TaxTMI 
TaxTMI 
TaxTMI 
Introduction
Special Economic Zones (SEZs) were established under the Special Economic Zones Act, 2005 with the objective of promoting exports and providing a globally competitive fiscal environment. With the advent of GST from 1 July 2017, the tax treatment of SEZ units and developers was realigned within the framework of the Integrated Goods and Services Tax Act, 2017 (IGST Act) and the Central Goods and Services Tax Act, 2017 (CGST Act). While GST subsumed multiple indirect taxes, the legislature consciously preserved the export-oriented character of SEZs through the concept of zero-rated supplies, exemption from import duties and structured refund mechanisms. The impact of GST on SEZ units and developers is therefore best understood through a combined reading of the IGST Act,CGST Act and the SEZ Act, 2005.
Separate GST Registration for SEZ Units and Developers
Under the second proviso to Section 25(1) of the CGST Act, 2017, a person having a unit in a Special Economic Zone or being a SEZ developer is required to obtain a separate GST registration distinct from its place of business located outside the SEZ in the same State or Union Territory. This statutory mandate treats SEZ registrations as distinct taxable persons. Consequently, transactions between a DTA unit and its SEZ unit, even if under the same PAN, are treated as supplies between distinct persons under Section 7 read with Schedule I of the CGST Act, thereby attracting GST implications as applicable.
Zero Rated Supplies to SEZ - Statutory Framework
Section 16(1) of the IGST Act, 2017 defines 'zero rated supply' to include (a) export of goods or services or both, and (b) supply of goods or services or both for authorised operations to a SEZ developer or SEZ unit. With effect from 1 October 2023, the statute expressly mandates that zero rating is available only when supplies are made for authorised operations. Section 16(3) of the IGST Act provides two alternatives to the supplier: supply under LUT or bond without payment of IGST and claim refund of unutilised input tax credit, or supply on payment of IGST and claim refund of the tax paid. Notably, unlike the automated system-driven refunds for physical exports of goods, the refund for SEZ supplies under the 'with payment' route is processed by the Jurisdictional Proper Officer upon the filing of a formal refund application (RFD-01). This statutory design ensures that supplies to SEZ remain tax neutral.
Refund Mechanism and Relevant Date
Refunds relating to zero-rated supplies are governed by Section 54 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017. As per the third proviso to Rule 89(1), in case of supply of goods or services to a SEZ unit or developer, the refund application is required to be filed by the supplier after endorsement by the specified officer of the SEZ confirming receipt of goods or services for Authorised Operations. Section 54(1) prescribes a limitation period of two years from the relevant date. Explanation (2)(ba) to Section 54 clarifies that, in case of zero-rated supplies to SEZ, the relevant date shall be the due date for furnishing the return under Section 39 (GSTR-3B) in respect of such supplies. The endorsement requirement and strict time limit make procedural compliance critical.
Inter-State Character of Supplies to SEZ
Section 7(5)(b) of the IGST Act provides that supply of goods or services or both to or by a SEZ developer or SEZ unit shall be treated as an inter-State supply. This provision overrides the general place-of-supply provisions contained in Section 10 and 12 of the IGST Act. Therefore, even if goods or services are supplied within the same State, transactions involving SEZ are treated as inter-State supplies and attract IGST, subject to zero-rating provisions under Section 16.
Import of Goods and Services by SEZ - Exemption from IGST
SEZ units and developers enjoy exemption from IGST on imports made for authorised operations. For goods, this is structurally achieved under Section 3(7) of the Customs Tariff Act, 1975, read withNotification No. 64/2017-Customs dated 05-07-2017 exempts goods imported by a SEZ unit or developer for authorised operations from IGST. Similarly, For services supplied for authorized operations, the exemption is granted under Section 6(1) of the IGST Act, 2017, viaNotification No. 18/2017 - IGST (Rate) dated 05-07-2017. These provisions collectively preserve the duty-free import regime historically available to SEZs, ensuring that the 'foreign territory' status for tax purposes remains intact for both tangible and intangible inputs.
