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SEZ Under GST: Definition, Transaction, E-way Bill and LUT Applicability

Confused how GST applies to Special Economic Zones in India? Time for your reading glasses

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Did you know that Special Economic Zones (SEZs) are treated as foreign territories for tax purposes, even though they're within a country's national borders? This is to provide simpler taxation and easier legal compliance so as to strengthen the economic fabric within such territories. Here, we will discuss everything you need to know about what SEZ under GST is, its transactions process, LUT applicability, and the e-Way bill.

What are SEZs?

SEZs or Special Economic Zones are areas within a country that are treated as foreign territories for tax purposes. In simple terms, even though an SEZ is located within a country, it's considered to be in a foreign territory. If supply is made to an SEZ it is considered as an export leading to no GST. However, if the supply is made from SEZ to any other part of the country, it is an interstate supply, and as a result, the Integrated Goods and Service Tax (IGST) becomes applicable. That said, there’s an exception to this rule: If a supply is made from an SEZ to a DTA (Domestic Tariff Area), it will be treated as an import and will again out of the periphery of GST.

For example: Let's say you have a business in Mumbai, and you're supplying goods to an SEZ in Pune. Even though both locations are in the same state of Maharashtra, the transaction is considered an interstate supply under GST. So, you'll have to deal with IGST. Now, if you receive goods/services from a non-SEZ location to your business set up in an SEZ, it will become an export and GST will not be applicable altogether.

SEZ under GST: Impact on Goods and Services Tax

Any supply of goods or services to an SEZ is considered a zero-rated supply. This means these supplies attract a zero tax rate under GST. You have two options when supplying to an SEZ:

  • Supply under bond or Letter of Undertaking (LUT) without payment of IGST and claim Input Tax Credit (ITC)

  • Make GST payment under IGST and claim a refund of the taxes paid

Please note that the transaction of goods/services from an SEZ to another SEZ is also considered an export item and thus the GST treatment of such supplies is NIL.

e-Way Bill for SEZ under GST

An e-Way bill is an electronic waybill that's required to relocate or move goods worth more than Rs 50,000. It's a critical document in the GST framework and is applicable to SEZ transactions under GST as well. So, if you're moving goods to or from an SEZ, you must carry a valid e-Way bill along.

How to Generate an e-Way Bill for an SEZ?

  • Log in to the E-Way Bill Portal: Use your GSTIN to log in.

  • Enter Details: Fill in all the necessary details like the value of goods, recipient GSTIN, etc.

  • Generate the e-Way bill: Once all details are filled in, generate the e-Way bill.

SEZ Transactions under GST

SEZ transactions under GST primarily fall into two categories as mentioned below:

  • Exports: Goods or services that are moved out of the SEZ to another unit in the same SEZ or different SEZ; or goods/services moved from an SEZ out of India. (w.r.t. the SEZ supplier)

  • Imports: Conversely, any goods or services coming into the SEZ from other parts of the country or from foreign territories are termed as imports. (w.r.t. the recipient in SEZ)

  • Interstate Supplies: This is when a supply is made from an SEZ to a non-SEZ area (except for DTAs). In such cases, it is considered an interstate supply and hence, IGST is applicable to the same.

Tax Implications of SEZ Transactions

Understanding the tax implications is crucial for smooth SEZ transactions under GST. Here's how it works:

  • Regular Supplies: When an SEZ unit supplies goods or services to any entity outside the SEZ, it's treated as a regular interstate supply. This means Integrated Goods and Service Tax (IGST) is applicable to such transactions.

  • Supplies to Domestic Tariff Area (DTA): If an SEZ unit supplies goods or services to a Domestic Tariff Area, it's considered an export to the DTA. In such cases, customs duties apply and the transaction is subject to export documentation and procedures.

Compliance and Documentation

For both types of transactions, proper documentation is essential. This includes invoices that clearly mention the nature of the supply and the applicable taxes. Additionally, E-Way bills must be generated for goods valued over Rs 50,000, ensuring compliance with GST regulations.

LUT Applicability in SEZ Under GST

Letter of Undertaking (LUT) is a commitment provided by the supplier to the government, assuring that they will adhere to all the rules and regulations of exports as per the GST law. You can supply goods to an SEZ under LUT without paying IGST. This is particularly useful for businesses having frequent transactions with SEZs.

Steps to Apply for LUT

To apply for a letter of undertaking is a fairly simple process, as given below:

  • Access the GST Portal: Log in using your credentials.

  • Navigate to Services: Go to 'Services' and then to 'User Services'.

  • Fill in the Form: Complete the LUT application and submit it.

Understanding SEZ under GST is crucial for businesses and tax professionals alike. The unique tax implications for SEZs make it essential to grasp the nuances of transactions, E-Way bills and LUT applicability.

As we have discussed earlier, zero-rated supplies offer a financial advantage, allowing businesses to manage cash flow effectively. The choice between supplying under a bond or LUT without paying IGST upfront and paying IGST to claim a refund later depends on your business needs.

Frequently Asked Questions FAQs

Q. What is the full form of SEZ?

The full form of SEZ is Special Economic Zone.

Q. What is the meaning of an SEZ?

As per the definition given in the Section 2 (za) of SEZ Act,2005, an SEZ or Special Economic Zone is an area within the borders of a country which is treated as a foreign land for the sake of taxation. For example: Noida Special Economic Zone or NSEZ and Gurgaon Infospace.

Q. Which services are zero rated services w.r.t. SEZs?

Services supplied to an SEZ are considered as zero-rated supplies, i.e. will be exempt from the purview of GST.

Q. Is RCM applicable to SEZ units under GST Law?

Yes, Reverse Charge Mechanism or RCM, under Section 9(3) and 9(4) of the CGST Act, 2017, applies to SEZ units or developer.

Q. What is a Domestic Tariff Area?

Domestic Tariff Area, as defined by law is the entire land of India excluding the areas covered by the Special Economic Zones or SEZs.


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