Table of contents:

• Understanding the basics of SEZ in GST
• Interpretation of key provisions under GST Laws on SEZ
• GST Implications for SEZ Units: Taxability and Zero-Rated Supplies
• E-Way Bill Rules for SEZ Units
• Benefits and Incentives for SEZ Units Under GST
• Challenges Faced by SEZ Units Under GST
• Registration and Compliance Requirements for SEZs
• What’s New in 2024 for SEZ units
• Case Studies
• Conclusion

A Special Economic Zone (SEZ) is a designated area where businesses enjoy various tax exemptions and incentives to promote exports, attract investment, and generate employment. SEZs are integral to India’s economic strategy, offering businesses unique benefits under the GST (Goods and Services Tax) framework.

Understanding the basic of SEZs under GST

The SEZ Act, 2005, governs these zones, aligning their operations with GST laws to simplify tax compliance for exporters. SEZs enjoy zero-rated supply status, meaning no GST is charged on goods or services supplied to these zones. Additionally, imports into SEZs are duty-free, further reducing operational costs for businesses focused on exports. SEZs play a vital role in India’s economy by:

• Reducing costs for businesses, encouraging exports.
• Attracting foreign and domestic investments.
• Boosting employment and global trade competitiveness.

By understanding SEZ provisions under GST, businesses can maximise tax benefits while staying compliant, ensuring smooth operations and contributing to India’s economic growth.

Interpretation of key provisions under GST Laws on SEZ

GST laws treat Special Economic Zones (SEZs) as distinct territories to encourage exports by offering tax relief and simplifying compliance. Supplies to SEZs are categorised as zero-rated supplies, meaning no GST is charged, while supplies from SEZs to Domestic Tariff Areas (DTAs) are treated as imports and attract applicable GST.

Key Provisions for SEZ Transactions:

1. Zero-Rated Supplies to SEZs:
   • Goods/services supplied to SEZ units or developers qualify as zero-rated.
   • Suppliers can claim Input Tax Credit (ITC) or refunds for GST paid on inputs.
   • Supplies can be made without payment of GST using an LUT (Letter of Undertaking) or with upfront IGST payment (later refunded).
2. Supplies from SEZ to DTA:
   • Considered imports, attracting GST and other duties as per customs rules.
   • The DTA recipient is responsible for GST payment under Reverse Charge Mechanism (RCM).
3. Imports into SEZs:
   • Goods/services imported into SEZs are exempt from GST, customs duties, and integrated tax.
4. Intra-SEZ Supplies:
   • Transactions within the same SEZ are GST-exempt. Supplies between SEZs follow inter-state GST rules.

Compliance Requirements:

• LUT Submission: Avoids upfront GST for zero-rated supplies.
• GST Invoices: Must state “Supply to SEZ for Authorised Operations – Without Payment of GST.”
• GST Returns and Refunds: Suppliers file GSTR-1 for zero-rated supplies and claim refunds via Form RFD-01.

Legal Framework:

These provisions are based on Section 16 of the IGST Act, Rule 89 of CGST Rules, and the SEZ Act, 2005. By leveraging these benefits, SEZ units and suppliers can reduce costs, streamline compliance, and boost exports, ensuring seamless trade under the GST framework.

GST Implications: Taxability and Zero-Rated Supplies

SEZ units benefit significantly under the GST framework, with provisions ensuring minimal tax liability. The classification of supplies as zero-rated eliminates GST on eligible transactions, supporting cost-effective operations. Key Taxability Aspects:

• Supplies to SEZ Units: These supplies are treated as zero-rated. Suppliers can either:
  • Use a Letter of Undertaking (LUT) to avoid charging GST.
  • Pay IGST and later claim a refund.
• Supplies from SEZ to DTA: Considered imports for the DTA buyer. GST is applied, with the buyer paying under the Reverse Charge Mechanism (RCM).
• Imports into SEZs: Goods or services imported for authorised operations are exempt from GST and customs duties.

Features of Zero-Rated Supplies:

By adhering to compliance rules such as accurate invoicing and claiming refunds, SEZ units and their suppliers can maximize the benefits of zero-rated supplies while staying tax-compliant.

E-Way Bill Rules for SEZ Units

E-Way Bills are essential for the smooth movement of goods under the GST framework, including transactions involving SEZ units. They ensure transparency, accountability, and compliance for the transport of goods into, out of, or between SEZs.

When is an E-Way Bill Needed?

• Supplies to SEZs: For goods transported from a Domestic Tariff Area (DTA) to an SEZ unit.
• Supplies from SEZs to DTA: Goods moving out of SEZs into the DTA as imports.
• Inter-SEZ Transfers: Mandatory for goods moving between two SEZs.
• Intra-SEZ Movement: Not required for movement within the same SEZ unless specified by state rules.

