SEZ Units –A discussion on provisions of GST Act & SEZ Act

A Special Economic Zone (SEZ) is an area located in the taxable territory. However, they are treated as a foreign territory for tax purpose i.e., SEZs are not considered as a part of India. The units/companies operating in said area are known as SEZ units. In simple words, even though the SEZ units are located in the same country, yet they are considered to be located in a foreign territory. The supply from and to special economic zone units have different treatment than the regular supplies. In this article we are going to discuss in detail about the provisions of GST which are applicable to SEZ units & the provisions of SEZ Act 2005 and we will also discuss the relaxations provided to units located in special economic zone.

GST provisions in respect of SEZ:

1. Interstate Supply:  
As per section 7(5) of IGST Act 2017 the supply of goods or services to or by a Special Economic Zone developer or a Special Economic Zone unit shall be treated as inter state supply. Further as per section 16 of IGST Act 2017 zero rated supply means export of goods or services or both; or supply of goods or services or both for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit.

Hence under GST laws the supplies made to SEZ units are treated as zero rated supplies, accordingly the supplies made to SEZ units can be done either on payment of integrated tax or on LUT basis. The supplier who supplies the goods or services to SEZ units shall be eligible for the benefits which are normally available for the exporters since it is considered as zero rated supply.

Since the supply made to a SEZ unit or to a SEZ developer is always considered as interstate supply, the doubt was arised among the taxpayers in respect of services of short term accommodation, conferencing, banqueting etc., provided to a SEZ developer or a SEZ unit. Since in case of accommodation services, the place of supply is the location of immovable property. Hence,  if the accommodation services are provided to SEZ units and if the location of supplier and place of supply is also in same state. Then in such whether such supply of service to SEZ unit would be considered as inter state supply or intra state supply.

In this respect the CBIC has also issued a Circular No. 48/22/2018-GST in para 1 of said circular it was clarified that it is an established principle of interpretation of statutes that in case of an apparent conflict between two provisions, the specific provision shall prevail over the general provision. In this respect, section 7 (5)(b) of the IGST Act is a specific provision relating to supplies of goods or services or both made to a SEZ developer or a SEZ unit, which states that such supplies shall be treated as inter-State supplies. It is therefore, clarified that services of short term accommodation, conferencing, banqueting etc., provided to a SEZ developer or a SEZ unit shall be treated as an inter-State supply.

2. Requirement to mention declaration on tax invoice issued to SEZ:
Rule 46 of CGST Rules 2017 contains the list of particulars that have to be shown in tax invoices. As per Rule 46 in the case of the export of goods or services, the invoice shall carry an endorsement 'supply meant for export/supply to SEZ unit or SEZ developer for authorised operations on payment of integrated tax' or 'supply meant for export/supply to SEZ unit or SEZ developer for authorised operations under bond or letter of undertaking without payment of integrated tax'.

Thus in case the goods are sold to the unit located in SEZ are done on payment of tax, the tax invoice should have the declaration that “supply to SEZ unit or SEZ developer for authorised operations on payment of integrated tax”. Similarly, if goods are sold to SEZ on LUT basis, the tax invoice should have the declaration that “supply to SEZ unit or SEZ developer for authorised operations under bond or letter of undertaking without payment of integrated tax”.

3. How to disclose in GST Returns – the supply made to SEZ units or SEZ developer:
(i) Under GSTR-1 there is separate table for showing the supplies made to SEZ unit or SEZ Developer , which is table 6B of GSTR-1.
(ii) In GSTR-3B the supplies made to SEZ units are required to be shown as zero rated supply i.e., table 3.1(b) the description of such table is outward taxable supplies (zero rated).
(iii) In GSTR-9 the supplies to SEZ units are shown in table 4(D) if supply is done on payment of tax. But if supply is done on LUT basis then  it is to be shown in table 5(B).

4. Non applicability of notified vide Notification No. 04/2024-CT dated 05.01.2024 on SEZ units or SEZ developers:
As per Notification No. 04/2024-CT dated 05.01.2024 the registered person engaged in manufacturing of the goods as specified in the schedule of said notification i.e., Pan-masala, Tobacco, Hookah etc. are required to furnish the details of packing machines being used for filling and packing of packages in FORM GST SRM-I, special statement for each month in FORM GST SRM-II, a certificate of Chartered Engineer FORM GST SRM-III in respect of machines declared.

In respect of the SEZ units or SEZ developers who are engaged in manufacturing of the goods such as Pan-masala, Tobacco, Hookah etc. the doubt was arised whether SEZ units or SEZ developers are required to furnish the details in FORM GST SRM-I, FORM GST SRM-II & FORM GST SRM-III. In this respect vide serial number 6 of para 2 of Circular No. 208/2/2024-GST it was clarified that the special procedure as notified vide Notification No. 04/2024-CT dated 05.01.2024 is not applicable to the manufacturing units located in Special Economic Zone.

