All About Special Economic Zone (SEZ) Under GST

The Goods and Services Tax (GST) Act defines a Special Economic Zone (SEZ) Under GST in the following manner:

→  As per Section 2(19) of the IGST Act, Special Economic Zone shall have the same meaning as assigned to it in clause (za) of Section 2 of the Special Economic Zones Act, 2005.

→ The specific clause (za) of Section 2 provides that “Special Economic Zone in GST” means each Special Economic Zone notified under the provision 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.

→ It is pertinent to refer to clause (i) of Section 2 which defines that “Domestic Tariff Area” means the whole of India but does not include the areas of the Special Economic Zones.

→ Further, exports defined under Section 2(m) of the SEZ Act as “Export” means:

• Taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or

• Supplying goods, providing services, from Domestic Tariff Area to a Unit or Developer; or

• Supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone.

→ It is settled that SEZ is an area considered to be situated outside India and any supply to SEZ is at par export and such supply attracts zero rates as zero-rated supply.

Thus, under GST Law, only for the purpose of levying GST, SEZ Units are not to be considered as part of India, which means:

• IGST Exemption: Any supply to SEZ Unit has been made exempt vide Notification No. 64/2017 – Customs dated 5th July 2017.

• Import: Any supply from SEZ Unit to DTA (Domestic Tariff Area) shall be treated as imports and would be taxable under Reverse Charge Basis at the end of the recipient. Rest other thing, it will be considered as part of India.

Simple Definition of Special Economic Zone (SEZ) Under GST

A Special Economic Zone, or SEZ, is an area which, although is situated within the territories of the Indian sub-continent, yet will still be considered as a foreign territory where trade takes place. This further reflects how compliances and taxes are levied on such SEZ Units or SEZ Developers by the government of India. Here, the supply of goods or services or both, to and from the so-called Special Economic Zones are treated in a different manner, as compared to the regular supply of goods or services or both that is carried out in India.

Thus, it can be said that under the Goods and Services Tax (GST) regulations, any supply of goods or services or both to or from an SEZ Unit or SEZ Developer will be considered as inter-State supply and further, an IGST (Integrated Goods and Services Tax) tax will be applicable.

SEZ and GST

When in a SEZ, it may be advantageous to a certain extent, especially in terms of taxes. One reason is that any supply of goods or services or both to a SEZ unit or Developer will be considered to be a zero-rated supply. It means that such supplies will attract zero tax rate under GST. In other words, supplies that are carried out into SEZs are exempt from GST and are considered as exports.

Therefore, suppliers of goods or services or both to any recipient in the SEZ can avail the following:

• Make supply under bond or Letter of Undertaking (LUT) without payment of IGST and claim credit of ITC (Input Tax Credit); or

• Make supply on payment of IGST and claim refund of taxes paid.

When goods or services or both are supplied from a Special Economic Zone to any one, it will be considered as a normal inter-State supply and will also attract IGST. However, the exception to this is, when a SEZ supplies goods or services or both to a Domestic Tariff Area (DTA), this will be considered as an export to DTA (which is exempt for the SEZ) and custom duties and other import duties will be payable by the person or business entity who receives supplies of goods or services or both via DTA.

Treatment of Special Economic Zone (SEZ) Under GST

Section 26 of the SEZ Act grants exemption, to every SEZ Unit and Developer from:

• Any duty of customs under the Customs Act,1962 on goods or services imported into or exported from India.

• Any duty of excise under Central Excise Act, 1944.

• Service Tax under Finance Act, 1994.

• Levy of taxes on sale and purchase of goods other than newspaper.

• The securities transaction tax levied under Section 98 of the Finance Act, 2004.

• Any transaction with or by SEZ Unit or SEZ Developer shall be exempted from any indirect tax law.

Export and Import of Goods and/or Services Explained

As we have learned from the definitions given above, an SEZ or Special Economic Zone is basically referred to as an area that is considered to be foreign territory, although such an area is originally situated in or within the borders of India.

Because SEZs are considered as a foreign territory, consequently, the transactions with SEZs also have been classified on the basis of exports and imports.

Exports are classified as:

• Taking goods or services or both out of India from a Special Economic Zone via any mode of transport; or

• Supply of goods or services or both from one SEZ Unit or Developer to some other unit in the same SEZ or to some other SEZ.

Imports are classified as:

• Bringing goods or services or both into a Special Economic Zone from an area located outside India, with the aid of any mode of transport; or

• Receiving goods or services or both from one SEZ Unit or Developer by some other unit or developer located in the same SEZ or in another SEZ.

E-Way Bill (EWB) and SEZ

Under GST, when transporting goods worth Rs. 50,000 or more, from one place to another, transporters are required to carry an E-Way Bill (EWB) and produce the same when needed by the authorities. Similarly, supplies of goods that are carried out to and from a Special Economic Zone are treated in the same manner as the other inter-State supplies. However, the SEZ Units or Developers will have to comply with the same EWB methods that are followed by the others in the same industry.

On the other hand, in case of supplies from SEZ to a DTA, or another area, the registered taxable person and/or business entity who facilitates the movement of goods shall be responsible for generating e-Way Bill.

Example:

Let us consider a simple example to understand this better:

Champak Co. is a unit in an SEZ that is located in the state of Karnataka. Mr. Gosh is the recipient of the goods that are manufactured by the SEZ and is located in the city of Bangalore. The value of the goods being transported is Rs. 75,000.

Therefore, from the example given above, we see that goods worth Rs. 75,000 are transported, for which an E-Way Bill is applicable and must be generated by the SEZ unit or SEZ Developer, which, in this example is Champak Co.

How is GST applicable in the above example?

The transport of goods from an SEZ is considered to be an inter-state supply. In this case, the goods have moved out of the SEZ, though it is moved inside the same state of Karnataka, it will be considered as inter-State supply and, therefore, IGST will be applicable to this supply of goods.

Is EWB required to be generated? If yes, who is supposed to generate it?

Since the transport of goods to and from SEZ is considered as inter-state supply of goods, and the value of this supply is more than Rs. 50,000, EWB is required to be generated. Here, Champak Co. is required to generate an EWB. The transporter may additionally opt to generate EWB if Champak Co. does not generate the bill. Further, it is important to be aware that, if Champak Co. is an unregistered supplier/dealer under GST, and Mr. Gosh is a registered dealer, then Mr. Gosh will be required to generate EWB.