Supply to Special Economic Zone under GST

Supply to Special Economic Zone under GST

Meaning of Special Economic Zone (SEZ)

A special economic zone (SEZ) is a dedicated zone wherein businesses enjoy simpler tax and easier legal compliances. SEZs are located within a country’s national borders. However, they are treated as a foreign territory for tax purposes.

As per provisions of section 2 (za) of the Special Economic Zones Act, 2005; “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.

SEZs are not considered as a part of India. Based on this, it can be clearly said that under GST, any supply to or by a Special Economic Zone developer or Special Economic Zone unit is considered to be an interstate supply and Integrated Goods and Service tax (IGST) will be applicable.


Definition of DTA (Domestic Tariff Area)

As per Section 2 (i) the definition of DTA refers as “the whole of India but does not include the area of the special economic zones”.


Supply to SEZ

Under GST the supply of goods or services or both to SEZ are treated as zero rated supplies.

The below mentions the relevant provisions of zero rated supplies as per Section 16 (1) of the IGST Act, 2017 which states as:

Zero rated supply means any of the following supplies of goods or services or both, namely:
a) export of goods or services or both; or
b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.

As per provision of section 16 (2) of IGST Act, Input Tax Credit is available for making zero rated supplies.

Under GST, there are two options available on supply of goods or services to SEZ:

  1. Supplying goods or services to SEZ units without paying IGST ; or
  • Supplying goods or services to SEZ units with payment of IGST.

Supply under GST Bond

Under this option there will be no tax payment on the Supply to SEZ and Invoice shall carry a declaration ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT

OF INTEGRATED TAX. This option is best option where supplier is able to utilize Input Credit against other domestic supply. Under this option supplier can supply goods or services by executing a Bond hence Supplier is not required to pay IGST and claim subsequent refund. For this purpose Indemnity Bond will be executed in the specified format GST RFD-11 on non-judicial stamp paper between the Supplier of SEZ and the Government through the President of India. Supplier need not to execute a bond for each supply to SEZ, rather Bond will be running bond i.e. Bond once executed will be valid for period of 12 months.

Further, on the top of the taxable invoice it should clearly be mentioned that ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT OF INTEGRATED TAX’.

For, easy compliance and procedure, Bond will be accepted by the Jurisdictional Deputy or Assistant Commissioner. Along with bond, a Bank Guarantee is to be furnished as a security under the Bond. The Jurisdictional Officer may decide the amount of Security to be kept as Bank Guarantee depending upon track record of the Supplier. As per direction in any case the B.G. should normally not exceed 15% of the bond amount. When there is breach or failure in performance as per bond executed, the Government will invoke the B.G. to recover the loss or damage to the revenue. As on date, the module for furnishing GST RFD-11 is not available on the GST Portal, so the form is to be furnished manually to the Jurisdictional Deputy/Assistant Commissioner.

The requirement of bond has been mostly dispensed with. Thus, all direct exporters are required to execute only LUT w.e.f. 4-10-2017. Now, bond and guarantee is required in very few cases.


Supply under LUT

Just like bond, LUT will also be accepted by the Jurisdictional Deputy or Assistant Commissioner. The LUT once given, will be valid for the period of 12 months, and should be furnished for each year in duplicate. No B.G. is required to be furnished along with LUT, however if there is breach in condition of LUT, there may be consequences to furnish Bank Guarantee.
There are following conditions prescribed, under which LUT can be furnished instead of Bond.
  • A status holder as specified in paragraph 5 of the Foreign Trade Policy 2015-2020; or
  • taxpayer who has received the due foreign inward remittances amounting to a minimum of 10% of the export turnover, which should not be less than one crore rupees, in the preceding financial year, and he has not been prosecuted for any
    offence under the Central Goods and Services Tax Act, 2017 (12 of 2017) or under any of the existing laws in case where the amount of tax evaded exceeds two hundred and fifty lakh rupees.
LUT is acceptable by the Assistant commissioner or Deputy commissioner and validity period for LUT will be 12 months. Unlike bond, under LUT only in case of breach of the LUT there would be need of bank guarantee, hence the same is easier option than bond.

