGST on its supply, pay it, and then claim the refund.

Thus, the levy of GST on a supply to SEZ is exempt.

On the other hand, when an SEZ provides products or services or both to anyone, it is deemed to be an ordinary inter-state supply and is subject to IGST.

But there is an exception to this. When an SEZ delivers products or services, or both, to a Domestic Tariff Area (DTA), this is deemed an export to DTA (which is exempt for the SEZ), and the individual receiving these supplies in DTA is responsible for paying customs duties and other import duties.

Rules of E-way bill for SEZ

An E-way bill is a digital way bill that is generated on the e-Way Bill Portal for the movement of products or goods from one place to another. It is generated on ewaybillgst.gov.in. If the value of the products being transported is greater than Rs. 50,000, the transporters are required to carry an e-way bill under GST. SEZ supplies are considered the same as other interstate commodities. The SEZ units or developers will be required to follow the same EWB practices as are followed by the rest of the industry.

The registered person who assists the movement of products from an SEZ to a DTA or any other location is responsible for the preparation and generation of e-way bills.

Example

Suppose XYZ is a unit or developer in an SEZ situated in Karnataka. A, based in Bangalore, is the recipient of items produced by the said SEZ. And this time, the commodities being transported are worth Rs. 75000.

As previously stated, movement from an SEZ is considered an interstate movement. In this instance, the goods have been moved out of the SEZ; however, even though they have been moved within the same state of Karnataka, it will be considered an inter-state supply, and IGST will be levied on this supply.

Now the question arises if an e-way bill is required to be generated, and if it is required to be generated, then who is responsible for that.

Because the movement of goods from and to an SEZ is considered to be an inter-state supply of goods, and the value of this particular supply exceeds Rs. 50,000, an e-way bill must be generated. To create an EWB, XYZ is obligated. If XYZ does not start generating the EWB, the transporter may choose to generate it. Furthermore, if XYZ is an unregistered dealer under GST rules and ‘A’ is a registered dealer, then ‘A’ must generate the e-way bill.

GST Refund for Export and Supply To SEZ

In accordance with the IGST Act, 2017, the GST Council implemented a ‘zero’ rated GST to exports and supplies to special economic zones. The term “zero-rated supply” refers to a product that is GST-free across its entire supply chain. GST exempts only the output in the event of exempted supplies, but GST must be paid on the input side. The principle of zero-rating aids Indian enterprises in competing globally on the global market by ensuring that tax is not imposed on the cost of exports.

According to the CGST Act, 2017, a person who has a GST registration and makes a zero-rated supply is eligible to receive a GST refund. The following are the two alternatives:

• Supply of goods or services under a bond or letter of undertaking without paying integrated tax and claiming a refund of unused CGST, SGST, UTGST, and IGST input tax credits, or
• Supply of goods or services with the payment of integrated tax and thereafter secure a claim of GST refund on the amount of tax paid

The taxable person registered under GST must meet the following conditions in order to obtain a GST refund:

• The person or individual in charge of the conveyance transporting the export products is required to file an export manifest or export report that includes the number and date of shipping bills or export bills.
• The applicant must also furnish a valid return in Form GSTR-3 or Form GSTR-3B. Once the shipping bill and export general manifest (EGM) is completed, as well as a valid return, the application for refund will be considered complete, and the refund process will begin.

Further, a statement stating the number and date of invoices, as well as the appropriate Bank Realisation Certificates or Foreign Inward Remittance Certificates, must be submitted along with the refund claim in the case of service exporters.

Takeaway

A special economic zone (SEZ) is a defined duty-free zone that is thought to be outside of India’s customs jurisdiction for the purposes of trade activities. Even though the GST regime was created largely to promote exports, it continues to stimulate SEZ entities by providing proper benefits for their permitted operations. The implementation of the GST (Goods and Services Tax) had a number of consequences for operational units in SEZs. These businesses had previously been exempted from a variety of taxes under the VAT regime, including Services Tax, Central Sales Tax & in some cases, Value Added Tax (VAT). However, under the GST regime, the units do not get the same benefits.

Read our article:What is the process of matching ITC (Input Tax Credit) under GST?