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Treatment of SEZ transactions under GST

Special Economic Zone (SEZ) means an area in the country subject to different economic regulations than other regions within the same country. In India , SEZs are the areas that offer incentives to resident businesses.SEZs generally offer duty-free exports, competitive infrastructures, tax incentives, and other measures to make it easier to conduct business.Therefore, in India, SEZs are a popular investment destination for many multinationals, especially exporters.

Further , SEZs are considered to be a foreign territory due to its unique economic regulations as compared to other areas in the same country. Resultant of which the SEZs experience and enjoy various benefits like paying lower tariffs , tax incentives , labour regulations etc.

SEZ zones have easy tax and legal compliances and make them the most convenient regions for FDI(Foreign Direct Investment).SEZ may also increase export levels for the implementing country and for the other countries that supply it with immediate required material.

Main objectives for implementation of SEZ Act , 2005 :

  • It helps in generation of additional economic activity,
  • It promotes export of goods and services,
  • It promotes investment from foreign and domestic sources,
  • Helps in creating employment opportunities,
  • Improves effective administration and procedure for compliance,
  • Facilitates development of infrastructure facilities in the country.

Definition of Special Economic Zone under the SEZ Act , 2005 and GST Law :

Section Definition
Section 2(za) of SEZ Act , 2005 SEZ 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 Zones.
Section 2(19) of IGST Act 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.

Treatment of SEZ under the GST Regime :

Any supply to or by a SEZ unit is inter-state supply thus attracting GST as per the provisions of IGST Act as SEZ is considered to be foreign entities.Supplies to Special Economic Zones are Zero Rated Supplies as per the IGST Act , 2017. Zero rating implies that the entire chain of Zero Rated Supplies is free from GST.

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

SEZ transactions under GST has been divided into two categories :

  • Exports Under GST :
  1. Taking goods, or providing services, out of India, from a Special Economic Zone by land, sea or air or by any other mode, whether physical or otherwise, or,
  2. Supplying goods, or providing services from the Domestic Tariff Area to a Unit or Developer, or,
  3. Supplying goods, or providing services from one Unit to another Unit or Developer, in the same or different Special Economic Zone
  • Imports Under GST :
  1. Bringing good and services into an SEZ from outside India by any transport mode,
  2. Goods and Services received from one SEZ unit by another unit located in the same or another SEZ unit.

As per Section 7(5)(b) of IGST Act , the supplies of goods or services or both to or by a developer of Unit Holder of SEZ will be designated as the supplies within the states and IGST would be chargeable with further refund mechanism.

In section 54 of CGST Act , 3 options have been mentioned to supply to special economic zones :

  • Supplies made with payment of IGST : As per GST Law, the supplies made with the payment of IGST to a SEZ Developer or SEZ Unit holder are liable for the payment of IGST at applicable rates. The Export invoice will be generated in Indian Currency with a proclamation that “SUPPLY MEANT FOR SEZ DEVELOPER/UNIT WITH PAYMENT OF INTEGRATED TAX”. The declaration made with the mentioned option will make the refund procedure quickly. The IGST mentioned in the Invoice is not charged from the customer, it is just for the acknowledgment purposes.
  • Supplies made under a Bond : As per Sec.16(3)(b) of CGST Act, 2017, there will not be any such payment of tax liability for the supply made to Special Economic Zone (SEZ) and the declaration will be clear in invoice such as ‘ SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT OF INTEGRATED TAX.”The option is very important as the supplier will be able to utilise ITC for any other supply.
  • Supplies made under a Letter of Undertaking : A Letter of Undertaking (LUT) is also acceptable by Assistant Commissioner or Judicial Deputy. The validity period for such a Letter of Undertaking (LUT) will be 12 months and it can be duplicated for each year.

As per Notification No. 16/2017 – Central Tax, dated. 07th July’ 2017, the conditions are specified for the intended person to release Letter of Undertaking (LUT).

The following conditions are specified for the intended person to release Letter of Undertaking (LUT) can be furnished in place of a Bond. As per the paragraph 5 of the Foreign Trade Policy 2015-2020, a person status holder can avail a Letter of Undertaking (LUT), The taxpayer who has got the foreign inward remittances which is at least 10% of the export turnover (which is not less than Rs.1 Cr.) in the previous financial year and the should not prosecuted as per CGST Act, 2017 or any laws claiming tax evasion of Rs.2.5 Cr.The exporters and suppliers who make supplies to the Special Economic Zone (SEZ), apart from the mentioned notification, are only to issue a Bond , not a Letter of Undertaking (LUT).

Procedure of raising invoice for supplies made to SEZ under GST :

Any supplying of goods or services to the Special Economic Zone can be done also by paying IGST. The supplier’s invoice must have a clear statement stating “ SUPPLY MEANT FOR SEZ WITH PAYMENT OF IGST ”. Suppliers who cannot use LUT for any reason can OPT for charging IGST, as stated under Sec.16 (3) of the IGST Act,2017.

E-way bill in SEZ under GST :

If the value of the goods is above Rs.50,000, the transporters need an E- way Bill to transport goods from one place to another under GST. As inter-state supplies, SEZ supplies are the same. Thus, SEZ units will have to follow the same E-Way Bill process as inter-supply goods.

Further , in case the supply of goods is from SEZ to a DTA, or any other place, then the person registered to do the movement of goods will also need to generate the e-way bill.

Applicability of RCM on SEZ units under GST Law :

Reverse Charge Mechanism (RCM) under Sec.9(3) and 9(4) of the CGST Act, 2017, applies to SEZ units or developers. They should recognise this as a liability and discharge the same by cash payment. Tax burden suffered can be availed as Input Tax Credit (ITC) and should be refunded under Rule 89(2)(a) & Rule 9(b).

Supply of Goods to DTA on instructions of SEZ :

A Bill-to-Ship-to transaction is when supplies are made at one place under the person's instruction, belonging to another place.

Asper Section 2(m) of SEZ Act 2005 ,a SEZ supplies goods to DTA as ‘export’ . If SEZ supplies goods to the DTA unit, the DTA unit must file a Bill of Entry and pay applicable customs duty, including IGST. DTA unit paying tax can be compared to reverse charge i.e, the tax is to be paid either by the recipient of goods and services.

The taxpayer supplying the goods to Domestic Tariff Area unit on the instructions of SEZ Unit (Bill to SEZ unit), the transaction is eligible to be treated as ZERO-RATED supply and the Recipient is eligible to claim refund in either of two ways specified under Sec.16(3) of IGST Act, 2017.

Thus , in India SEZs are the areas that offer incentives to resident businesses. SEZs generally offer duty-free exports, competitive infrastructures, tax incentives, and other measures to make it easier to conduct business.

Therefore, in India, SEZs are a popular investment destination for many multinationals, especially exporters.