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.

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.