GST on Supplies Made to Special Economic Zone (SEZ)

Under India’s GST regime, Special Economic Zones (SEZs) continue to enjoy a preferential tax treatment to promote exports, investment, and economic growth. Businesses supplying goods or services to SEZ units or developers often face confusion around GST applicability, zero-rated supplies, documentation, and refund procedures.

This blog explains GST on supplies made to SEZs in a clear and practical manner, covering legal provisions, tax treatment, Input Tax Credit (ITC), refund mechanisms, and compliance requirements.

What is a Special Economic Zone (SEZ)?

A Special Economic Zone (SEZ) is a designated area in India created to promote exports, attract foreign investment, and generate employment. SEZs operate under a special regulatory framework that provides tax and procedural benefits to businesses.

Under GST: 

• SEZs are treated as deemed foreign territory for taxation purposes.
  
  
• Supplies made to SEZs are treated similarly to exports.
  
  
• SEZs can be of two types:
  
  
  • SEZ Units
    
    
  • SEZ Developers

Legal Framework Governing GST on SEZ Supplies

The GST treatment of supplies to SEZs is governed mainly by the Integrated Goods and Services Tax (IGST) Act, 2017. 

Key legal provisions include:

• Section 16 of the IGST Act – Defines zero-rated supplies
  
  
• Section 7(5)(b) of the IGST Act – Treats supplies to SEZ as inter-state supplies
  
  
• Relevant CBIC notifications and circulars that clarify procedures and documentation

These provisions ensure that GST does not become a cost for export-oriented SEZ operations.

Whether Supplies to SEZ Are Taxable Under GST

Supplies made to SEZ units or developers are classified as zero-rated supplies, not exempt supplies.

This means:

• GST is technically applicable
  
  
• However, the effective tax burden is nil
  
  
• Suppliers can still claim Input Tax Credit (ITC)

Zero-rating applies to:

• Supply of goods to SEZ
  
  
• Supply of services to SEZ

Types of Supplies Made to SEZ

Supplies to SEZs can be categorized as:

a. Supply to SEZ Unit

Goods or services supplied directly to an operational SEZ unit for authorized activities.

b. Supply to SEZ Developer

Supplies made for the development, operation, or maintenance of the SEZ.

c. Authorized Operations

Zero-rated benefits apply only if the supply is for authorized operations, as approved by the SEZ authorities.

GST Rate Applicable on Supplies to SEZ

Although supplies to SEZs may attract a GST rate under normal circumstances, they are treated as zero-rated, making the effective GST rate 0%.

It is important to note:

• Zero-rated ≠ Exempt
  
  
• Exempt supplies block ITC
  
  
• Zero-rated supplies allow ITC and refunds

Two Options Available to Suppliers Making SEZ Supplies

Suppliers making zero-rated supplies to SEZs have two options:

Option 1: Supply Under LUT or Bond (Without Payment of IGST)

• Supplier does not charge IGST on the invoice
  
  
• Furnishes a Letter of Undertaking (LUT)
  
  
• Claims refund of unutilized ITC

Option 2: Supply With Payment of IGST

• Supplier charges IGST on the invoice
  
  
• Pays IGST to the government
  
  
• Later claims refund of IGST paid

Both options are legally valid; the choice depends on the supplier’s cash flow and compliance strategy.

Input Tax Credit (ITC) on Supplies Made to SEZ

Suppliers are eligible to claim ITC on inputs, input services, and capital goods used for making SEZ supplies.

Key points:

• ITC is allowed even if outward supply is zero-rated
  
  
• No ITC reversal is required for zero-rated SEZ supplies
  
  
• Proper documentation is essential to avoid disputes

Refund Mechanism for SEZ Supplies

Refunds can be claimed in two ways:

a. Refund of IGST Paid

Applicable when supply is made with payment of IGST.

b. Refund of Unutilized ITC

Applicable when supply is made under LUT without payment of IGST.

Conditions for refund:

• Supply must be for authorized SEZ operations
  
  
• Endorsement from SEZ officer is mandatory
  
  
• Refund application must be filed within the prescribed time limit

Documentation and Compliance Requirements

To avail zero-rating benefits, the following compliance requirements must be fulfilled:

• Tax invoice mentioning “Supply to SEZ – Zero Rated”
  
  
• e-Invoice compliance, wherever applicable, with correct SEZ details and zero-rated supply classification
  
  
• Endorsement by specified SEZ officer
  
  
• LUT filing (if applicable)
  
  
• Correct reporting in:
  
  • GSTR-1
    
    
  • GSTR-3B
    
• E-way bill compliance for movement of goods

Any lapse in documentation can lead to denial of refund or ITC.

Common Mistakes in GST on SEZ Supplies

Some frequent errors businesses make include:

• Treating SEZ supplies as exempt instead of zero-rated
  
  
• Missing SEZ endorsement on invoices
  
  
• Incorrect GST return reporting
  
  
• Claiming ITC without proper linkage to SEZ supplies

Avoiding these mistakes is crucial to prevent refund rejections and notices.

Recent Clarifications and Judicial Views

GST authorities have repeatedly clarified that:

• Zero-rating applies only to authorized SEZ operations
  
  
• Refunds are subject to strict procedural compliance
  
  
• Endorsement by SEZ officer is non-negotiable

Courts have also emphasized substance over form, but documentation remains critical.

Practical Example: GST Treatment on Supply to SEZ

Example:
A supplier provides services worth ₹10,00,000 to an SEZ unit.

• Under LUT:
  
  
  • No IGST charged
  • Supplier claims refund of ITC used
    
• With IGST:
  
  
  • IGST charged @18%
  • IGST paid and later claimed as refund

In both cases, GST does not become a cost if compliance is correct.

How Automation Can Simplify GST Compliance for SEZ Supplies

Manual handling of SEZ supplies often leads to errors in ITC tracking, return filing, and refunds. Automation helps by:

• Accurately classifying zero-rated supplies
  
  
• Tracking ITC and refunds
  
  
• Ensuring correct GST return reporting
  
  
• Reducing compliance risk and effort

Conclusion

Supplies made to SEZ units and developers enjoy a zero-rated GST status, provided they are for authorized operations and comply with procedural requirements. Understanding the distinction between zero-rated and exempt supplies, choosing the right refund option, and maintaining proper documentation are essential.

With correct compliance and the right systems in place, GST on SEZ supplies can be managed efficiently without impacting cash flows.