[2017] 

83 taxmann.com 238 (Article)
Date of Publishing: July 18, 2017

Supply of Goods or Services to/ by Special Economic Zones under GST

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RAJASEKARAN K.
ACA

Meaning of Special Economic Zone

It is an exclusive territory established within India with the objective to attract more Foreign Direct
Investment, increased exports, increased employment creation, tax sops and to increase globally
competitive enterprises.

Types of SEZ

  Free Trade Zones (FTZ)

  Export Processing Zones (EPZ)
  Industrial Parks/Industrial Estates (IE)
  Bonded Logistics Parks (BLP)
  Free Zones/Free Economic Zones (FE/FEZ)
Categories under SEZ Act

Three categories of persons classified under SEZ act and governed by IGST Act are:

  SEZ Unit → A unit which is located in a SEZ

  SEZ Developer → A person who develops a SEZ as per the framework designed by
the Government
  SEZ Co-developer → A person who develops a SEZ along with another developer
Taxability of supplies to /By SEZ unit or SEZ Developer

 As per Section 7 of the IGST Act, Supply of goods or services or both to a unit
located in SEZ or SEZ Developer shall be treated as an inter-state supply.
  Similarly, Supply of goods or services or both by a unit located in SEZ or SEZ
Developer shall be treated as an inter-state supply.
  Supply of goods or services or both to a unit located in SEZ or SEZ Developer shall
be treated as a zero-rated supply u/s 16 of the IGST Act.
  Supply of goods or services or both by a unit located in SEZ or SEZ Developer to an
entity in taxable territory shall be treated as inter-state supply and IGST shall be
collected and remitted.
  Supply of goods or services or both by a unit located in SEZ or SEZ Developer to an
entity located outside India shall be treated as export of goods/services and hence as
zero rated supplies.
The impact of the aforesaid provisions can be understood from the following examples

S. Situation Taxability
No.
1 SEZL is a unit located in a SEZ in Chennai. As per S.16 of IGST Act, any supply to a
DTAL is a unit located in Domestic Tariff unit in SEZ is a zero rated supply. Hence
Area. DTAL supplies goods to SEZL for use the supply of RM by DTAL to SEZL shall be
in manufacture of finished products for subject to tax at Nil rate of duty.
exports.
 2 IFL is a unit located in an EPZ in Chennai As per S.7 of the IGST Act, supply of goods
which is a notified SEZ. It supplies finished by a SEZ unit shall be an inter-state supply
products taxable at 5% GST to DTAL which irrespective of both the supplier and
is a unit located in Domestic Tariff Area recipient being located in the same state.
(DTA) in Kanchipuram. IFL shall collect IGST @ 5% from DTAL on
the supply of finished goods.
3 CTL is a unit located in an EPZ in Chennai The supply of services by a SEZ unit shall
which is a notified SEZ. CTL exports IT be treated as export of service which is a
services to USL which is a limited company zero rated supply.
situated in USA. The consideration for the
supply is in convertible foreign exchange.
4 SEZL, a unit located in EPZ, imports goods
Any import of goods from an unregistered
from UK for use in manufacture of finished
person attracts GST under reverse charge
products that are to be exported to China.
mechanism. However the GST Council has
decided to allow exemption on imports by
SEZ units/SEZ developers that are to be
used for authorized operations. In the
given case since SEZL is using the goods
for manufacture of finished products for
export, there is no IGST impact on the
imports, subject to the other provisions of
the Customs Act, 1962 and the rules made
thereunder.
Availability of Input Tax Credit on supplies to SEZ

 The definition of exempt supply u/s 2(47) of the CGST Act covers supplies attracting
nil rate of duty. Section 16(2) of the IGST Act states that ITC can be availed in
respect of zero-rated supplies, irrespective of the fact that such zero-rated supplies
are covered under the scope of exempt supply.
  Section 17(2) of the CGST Act states that the availability of ITC shall be restricted
only to taxable supplies including zero–rated supplies and ITC shall not be available
on exempt supplies.
  Section 17(5) restricts ITC in respect of certain notified items as those which are
ineligible for ITC claim.
  Thus a unit supplying goods or services or both to a unit located in SEZ or to a SEZ
developer can claim ITC on the inputs or capital goods or input services used to
provide a supply to SEZ units/SEZ developer subject to restrictions given u/s 17(5).
Claim of Refund for Zero Rated Supply

  A person making a zero-rated supply can claim refund under any of the following
mechanisms prescribed u/s 16 of the IGST Act -
•   Supply without payment of IGST under a bond or Letter of Undertaking, subject to
prescribed conditions and procedure and claim the refund of unutilized ITC; or
•   Supply with payment of IGST and claim refund as per the procedure prescribed u/s 54
of the CGST Act.
  Refund of unutilized ITC shall not be available if -
•   the goods exported out of India are subjected to export duty; or
•   the supplier of goods or services or both avails of drawback in respect of central tax; or
•   claims refund of the integrated tax paid on such supplies.
  Further the refund rules prescribe that the refund application can be made by the
supplier only after the SEZ unit/Developer admitted the goods fully for authorized
operations. In case of supply of services, the supplier has to provide evidence of receipt
of services by the SEZ unit/Developer for authorized operations.
  In respect of refund of tax paid by the SEZ unit/SEZ developer on its supplies, the law is
 not very clear. However the Refund Rules prescribe a condition that to claim refund in
respect of export of goods can be made only after Export Manifest or the Bill of Export
is filed. This implies that any amount of tax/duty paid on export by the SEZ
unit/Developer can be claimed as refund. Similarly the SEZ unit/Developer can claim
any duty drawback or rebate of duty provided he does not make any other claim on the
same amount.
  As per Section 54 read with the Refund Rules, where a refund claim is made in respect
of zero rated supplies, 90% of the amount claimed shall be given as a provisional
refund. The balance amount shall be given within 60 days of the claim after due
verification of the documents and information.
  The refund of unutilized credit or as the case may be, the tax paid on zero-rated supplies
shall be paid directly to the applicant instead of crediting to Consumer Welfare Fund.
  The Doctrine of Unjust Enrichment that was applicable under the erstwhile Section 11B
of the Central Excise Act, 1944 and other VAT laws shall continue to apply in the GST
regime also. Thus the refund claim shall be allowed only if the incidence of tax is not
passed on to the buyer.
Status of export oriented undertakings

There is no clarity in the GST law with respect to the status of EOUs as the word EOU is mentioned
nowhere in the Act. Interestingly both SEZs and EOUsare governed by the SEZ Act, 2005. By the literal
interpretation of the word 'SEZ' used in the law, it can be understood that the benefit of zero rated
supply shall apply only in respect of a unit/EOU situated in a SEZ, as the latter partakes the character of
a unit being situated in a SEZ. As such, any supply made to an EOU other than being situated in a SEZ,
it shall be taxable at the applicable rates and not to be treated as a zero-rated supply. It is expected that
the Government would update the SEZ law and bring the status of EOU at par with SEZ. If and only if
such status is given, the purpose of implementing SEZ and EOU schemes would bear the intended fruits
under the GST regime. This would also give impetus for more EOUs to come up and give a boost to the
exports from India.

Summary

The summary of outward and inward supply by / to an SEZ and EOU are given in the following images:

Outward Supplies

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