Sandal wood supplies to SEZ units qualify as zero-rated inter-state supply under IGST Act Section 7(5)(b), 18% tax demand rejected

Kerala HC dismissed an appeal regarding GST classification on sandal wood sold to SEZ units. The court held that supply of goods to SEZ units constitutes inter-state supply under IGST Act Section 7(5)(b), regardless of whether supplier and delivery location are within the same state. Such supplies qualify as zero-rated under Section 16, making 18% IGST demand unsustainable. The court rejected arguments that the SEZ exemption applies only to units within the same state, finding no statutory distinction based on SEZ location.

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Issues Involved:
1. Liability to pay 18% IGST on goods purchased by a SEZ unit.
2. Determination of the nature of supply (inter-State or intra-State).
3. Applicability of zero-rating to supplies made to SEZ units.

Issue-wise Analysis:

1. Liability to Pay 18% IGST:
The primary issue is whether the respondent, a SEZ unit, is liable to pay 18% IGST for Sandal Wood purchased in an auction conducted by the Forest Department. The tender notification required the successful bidder to remit 35% of the bid amount within 7 days and the balance along with applicable taxes within 14 days. The sale confirmation letters included an 18% IGST demand, which the respondent challenged, seeking to exclude the IGST amount from the purchase value.

2. Determination of the Nature of Supply:
The court examined whether the transaction should be classified as inter-State or intra-State supply. According to Section 7 of the IGST Act, inter-State supply involves the supplier and place of supply being in different States or Union territories. Section 8 defines intra-State supply as occurring within the same State or Union territory but excludes supplies to SEZ units. The court noted that the supply of goods in this case did not involve movement of goods, as the delivery was to be taken from the Forest Depot in Kerala. Therefore, the supply location was within the State itself. However, Section 7(5)(b) specifies that supplies to SEZ units are treated as inter-State trade, regardless of the supplier's and supply's locations.

3. Applicability of Zero-Rating to Supplies Made to SEZ Units:
Section 16 of the IGST Act provides that supplies to SEZ units are zero-rated. Thus, the demand for 18% IGST was deemed unsustainable. The court referenced a previous Division Bench decision but distinguished the present case based on the specific provisions of the IGST Act, emphasizing that supplies to SEZ units are inter-State and zero-rated. The court rejected the appellants' argument that the intra-State supply exemption in Section 8(1) only applies to SEZ units within the same State, noting that the statutory language does not support such a distinction.

Conclusion:
The court upheld the Single Judge's decision, confirming that the supply to the SEZ unit is zero-rated and dismissing the appellants' demand for 18% IGST. The writ appeals were dismissed, affirming that the supply in question is an inter-State supply under the IGST Act and subject to zero-rating.

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