5.  IGST Exemption to SEZ units in case of import of services:
In respect of SEZ units an exemption has also been provided vide Notification No. 18/2017 -Integrated Tax (Rate) which dictates that services imported by a unit or a developer in the Special Economic Zone for authorised operations would be exempt from the whole of the integrated tax leviable thereon under section 5 of the IGST Act, 2017.

6. No need to pay RCM:
In respect of SEZ units or SEZ developer it is also important to know that the units located in SEZ or SEZ developer is also not required to pay tax under Reverse Charge Mechanism. Thus if any unit located in SEZ has availed the services of GTA or Advocates or any other service on which RCM is applicable, in such situation still the SEZ unit is not required to pay tax under RCM. The same was also clarified by advance rulings authorities.

On same issue the Gujarat Authority for advance ruling in case of Abans Alternative Fund Manager LLP [2024(04)LCX0057(AAR)] pronounced a ruling. The facts of the case and the findings of advance ruling authority in the said case are summarised below;

The applicant being an SEZ unit has availed the service from Advocate towards execution of lease agreement for premise. The applicant has sought an advance ruling in respect of the question that whether applicant (SEZ Unit) is required to pay tax under reverse charge mechanism on services received from advocate by virtue of Notification No. 13/2017-Central Tax (Rate).

The advance ruling authority has observed that as per Notification No. 37/2017-Central Tax, a unit in DTA can supply services to a unit in SEZ without payment of IGST subject to furnishing of LUT to the jurisdictional Commissioner. Accordingly the advance ruling authority in this case held the applicant an SEZ unit is not required to pay GST under RCM on said services subject to furnishing a LUT or bond as specified in the Notification No. 37/2017-CT.

There is another ruling of Gujarat Authority for advance ruling in case of Waaree Energies Limited [2024(04)LCX0056(AAR)] in the said ruling it was also held that the applicant being an SEZ unit is not required to pay GST under RCM, subject to furnishing a LUT or bond as specified in Notification No. 37/2017-Central Tax dated 4.10.2017.

7. E-Way Bill and SEZ:
As per Rule 138 of CGST Rules 2017, the transporters should carry an E-Way Bill when moving goods from one place to another if the value of these goods are more than Rs. 50,000.
The SEZ supplies are treated how the other inter-state supplies are treated. The SEZ units or developers will have to follow the same EWB procedures as the others in the same industry follow. In case of supplies from SEZ to a DTA or any other place, the registered person who facilitates the movement of goods shall be responsible for the generation of e-Way bill.

Till now have discussed the provisions of GST which are relevant in relation to SEZ, now we are going to discuss the provisions of SEZ Act & SEZ Rules. Some important Provisions of SEZ Act 2005 & SEZ Rules 2006 are summarised as follows;

1. Establishment of SEZs:
Section 3 of the SEZ Act 2005 contains the procedure for making proposal to establish Special Economic Zone. The SEZs can be set up either jointly or severally - by the Central Government, State Government, or any person as per Section 3 of the SEZ Act. Further as per Section 15 of the SEZ Act, any person, who intends to set up a Unit for manufacture of goods or rendering services in a Special Economic Zone, may submit a proposal to the Development Commissioner concerned. On receipt of the proposal, the Development Commissioner is required to submit the same to the Approval Committee for its approval.

2. Net Foreign Exchange Earnings:
Rule 53 of SEZ rules 2006 states that SEZ units shall achieve positive Net Foreign Exchange Earnings (NFE), which is calculated cumulatively for a period of 5 years from the commencement of production, subject to conditions prescribed in the said rule.

4. Import and Procurement.
As per Rule 27(1) the SEZ unit or Developer may import or procure from the  DTA without  payment  of  duty, taxes  or cess  or procure from DTA after availing export entitlements or procure from other units in the  same or  other Special  Economic  Zone  or from  Export Oriented Unit,  all type of goods,  including capital goods  (new or  second hand),  raw  materials,  semi-finished  goods,  (including  semi-finished  Jewellery) component, consumables, spares   goods and   materials for making capital goods required for authorized operations except prohibited items under  the Import Trade Control (Harmonized System) Classifications of Export and Import Items.

5. DTA sale by SEZ:
A Unit may sell goods and services including rejects, wastes, scraps, remnants, broken diamonds, by-products arising during the manufacturing process, in the Domestic Tariff Area on payment of applicable Customs Duties under Section 30 of the SEZ Act and subject to fulfillment of condition laid down in Rule 47 of SEZ Rules. Further as per Rule 48(1), the DTA buyer shall file Bill of Entry for home consumption giving therein complete description of the goods and/or services namely, make and model number and serial number and specification along with invoice and packing list with the Authorised Officers.

