On 1^st of July 2017, GST (Goods and Services Tax) was introduced, defined in Article 366 (12A) of the Indian Constitution as, “any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.” applicable in whole of India. However, one question persists: How does GST affect SEZ?

SEZ or Special Economic Zone is a duty-free area designed to implement liberal economics and promote growth, trade and investment. This article unboxes tax provision, implication of GST on SEZ, and whether SEZ is exempted from GST or not?

SEZ Under GST

Special Economic Zone (SEZ), designed to foster special economic regulations and tax benefits in specific geographical areas in national territory but treated as foreign territory for promoting liberal economics, growth, investment and trade. SEZ plays a major role generating economic activity, jobs, develop infrastructure and increase FDI.

SEZ comes under legislative purview of SEZ Act, 2005 providing framework for establishment, development and management of SEZ, deemed as foreign territory for economic growth and activities. SEZ is defined as “"Special Economic Zone" means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone;” under Section 2 (za) of SEZ Act 2005.

This treatment as foreign territory, makes the supply from and to special economic zones very unique, making SEZ exempt from GST in normal understanding of GST, rather any trade or supply by and to SEZ is considered inter state supply or trade, therefore making it come under purview of Integrated Goods and Service tax (IGST).

Integrated Goods and Service tax (ISGT), an indirect tax levied upon any interstate supply of goods and services in India, collected by the central government and revenue shared between state and centre. For a better understanding see let’s go with an example:

A vendor in Delhi supplies any good to Special Economic Developer in Delhi or vice versa, it would be considered as interstate supply. Still, this doesn’t give complete view on tax implications on sez.

Supply To/From SEZ

SEZ being considered as foreign area, any supply by/to SEZ is considered as export and import,

1.      Import or Supply to SEZ: Bringing or suppling good or services into SEZ by any means of transport. Supply to SEZ has two scenarios for better understanding of tax implications on SEZ which are,

§  Supply to Sez with payment of duty:

Though SEZ units or developers don’t have any liability under GST but under some cases they might have to pay GST when an invoice with GST is issued against them by regular taxpayer. Later such SEZ unit/developer can claim refund from GST system for such charge.

§  Supply to Sez without payment of duty:

If such regular taxpayer doesn’t issue any such invoice with GST against SEZ unit/developer, it becomes tax-free for SEZ and later regular taxpayer can also claim refund through GST system.

2.      Export or Supply by SEZ: Taking or supplying goods or services out of SEZ by any means of transport, Supply from SEZ has two scenarios for better understanding of tax implications on SEZ, but it is little different from Supply to SEZ, here they can sell a good or service with or without Bill of Entry, Bill of Entry is a legal document filed  to custom authorities importer or their clearing agent declaring about the goods being imported.

§  Supply by Sez with Bill of Entry:

When SEZ unit supplies any good with Bill of Entry, they don’t face any liability under GST, but regular taxpayer has to pay regular GST as import rule, this supply is treated as import from SEZ.

§  Supply by Sez without Bill of Entry:

When SEZ unit supplies any good without Bill of Entry, this transaction or supply is treated as normal sale and purchase and regular taxpayer will have pay required GST.

Note: Services are treated as normal sales and are always supplied without Bill of Entry

Conclusion

Special Economic Zone (SEZ) play an important role to foster economic growth in nation, acting as cornerstone for increasing employment, FDI and economic activities. It has a very advantageous stance when it comes to tax provision and tax implications on SEZ and how GST affect SEZ, as any supply of goods or services or both to a Special Economic Zone developer/unit will be considered to be a zero-rated supply, but one must understand the compliance requirement to maximize benefits and avoid any error and navigate through tax provision affecting supply by and to SEZ.

By understanding such tax implication on SEZ, and maintaining accurate documents and being in adherence with other requirement, one can contribute in this liberal economic, economic growth and activities and personal benefit too and to achieve such one must know Supply by and to SEZ Under GST and tax implications.

References:

SEZ Act 2005

GST Act 2017