Special Economic Zones are specially delineated areas that are treated as foreign territories in the context of trade and tariff laws. A Special Economic Zone (SEZ) is a specified duty-free zone deemed to be a foreign territory within the country for the purpose of tariff and trade. The objectives of SEZ include promotion of goods and services leading to enhanced economic activities, investment promotion, development of infrastructure, creation of employment opportunities etc. SEZ’s could be multiple product SEZ’s, sector specific, IT sector, free trade and warehousing, gem and jewellery sector, biotechnology etc. SEZ’s enjoy a host of fiscal and tax benefits. Indirect tax exemptions include customs duty, central excise duty, service tax, central sales tax, stamp duty and other miscellaneous taxes and duties. Direct tax exemptions include income tax, dividend distribution tax, securities transaction tax, minimum alternate tax etc.
In CCE, Thane-I v. Tiger Steel Engineering (I) Pvt Ltd 2010 (7) TMI 324 - CESTAT, MUMBAI, it was observed that SEZ Act, 2005 deems supplies from DTA to SEZ unit or developer as exports and deeming provisions are meant exclusively for the benefit of SEZ units. DTA units can not claim any complementary benefit based on deeming provision of SEZ Act or Rules by mere supply of goods to SEZ units. It was held that SEZ Act, 2005 is a special statute enacted for manufacturing units in SEZs and is intended to benefit such units only. The provisions in SEZ Act, must be considered as vehicles to convey benefit to SEZ units. Deeming fiction implies that legal fiction can not be extended beyond statutory object.
The SEZ Act, 2005 and the SEZ Rules, 2006 envisage the demarcation of an area of land to be designated as a Special Economic Zone. For the purpose of doing business in India, it is to be treated as a foreign country. The main incentive of setting up a unit in an SEZ is the relaxation in normally cumbersome procedure and much convoluted tax laws.
GST law is silent about separate registration of SEZ unit located in SEZ. Accordingly, SEZ unit will have to take registration under GST for either principal place of business or additional place of business.
Rule 8 of the CGST Rule, 2017 require each unit in a Special Economic Zone (SEZ) to seek a separate registration under the new tax regime, for each of the States where a business operation is carried on and where GST liability arises. Accordingly, a SEZ unit or SEZ developer shall make a separate application for registration as a business vertical, distinct from its other units located outside the SEZ zone.
Inter-State or Intra-State Trade
Export of goods and/or services shall be considered as inter-state supply of goods and/or services. Section 7(5) of the IGST Act, 2017 provides that supply of goods and/or services, when the supplier is located in India and the place of supply is outside India and to or by a SEZ developer or a SEZ unit shall be deemed to be a supply of goods and/or services in the course of inter-State trade or commerce.
SEZ Benefits and Incentives
The SEZ scheme was introduced in 2000, as an improved version of the earlier Free Trade Zone (FTZ) and Export Processing Zone (EPZ) schemes. Special legal dispensations by way of the SEZ Act, 2005, and SEZ Rules, 2006, were put in place with great hopes of facilitating creation of world-class infrastructure where investment would flow, generating a lot of employment and exports. Liberal tax exemptions were given to SEZ developers and units set up in SEZs for manufacturing, trading and for providing services.
Various incentives offered to SEZ units include duty-free import and duty-free domestic procurement of goods for development, operation and maintenance of SEZ units. SEZ units are also exempted from Central Sales Tax (CST), service tax and State sales tax.
Under the erstwhile tax regime, imports by SEZs were not charged excise duty and central sales tax (a levy on inter-State transactions). However, some States levy value added tax.
SEZs are governed by the Special Economic Zones Act, 2005. Sections 26(c), 26(e) and 26(g) of the SEZ Act, 2005, provides exemption from earlier indirect taxes to SEZ units or Developers. Section 26(c) deals with exemption from any excise duty on goods brought from the domestic market to an SEZ to carry out authorized operations by the units or developers. Similarly, Section 26(e) provides for exemption from the service tax on relevant services provided to SEZ units or developer. Section 26(g) of SEZ Act, 2005, offers tax exemption to SEZ units or developers from the sale or purchase of goods other than newspapers under the Central Sales Tax Act, 1956.
Zero Rated Supply
As per section 16 of the IGST Act, 2017, ‘Zero rated supply’ means any of the following taxable supply of goods and/or services, namely –
(a) export of goods and/or services, or
(b) supply of goods and/or services to a SEZ developer or an SEZ unit.
(a) Export of goods and/or services shall be considered as zero-rated supply under GST. What shall be considered as export of goods/services, is defined under section 2(5)-Export of goods and under section 2(6) Export of services of IGST Act, 2017
As per section 2(5) of IGST law, ‘export of goods’ means taking goods out of India to a place outside India. Therefore, to be called as export of goods, goods should cross the territory of India.
As per section 2(6) IGST law ‘export of services’ is defined to means
the supply of any service when
(i) the supplier of service is located in India,
(ii) the recipient of service is located outside India,
(iii) the place of supply of service is outside India,
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange, and
(v) the supplier of service and recipient of service are not merely establishments of a distinct person in accordance with section 25(4) of the CGST Act, 2017.
As per section 25(4) of the CGST Act, 2017, a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.
Therefore, to be called as export of service, above mentioned conditions needs to be satisfied.
(b) Supply of goods and/or services to a SEZ unit or a SEZ developer from a supplier located outside SEZ area i.e., Domestic Tariff Area (DTA) shall be considered as a zero rated supply.
Therefore, supply of goods and/or services to the SEZ units or Developers would be considered as zero rated supply but on other hand, supply of goods and/or services by the SEZ units or Developers from SEZ to DTA would be covered under the normal course of supply. Accordingly, such unit or developer will have to pay GST at the prescribed rates.
This can be understood by the given below Table:
Unit in SEZ
Nature of Supply
Zero rated supply
Exemptions under GST
As per GST law, no exemptions including utilization of duty credit scrips (MEIS/SEIS) have been specified for exporters or EOUs and SEZ units or Developer. Upfront exemption from customs duty/ excise duty for exporters or EOUs and SEZ units or Developer (including service tax and CST exemption) shall not continue as GST will be payable on imports or procurements from DTA.
For SEZ exemptions, the Central Government vide Notification No. 18/2017 -Integrated Tax (Rate), dated 05.07.2017has exempted services imported by a unit or a developer in the Special Economic Zone for authorised operations, from the whole of the integrated tax leviable thereon under section 5 of the Integrated Goods and Service Tax Act, 2017.
GST paid on such procurements shall be eligible as refund and therefore, will impact the working capital requirements temporarily (i.e., blockage of working capital) of such taxable persons. Therefore, for the exporters, SEZ developers and SEZ units, the facility of duty free imports/procurement of inputs for exports should be continued else it will lead to increasing requirement of working capital even for payment of IGST/CGST/SGST/UTGST.