Also as per sub rule (3) of Rule 48 of SEZ rules 2006 where the goods procured from DTA by a SEZ Unit are supplied back to the DTA as it is or without substantial processing, such goods shall be treated as re-imported goods and shall be subject to such procedure and conditions as applicable in the case of normal re-import of goods from outside India.

Provided that in the case where such goods are supplied back to the DTA as it is, and where the import duty on such goods is "Nil" and while procurement of such goods no export benefits were allowed against such goods, the Unit may be allowed to supply back such goods to DTA on the basis of invoice only and filing of Bill of Entry in such cases shall not be required.

6. Procedure  for  procurements  from the  DTA:
Rule 30 of SEZ Rules  prescribes the Procedure  for  procurements  from  the  DTA, as per sub rule 1 of rule 30 the DTA supplier supplying goods or services to a unit or Developer shall clear the goods or services, as in case of zero-rated supply as per provisions of section 16 of IGST Act, 2017 either under bond or undertaking or under any other refund procedure permitted under GST laws  or Central Excise law, or as duty or tax paid goods under claim of rebate, on the cover of documents laid down under the relevant Central Excise law for the purpose of export by a manufacturer or supplier.

7. Export of goods by SEZ:
As per Rule 45 of the SEZ Rules, a unit may export goods or services as per the terms and conditions of Letter of Approval including agro-products, partly processed goods, sub assemblies and components except prohibited items under the Import Trade Control (Harmonized System) Classification of Export and Import Items and the Unit may also export by-products, rejects, waste scrap arising out of the manufacturing process. A Unit may export free samples without any limit, including samples made in wax moulds or silver mould or non precious metal alloy or rubber moulds through all permissible modes of export.

8. Sub-contracting by SEZ:
As per rule 41 of the SEZ Rules, a unit may sub-contract a part of its production or any production process, to a unit in the DTA or in a SEZ or EOU or a unit in Electronic Hardware Technology Park unit or Software Technology Park unit or Bio-technology Park unit with prior permission of the Specified Officer to be given on an annual basis. No permission is necessary if subcontracting is done through units in same SEZ but both the supplying and receiving units should maintain proper account of goods involved in the sub-contracting.

9. Sub-contracting for DTA unit for export:
A Unit may on the basis of annual permission from the Specified Officer undertake subcontracting for export on behalf of a DTA exporter subject to conditions prescribed in Rule 43 of the SEZ Rules.

Further, as per Rule 47(2) of the SEZ Rules, scrap or dust or sweepings of gold or silver or platinum may be sent to Government of India Mint or Private Mint from a Unit and returned in standard bars in accordance with the procedure specified by Customs authorities or may be sold in the DTA on payment of duty on the gold or silver or platinum content in the said scrap.

10. Temporary removal of goods into the DTA:
As per Rule 50 of the SEZ Rules, the SEZ units can remove the goods from the Zone into the DTA temporarily without payment of duty & IGST for the purpose of display, export promotion, exhibition, testing , repair, refining, calibration or subject to conditions as prescribed.
Further as per Rule 51, such goods shall be brought back to the SEZ within one hundred and twenty days from the date of taking the goods out of the SEZ or within such extended period as may be permitted by the Specified Officer. If a unit fails to bring back the goods into SEZ within the prescribed period, the unit is liable to pay applicable duty on such goods.

11. Monitoring of activities of SEZ units:
As per Rules 15 and Rule 54 of the SEZ Rules, the performance of the Unit is to be monitored by the Approval Committee. If Approval Committee comes to the conclusion that a Unit has not achieved positive Net Foreign Exchange Earning or failed to abide by any of the terms and conditions of the Letter of Approval or Bond-cum-Legal Undertaking, without prejudice to the action that may be taken under any other law for the time being in force, the said Unit shall be liable for penal action under the provisions of the Foreign Trade (Development and Regulation) Act, 1992.

12. Exit of units:
As per Rule 74 of the SEZ rules, the Unit may opt out of Special Economic Zone with the approval of the Development Commissioner and such exit shall be subject to payment of applicable duties and taxes on the imported or indigenous capital goods, raw materials, components, consumables, spares and finished goods in stock and if the unit has not achieved positive Net Foreign Exchange, the exit shall be subject to penalty that may be imposed under the Foreign Trade (Development and Regulation) Act, 1992. The unit opting out of SEZ shall execute a legal undertaking in Form L.

In the event of a gems and jewellery unit ceasing its operation, gold and other precious metals, alloys, gem and other materials available for manufacture of jewellery is required to be handed over to an agency nominated by the Central Government at a price to be determined by that agency.

Development Commissioner can permit a Unit, as one time option to exit from Special Economic Zone on payment of duty on capital goods under the prevailing Export Promotion Capital Goods Scheme under the Foreign Trade Policy subject to the Unit satisfying the eligibility criteria under that Scheme.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.