How to apply LUT in GST visit here

Supply to SEZ With Payment of IGST

Supply of goods or services to SEZ unit can also be done with payment of IGST. When the supplier delivers the supply and makes the IGST payment, the supplier, on top of the invoice clearly mentioned that ‘SUPPLY MEANT FOR SEZ UNIT / SEZ DEVELOPER WITH PAYMENT OF INTEGRATED TAX’.

As per provisions of section 16 (3) of the IGST Act, suppliers who are not able to execute LUT for any reason could explore the option of charging IGST. Hence, the suppliers can avail refund for such amount charged as IGST. Further, if the suppliers unable to claim the IGST refund, the supplier can request the SEZ unit to claim the refund of IGST charged.


SEZ Under GST

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

1. IGST Exemption:

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

2. 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.

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

  • Make supply under bond or LUT without payment of IGST and claim credit of ITC; or

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


GST Refund Policy on Supply to SEZ

Application for refund can be filed for supplies to a Special Economic Zone unit or a Special Economic Zone developer by:

  1. Supplier of goods after such goods have been admitted in full in the Special Economic Zone for authorised operations, as endorsed by the specified officer of the Zone;

  2. Supplier of services along with such evidence regarding receipt of services for authorised operations as endorsed by the specified officer of the Zone.

To claim refund on supply to SEZ, the following documents and information must be submitted:

  • Proof of receipt of goods or services as demonstrated by the specified officer of the SEZ.

  • A statement containing the number and date of invoices, the evidence regarding the endorsement SEZ Officer and the details of payment.

  • A declaration to the effect that the Special Economic Zone unit or the Special Economic Zone developer has not availed the input tax credit of the tax paid by the supplier of goods or services.


Supply from SEZ unit to a Regular Taxpayer:

Treatment of sales by SEZ is quite different from sales to SEZ. Under GST, an SEZ unit can sell their goods and service with or without the cover of Bill of Entry, which, like any other purchase, can be subject to Reverse Charge Mechanism (RCM).


Sale from SEZ with Bill of Entry

In cases wherein goods are supplied with Bill of Entry, such transaction shall bear no liabilities for the SEZ unit, however, for the buyer (Regular Taxpayer) it will be treated as imports from SEZ.


Sale from SEZ without Bill of Entry

In cases wherein the goods and services are sold without Bill of Entry,  then such transaction shall be treated as normal sales and purchase for SEZ and Regular Taxpayer, respectively.




For More information Visit TAXAJ
Posted By Ramesh Kumar Gupta




    • Related Articles

    • Letter of undertaking under gst for export

      What does LUT under GST mean? LUT in GST: Full form/meaning is Letter of Undertaking. It is prescribed to be furnished in the form GST RFD 11 under rule 96 A, whereby the exporter declares that he or she will fulfill all the requirement that is ...
    • Letter Of Undertaking Under GST

      File Letter of Undertaking (LUT) in GST What does LUT under GST means? LUT in GST: Full form/meaning is Letter of Undertaking. It is prescribed to be furnished in the form GST RFD 11 under rule 96 A, whereby the exporter declares that he or she will ...
    • Advantages of E-invoicing System in GST

      Introduction The GST Council, in its 35th meeting held on 21stJune 2019, has recommended the introduction of electronic invoices (‘e-invoice’) in GST in a phased manner on a voluntary basis for online generation of B2B e-invoices from January 2020. ...
    • GST e invoicing turnover limit

      e-Invoicing denotes electronic invoicing. Just like how a GST-registered business uses an e-way bill while transporting goods from one place to another. Similarly, certain notified GST-registered businesses must generate e-invoices for ...
    • Input Tax Credit Under GST With Example

      Input Tax Credit (ITC) Under GST With Examples  One of the objectives of GST was to eradicate cascading effect of taxes which existed under excise, VAT and service tax. Under GST Input Tax Credit can be claimed irrespective of place of supplier, thus ...