Supply to SEZ unit WITH PAYMENT OF TAX

[SRINVASAN TR]

Query - Supply to SEZ with Payment of IGST

I have a query regarding zero-rated supply to an SEZ Unit/Developer with payment of IGST.

Suppose a supplier makes a supply to an SEZ Unit for authorised operations:

• Value of supply: Rs. 10,00,000
• IGST @ 18%: Rs. 1,80,000
• Total invoice value: Rs. 11,80,000

My understanding is that, under the payment-of-IGST route, the supplier charges Rs. 1,80,000 IGST on the invoice. Therefore, the SEZ recipient would pay Rs. 11,80,000 to the supplier, including the IGST component.

This raises the following question:

If the SEZ recipient actually pays the IGST amount of Rs. 1,80,000 to the supplier, does this not effectively create a tax/cash-flow burden on the SEZ Unit?

Further, if the supplier subsequently deposits the Rs. 1,80,000 IGST with the Government and then claims a refund of the IGST paid, would this not appear to provide a dual benefit to the supplier:

1. IGST of Rs. 1,80,000 is collected from the SEZ recipient; and
2. The same Rs. 1,80,000 is subsequently refunded to the supplier by the Government.

In that case, how does the zero-rating mechanism ensure that the SEZ recipient is not ultimately bearing the tax burden?

Is there any mechanism under GST/SEZ law whereby the SEZ recipient recovers or neutralises the IGST paid to the supplier? Or is the payment-of-IGST route intended to operate differently from the normal understanding of tax incidence?

I would appreciate an explanation of the economic/legal incidence of IGST in this specific transaction, preferably with a numerical example and reference to the relevant provisions/rules.

[Raam Srinivasan Swaminathan Kalpathi]

Dear Querist

Under the SEZ Act and Rules framed thereunder, the supplier to an SEZ unit or SEZ developer can either supply goods or services, for authorised operations, under LUT or with payment of tax.

Considering your very example, if the supplier raises an invoice for Rs.10,00,000/- and opts for with payment (WP) of tax then the recipient SEZ unit will only settle/ pay to the supplier Rs.10,00,000/- (NOT Rs.11,80,000/- as per the presumption in the query).

It is the supplier's burden to apply for refund with the jurisdictional GST department after obtaining an endorsement from the Proper Officer/ Specified Officer of the SEZ unit/ SEZ developer.

Basically persons supplying to SEZ units/ developers have 2 options, viz.

1) Raise a zero-rated tax invoice and apply for refund of input tax credit (ITC)

2) Choose to remit tax and then apply for refund of the tax so remitted.

The SEZ unit/ developer will not suffer any tax and therefore the statement of their cash flows getting impacted is simply not true.

[Raam Srinivasan Swaminathan Kalpathi]

FYI, please appreciate that the supplier who opts for WP will raise an invoice on the recipient only for Rs.10,00,000/-. While reporting in GSTR-1 the same will get reported either as WP or WOP of tax.

[Sanjeev Agarwal]

Summary

A supply to an SEZ Unit/Developer for authorised operations is a zero-rated supply under section 16 of the IGST Act. The supplier has two broad options:

1. Supply under LUT without payment of IGST, with refund of eligible unutilised ITC; or

2. Supply on payment of IGST, followed by refund of the IGST paid by the supplier.

For the second route, suppose:

• Value = Rs. 10,00,000

• IGST @18% = Rs. 1,80,000

• Invoice = Rs. 11,80,000

The important point is that the supplier cannot legitimately obtain a Rs. 1.80 lakh refund while also retaining Rs. 1.80 lakh actually collected from the SEZ. Rule 89(2)(f) requires the refund claimant, in relation to SEZ supplies, to declare that the tax has not been collected from the SEZ Unit/Developer.

Therefore, the intended economic mechanism is:

Supplier pays Rs. 1.80 lakh IGST claims eligible refund IGST is neutralised tax does not remain an economic burden of the SEZ.

There is generally no separate refund mechanism under the SEZ/GST framework under which the SEZ recipient recovers the same Rs. 1.80 lakh from Government. The refund mechanism is primarily supplier-side, subject to prescribed SEZ endorsement and other conditions. The uploaded ICAI GST bare-law material supports the zero-rating/refund framework.