Supply from SEZ to DTA - Treated as Import.
Under Section 2(m)(ii) of the SEZ Act, 2005, supply of goods or services from DTA to SEZ is treated as export. Section 2(i) defines Domestic Tariff Area as the whole of India excluding SEZs. Further, Section 51 of the SEZ Act provides that the provisions of the SEZ Act shall have overriding effect over any other law in case of inconsistency. When goods are supplied from SEZ to DTA, the transaction is treated as import into India. The DTA unit is required to file a Bill of Entry and discharge customs duty including IGST. Once IGST is paid at the time of clearance into DTA, the SEZ supplier is not liable to pay GST again on the same transaction, as such dual levy would amount to double taxation, which is not contemplated under the law.
Authorised Operations - Core Determinant of Tax Benefits
The concept of 'authorised operations' is fundamental to GST benefits available to SEZ units and developers. Section 2(c) of the SEZ Act defines authorised operations as those operations authorised under Section 4(2) for developers and Section 15(9) for units. Section 26(1) of the SEZ Act grants exemption benefits for authorised operations, subject to conditions under Section 26(2). Under GST, zero rating and import exemptions are available only when supplies are for authorised operations and duly endorsed by the Development Commissioner or specified officer. Supplies not forming part of authorised operations may not qualify for zero rating, as seen in various advance rulings ((e.g., cases involving construction of residential quarters or
staff canteens))
Do SEZ Units Have to Pay GST Under Reverse Charge (RCM)?
Under the Reverse Charge Mechanism (RCM), in a normal business scenario the recipient is required to pay GST on certain services such as legal services or GTA services. For a long time, there was uncertainty as to whether SEZ units were also required to discharge GST under RCM. However, recent judicial pronouncements such as in the Waaree Energies and Portescap India cases have clarified that SEZ units are not required to pay GST in cash under RCM where the services are used forauthorised operations. The legal reasoning is that, for this limited purpose, the SEZ unit can be treated as a 'deemed supplier', and since supplies to SEZ for authorised operations are zero-rated under Section 16 of the IGST Act, the SEZ unit may furnish aLetter of Undertaking (LUT) and treat the transaction as a zero-rated supply instead of paying tax in cash and later claiming refund. Consequently, the SEZ unit can avoid the cash outflow and refund cycle. However, this benefit is available only where the services are covered under the authorised operations specified in the Letter of Approval (LoA); if the services are not so authorised, the SEZ unit would be required to discharge GST under RCM in the normal course.
Overriding Effect of SEZ Act
Section 51 of the SEZ Act, 2005 provides that the provisions of the SEZ Act shall have effect notwithstanding anything inconsistent contained in any other law. This ensures that the export-centric and exemption-oriented scheme of SEZ is preserved even within the GST framework. While GST operates as a comprehensive tax law, it must be interpreted harmoniously with the SEZ Act to avoid defeating the legislative intent behind SEZ incentives.
Conclusion
The GST regime has preserved the essential tax-neutral character of SEZ units and developers through statutory recognition of zero-rated supplies under Section 16 of the IGST Act, mandatory separate registration under Section 25 of the CGST Act, and exemption from IGST on imports under Notifications 64/2017-Customs and 18/2017-IGST (Rate). The combined reading of Sections 7(5)(b),16 of the IGST Act, Sections 25 and 54 of the CGST Act, and Sections 2(m), 26 and 51 of the SEZ Act demonstrates a clear legislative intent to maintain SEZs as export-oriented enclaves within the GST ecosystem. However, the benefits are conditional upon strict adherence to authorised operations, procedural endorsement, timely refund filing and proper documentation. While GST has not diluted the fiscal incentives available to SEZ units and developers, it has introduced a structured compliance framework. A carefully designed compliance strategy aligned with statutory provisions and notifications is therefore essential to fully realise the intended tax advantages under the SEZ regime.