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Special Economic Zones (SEZs) are designated geographical areas of economic significance. The businesses in SEZs (called ‘units’) enjoy the benefits of liberal tax & fiscal laws.

“India was one of the first in Asia to recognise the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000 [1].

Many of your businesses may be making supplies to units in SEZ. This article discusses the matters that you should take care of while making supplies to these units.

Supplies to SEZs are Zero-rated

All approved supplies made to SEZ units are ‘zero-rated’. Zero-rating is a term that is often associated with export of goods & services. It is a concept wherein the supplier need not collect GST from the customer. However, the supplier will be entitled to claim refunds of the GST paid on procuring inputs used to make the export. Alternatively, the supplier may choose to ‘pay’ IGST on the exports after setting off the credits available. The IGST so ‘paid’, can then be claimed as refund.

Supplies to units in SEZs are to be treated on par with exports; which means that suppliers will be entitled to claim refund of the GST involved in the transaction. Similarly, units within SEZs could insist their vendors not to charge GST on the supplies made to them basis certain documents which we shall cover in this article.

So can all my supplies to SEZ units be free of GST?

Yes. But there are certain safeguards installed by the GST law. Here is a checklist of matters that the suppliers must take care of before making a supply to SEZs.

  • Supplies to SEZs should be under the cover of a Letter of Undertaking (LUT). LUT can be applied for online through form GST RFD 11
  • Search for the the customer’s GST number on the portal gst.gov.in to validate that the taxpayer type is ‘SEZ Unit’. Follow these steps
    • Log-in to your GST account on gst.gov.in and go to Search Taxpayer tab
    • Enter the GST number of the customer and look under ‘Taxpayer Type’
  • Obtain valid Letter of Approval for the SEZ unit. This is the primary document that would establish that the customer is an SEZ unit.
  • Your customer may have operate through both SEZ and non-SEZ units. Thus, an approval / confirmation from the customer that the goods / services supplied will be used by the SEZ unit only would be necessary.
  • Ask for an undertaking (mail confirmation should do) that they would facilitate and provide you endorsement on your invoices. The invoices will be endorsed by a SEZ officer. Though this is not a pre-requisite for claiming refund of GST, it may lead to delays if the GST officer insists on it.

We would advise your finance & accounts team to follow up on the endorsements on regular basis. This requirement may take longer compared to others.

In case of any questions, please do not hesitate to reach out to us on pavan@bclindia.in or pradeep@bclindia.in or write to us on bclindia.in/contact/. We would be glad to be of your assistance.

[1] Source: http://sezindia.nic.in/cms/introduction.php
[2] We shall be posting another article soon on the options available to suppliers to claim GST refund.


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