Accordingly, if the SEZ actually pays Rs. 11.80 lakh, including Rs. 1.80 lakh IGST, the supplier's subsequent refund claim requires careful examination because the Rule 89(2)(f) declaration that tax has not been collected would be inconsistent with that factual position.

Practical conclusion: If the commercial objective is to ensure that the SEZ has no IGST cash-flow burden, the LUT route is the cleaner mechanism. Under the payment-of-IGST route, the tax is intended to be a temporary pass-through followed by supplier-side refund, not a permanent tax cost to the SEZ coupled with a second benefit to the supplier.

Risk position: Strong/Clear on the core mechanism, provided the supply is genuinely for authorised operations and all SEZ/refund conditions are satisfied.

[Shilpi Jain]

How is there double benefit to supplier? Tax is collected from recipient and recipient can go for refund, not the supplier.

Zero rating is achieved since SEZ goes for refund.

[SRINVASAN TR]

Please correct me if my understanding is wrong:

In both cases - with payment of tax and without payment of tax - will the tax invoice value remain Rs. 10 lakh?

In the with-payment-of-tax (WP) case, is the Rs. 1.80 lakh tax component reported only in the GST return and not shown separately on the tax invoice, so that the invoice value remains Rs. 10 lakh?

Please confirm if this understanding is correct.

[Raam Srinivasan Swaminathan Kalpathi]

Yes. Your comprehension is precise.

[Sanjeev Agarwal]

Summary

• Without payment of IGST (LUT):
  • Taxable value = Rs. 10,00,000
  • IGST = Nil
  • Invoice total = Rs. 10,00,000
• With payment of IGST (WP):
  • Taxable value = Rs. 10,00,000
  • IGST @ 18% = Rs. 1,80,000
  • Invoice total = Rs. 11,80,000

Therefore, in the WP route, the Rs. 1.80 lakh IGST is not merely reported in the GST return. It is separately shown on the tax invoice and is also reported as output IGST in the supplier's GST returns.

The key distinction is:

Rs. 10 lakh = taxable value of the supply
Rs. 11.80 lakh = total invoice value under the WP route

Accordingly, if the SEZ pays the invoice, it pays Rs. 11.80 lakh, including Rs. 1.80 lakh IGST. The subsequent question is how the SEZ avails credit/refund of that IGST, which is what ultimately determines tax neutrality under the zero-rating mechanism.

[SRINVASAN TR]

Thank you very much, Mr. Raam Srinivasan Swaminathan Kalpathi, for your valuable support and clarification.

Could you please also confirm whether this is the generally accepted understanding/practice in the industry, or whether there is any specific source on the invoicing aspect, such as a Notification, Circular, Press Release, FAQ, CBIC clarification, or other official guidance?

In particular, it would be helpful to know whether there is any specific reference confirming that, in the WP (with payment of tax) case, the tax component is reported on the GST portal/return but not separately disclosed on the tax invoice, while the invoice value remains Rs. 10 lakh.

A reference would be very helpful for documentation and future compliance purposes.

Thank you once again for your guidance and support.

[Raam Srinivasan Swaminathan Kalpathi]

Dear Querist

There is no Notification or Circular for this. The GST Act treats supplies to SEZ and exports identically. For exports WP we just inform the CHA who takes care of the process at Customs. Similarly for SEZ supplies WP we prepare the invoice as per second proviso to Rule 46. We do not impute GST in the invoice but mention the following endorsement in it, viz.

1[12[Provided further that in the case of] the export of goods or services, the invoice shall carry an endorsement "SUPPLY MEANT FOR EXPORT/SUPPLY TO SEZ UNIT OR SEZ DEVELOPER FOR AUTHORISED OPERATIONS ON PAYMENT OF INTEGRATED TAX"

We remit the tax to the department and then file Form RFD-01 for refund. Rule 46 will provide the full guidance. Best wishes

AI Summary

Zero-rated SEZ supplies allow LUT or tax-payment refund routes, while invoice treatment and recipient cash-flow effects remain contested.
Zero-rated supplies to an SEZ Unit or SEZ Developer for authorised operations may be made under a letter of undertaking without payment of integrated tax, with refund of eligible unutilised input tax credit, or on payment of integrated tax followed by supplier-side refund. The discussion contrasts a view that tax is separately charged and subject to the Rule 89(2)(f) non-collection declaration with a view that the SEZ pays only the agreed supply value. Both approaches require authorised operations and prescribed SEZ endorsement.