Special Economic Zone or SEZ in GST
A Special Economic Zone (SEZ) in GST guidance
Hello, in this post we are going to discuss the Special Economic Zone in India also known as SEZ in GST.
We will cover the following topics in this blog:
What is SEZ or Special Economic Zone?
A special economic zone (SEZ) is a special area that enjoys a unique economic regulation compared to other regions of the same country. SEZ is considered to be foreign territory.
These zones have simpler tax and easier legal compliances making it the most favourable area for foreign direct investment (FDI).
Therefore when you conduct business in SEZ, you can enjoy many benefits like tax incentives, pay lower tariffs and labour regulations, etc. Special tax holidays are also offered to the operational units in SEZ.
Objectives of SEZ
The various objectives behind the implementation of SEZ are:
- To increase foreign trade by promoting the export of goods and services
- Increase foreign investment in the country.
- Create more domestic jobs for the people and increase the employment rate.
- Improve effective administration and procedures for compliance.
- To improve infrastructural facilities in the country.
What is the impact on SEZ under the GST regime?
As per the GST, any supply to or by an SEZ developer /SEZ unit is an inter-state supply. It is because SEZ is considered to be a foreign territory and it will attract IGST.
It can be classified into 2 and they are Export and Import:
Export under SEZ in GST
- Transport of goods/services by any mode of transport from SEZ to outside India.
- Supply of goods /services between one SEZ unit/developer to another unit or the same unit.
Import under SEZ in GST
- Bringing goods /services by any mode of transport into an SEZ from outside India.
- Receiving goods/services from one SEZ unit/developer by another unit/developer located in the same SEZ or another SEZ.
Goods suppliers to SEZs can supply by the following:
- Under bond / LUT without paying IGST and claim ITC.
- By IGST payment and claiming refund of taxes paid.
- Integrated Goods and Service Tax (IGST) is applicable to the supply of goods/services from SEZ.
- IGST exception when an SEZ supplies goods /services to a Domestic Tariff Area (DTA). So, it is exported to DTA (exempt for the SEZ). The person receiving these DTA supplies is liable to pay customs duties and other import duties.
- Any supply of goods /services to an SEZ developer/unit has a zero-rated supply ( ie, Zero tax rate under GST). In short, supplies into SEZ are exempted from GST and considered as exports.
E-way Bill in SEZ under GST
Under GST, transporters need an e-Way Bill for the transport of goods from one place to another and if the value of the goods is above Rs. 50,000.
SEZ supplies are the same as inter-state supplies. So, SEZ units need to follow the same E-Way Bill procedures like that of inter-supply of goods.
Note: If the supply of goods from SEZ to a DTA or any other place, the registered person who does the movement of goods needs to generate the e-Way Bill.
An example to make it more clear for you:
Somz industries is an SEZ unit located in Kerala. Deepak located at Kochi receives the Somz manufactured goods. The value of transported goods by Somz industries is Rs. 60,000. So, this transport of goods is an Inter-state supply and thus IGST is applicable.
SEZ under GST
The GST is India’s largest economic reform, and it provides multiple benefits to companies located in special economic zones. The advantages are:
- Any transfer of products or services to the SEZ unit is considered a zero-rated supply.
- Every transaction of goods and services to the SEZ shall be free from IGST (Notification No. 64/2017-Customs).
Any transfer or supply from the special economic zone (SEZ) to the domestic tariff area (DTA) will be regarded as an export from the SEZ to the DTA. In such cases, the reverse charge is applicable where the recipient of the supply is liable to pay the tax.
Additionally, the supplier shipping goods to SEZ can
- Deliver products or services, or both, depending on the situation, in accordance with the letter of undertaking (LUT) or bond without having to pay the IGST, and you can also make an input tax credit claim (ITC). Or,
- Transfer the goods and services after paying the IGST, and then request a tax refund.
Definition of DTA (Domestic Tariff Area)
The definition of DTA, according to Section 2(i), relates to “the entire territory of India, excluding the region of the special economic zones.”
Supply to SEZ
The supply of products, services, or both to SEZ is a zero-rated supply under GST.
As stated in Section 16(1) of the IGST Act of 2017, the following details the applicable provisions for zero-rated supplies:
A zero-rated supply is any product, service, or combination of both, such as:
a) export of goods or services or both; or
b) providing goods, services, or both to a developer of a special economic zone or a special economic zone unit.
According to section 16 (2) of the IGST Act, input tax credits are available for making zero-rated supplies.
On the supply of goods or services to SEZ under GST, there are two possibilities:
- Supplying goods or services without paying IGST to SEZ units; or
- Supplying goods or services to SEZ units with payment of IGST
Supply of Goods or Services by SEZ
According to rule 47 of the Special Economic Zones Rules, 2006, the delivery of goods from a SEZ is subject to section 30 of the Special Economic Zone Act, 2005, which requires the payment of customs duty. According to Section 30 of the Special Economic Zone Act of 2005, the charge will apply to the customs charges if the concerned holder of the items removed them from the SEZ.
The provisions above clearly state that, under the SEZ plan, supplies provided by SEZ to DTA shall treated as goods imported into India, and as a result, the importer shall pay the required customs charges to the customs division upon clearance of the items. As a result, under the Customs Tariff Act of 1975, which contains Integrated Tax in accordance with section 3 (7) of the Customs Tariff Act, the items that have been cleared from SEZ to DTA are considered imports into India and are therefore subject to payment of customs tax.
Section 3(7) of the Customs Tariff Act states that “any article imported into India shall, in addition, become liable to integrated tax at such rate, not exceeding forty percent, as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section” (8)
With that, we have come to an end to this post on SEZ in GST. Share with us your queries in the comments section below.