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What is the impact of Special Economic Zones under GST?

GST Impact on special economic zone

Implementation of GST regime in India is one of the huge transformations, apart from demonetisation, that the country has seen in centuries. GST has become a major contributor towards the Indian economy and has had an impact on both the common man as well as business entrepreneurs. The new tax regime has affected every industry in a very short span of time. Today we will look at its impact on Special Economic Zones in India.

Guidelines of World Trade Organisation for Special Economic Zones

Supplies across the globe are governed by some standard principles set by the World Trade Organisation. As per the rules set by WTO, exports made to Special Economic Zones or SEZs get an exemption from VAT or GST. Any import made from such areas is taxed at the same rate as applicable to local production within the country. So, considering a zero-rated tax on exports is a principle of WTO which is related to destination based taxation rules and the VAT free items here is described as zero-rated where the manufacturer can recover the costs and overheads used to get resources. As GST also depends on a destination principle of WTO, the exports made within the country go outside of it termed as zero-rated, and the cost and overheads spent on resources are refunded back to manufacturers in the name of input tax. Guidelines have been set by OECD to neutralise VAT for multi-national companies. This ensures that the companies find it easier to comply with laws and find it easier to do their business.

GST Laws on Exports made to SEZs

Under GST Regime, the guidelines mentioned above remain the same and destination based taxation persists as zero-rated and a described benefit stays for the exports to Special Economic Zones (SEZs). The extension for the stated benefit is up to processing zones of the SEZs, but the supplies from this SEZ Areas to Domestic Tariff Area (DTA) is liable to describe as a taxable trade under the scope of GST rules and regulations.

As per the IGST Act, zero-rated supplies can be described as follows:

  • Zero-rated supplies are mentioned below regarding the goods or services or both, viz:
    • a. Export of Goods/Services or both
    • b. Supply of Goods/Services or both to SEZ developer or unit
  • According to the provisions of sub-section (5) of section 17 of CGST Act, the credit of input tax can be claimed for such zero-rated supplies, despite the supply being an exempt supply
  • A registered person under GST regime can claim the refunds in either case:
    • A taxpayer can supply the goods or services or both, under a bond or a letter of undertaking, fulfilling the conditions and procedure must be as mentioned in above provisions, without paying IGST and can claim the refunds of unused input tax credit.
    • A taxpayer can supply the goods or services or both, fulfilling the conditions and procedure as may be mentioned, with the payment of IGST and can claim the tax paid on the supply of the Goods or Services or both, according to the rules described under CGST Act.

Some other special provisions are also described under IGST Act, 2017 pertaining procurement of Goods and Services on which taxes are not paid. GST law provides the refunds for taxes paid by the supplier for supplies made to an SEZ developer or SEZ unit.

As per section 7(5), (b) of IGST Act, the supplies of Goods or Services or both to or by a developer or Unit Holder of SEZ will be termed as the supplies within the state and IGST would be chargeable with further refund mechanism.

For example, a taxpayer living in Bhuj supplies to Kandla SEZ in Gujarat, this supply must be termed as interstate supply, and IGST will be charged, despite refund scheme is also eligible for the same procedure because the supply comes under as zero-rated supply.

The laws are quite clear that supplies made in reference to a bond or a letter of undertaking to SEZ areas will be tax-free and other supplies to this area will attract the IGST, which will be claimed further for refunds.

GST Laws for SEZs where IGST is paid for Supplies

According to CGST laws, the supplies made with the payment of IGST to an SEZ Developer or SEZ Unitholder, he is liable for the payment of IGST at applicable rates. The export invoice will be generated in Indian currency with a proclamation that ‘Supply is meant for SEZ developer / unit with payment of integrated tax’. The declaration made with the mentioned option will make the refund procedure fast. The IGST mentioned in the invoice is not charged from the customer, it is just for the acknowledgement purposes.

The procedure will go like this:

  • For example, An entity X Pvt. Ltd. supplies the Goods (whose purchase price is Rs 1 lakh) for Rs 1.5 lakh to an entity Y Pvt. Ltd located in Kandla SEZ. The applicable IGST will be charged at 18%. The invoice will look like:
    • The selling price of the supply: Rs 1.5 lakh
    • Applicable IGST at 18%: Rs  27,000
    • Invoice will consist total value: Rs 1.77 lakh

Now, the entity X Pvt. Ltd. will release the tax liability of Rs 27,000 by using Input Credit of Rs 18,000 which is available on an account and cash payment of remaining Rs 9,000. So, the entity X will get a refund of Rs 27,000, and subtracting Rs 9,000 from the whole, a refund will be Rs 18,000 which is the real net worth of input tax credit.

GST is a new taxation regime with various new laws and requirements for proper compliance. Our tax experts at earlyGST can help you get all your GST returns filed and comply with the laws so that you can focus more on your business.

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Niteesh Singh
Niteesh Singh
Niteesh is a Tax Researcher and Content Lead at H&R Block (India). He holds an MBA with a specialisation in BFSI domain. In his career spanning over six years, he has helped thousands of people understand taxes in a simple and effective manner. Outside work, Niteesh is an astronomy geek who is also involved in wildlife conservation activities.