Key Details to Include in an E-Way Bill

• Supplier and recipient GSTIN, address, and SEZ registration details.
• Description of goods, HSN code, quantity, and value.
• Transporter details, including vehicle number or transporter ID.

Exemptions

• Goods valued below ₹50,000.
• Movement of goods within the same SEZ in non-motorised transport.

Compliance Tips

• Use the correct GSTIN and SEZ registration numbers.
• Ensure invoices match E-Way Bill details.
• Generate the bill under the ‘Bill to-Ship to’ model if goods are shipped via a third party.

Failure to comply can result in penalties up to ₹10,000 or seizure of goods. Following E-Way Bill rules ensures timely delivery and prevents disruptions in operations.

Benefits and Incentives for SEZ Units Under GST

Under the GST framework, SEZ units and developers enjoy several incentives that reduce tax burdens, encourage investment, and streamline trade. These benefits make SEZs highly attractive for export-oriented businesses.

1. Zero-Rated Supplies: Under Section 16 of the IGST Act, supplies to SEZ units and developers are classified as
2. Tax Exemptions on Imports: SEZ units enjoy complete tax relief on imports of goods and services.
3. Simplified Compliance Processes: SEZs benefit from a streamlined GST process with reduced documentation for tax exemptions.
4. No GST on Exports: Under GST, SEZ units’ exports are considered zero-rated supplies.
5. Operational Efficiency through Duty-Free Procurement: SEZ units can procure goods and services duty-free from both domestic and international suppliers.
6. Earnings in foreign currency: SEZ units focus on exports and make money in foreign currency; they are eligible for extra financial benefits such as lower interest rates on loans and money to help with export promotion schemes.
7. Enhanced Business Credibility: Operating within an SEZ often enhances a business’s reputation.
8. Long-Term Policy Stability: SEZs are governed by the SEZ Act, 2005, and the benefits under GST are well defined.

Comparison of Benefits for SEZ Units and Regular Units

By leveraging these incentives, businesses can reduce costs, improve profitability, and establish themselves as globally competitive entities.

Challenges Faced by SEZ Units Under GST

While SEZ units enjoy significant benefits under GST, they face unique challenges that can complicate compliance and disrupt operations.

Simplifying refund processes, providing clarity on authorised operations, and improving automation in tax administration can significantly reduce these barriers, allowing SEZ units to leverage their benefits fully.

Registration and Compliance Requirements for SEZs

To fully benefit from GST provisions, Special Economic Zones (SEZs) must adhere to specific registration and compliance requirements. These requirements are essential for ensuring eligibility for tax benefits, maintaining operational transparency, and avoiding penalties.

1. Separate GST Registration: SEZ units and developers must get a separate GSTIN for their SEZ operations, which is different from any DTA registrations. Each SEZ unit must register individually.
2. Document Submission:  Businesses need to provide documents such as:
   • PAN of the entity.
   • Proof of SEZ approval from the Development Commissioner.
   • Address proof of the SEZ unit.
   • Details of authorised signatories.
   • Registration is completed online via the GST portal.
3. GSTIN for Authorised Operations: SEZ GST registration applies solely to activities approved as authorised operations by the Development Commissioner. Non-authorised operations must be handled separately under DTA registrations.

Compliance Requirements for SEZs

Proper registration and meticulous compliance ensure that SEZ units can fully leverage the benefits under GST. Staying updated on procedural changes and maintaining accurate records are crucial for smooth operations and uninterrupted access to incentives.

Case Study

Nokia SEZ in Sriperumbudur, Tamil Nadu

Industry: Electronics Manufacturing

• Background: Nokia established a manufacturing facility in the Sriperumbudur SEZ to cater to domestic and international markets. This SEZ became one of the largest mobile handset manufacturing hubs globally during its peak.
• Impact:
  • Generated employment for over 30,000 individuals, including direct and indirect jobs.
  • Exported mobile devices worth over ₹10,000 crore annually during its peak years.
  • Benefited from SEZ incentives, including zero-rated GST on exports and customs duty exemptions on imported components.
• Challenges: The facility faced legal and tax disputes, resulting in a decline, but it remains an example of how SEZs can boost industrial growth.

Conclusion

Special Economic Zones (SEZs) play a vital role in driving India’s economic growth by offering tax incentives, duty-free imports, and zero-rated supplies under the GST framework. These benefits enhance export competitiveness, attract investment, and create employment opportunities.

While challenges like complex compliance and refund delays persist, initiatives such as the DESH Bill and technological advancements like blockchain promise to simplify operations further. Successful examples like Mundra SEZ and Infosys IT SEZ highlight their potential to boost exports and strengthen India’s global position.

By staying updated on evolving regulations and leveraging SEZ benefits effectively, businesses can maximise growth and contribute to India’s export-led economic future.