Impact of GST on Special Economic Zone – Part I

Special Economic Zones (SEZs) are designated areas in India that are developed to enable easier international trade and investment. They are considered to be an engine of economic growth, contributing significantly to the country's export sector. In 2017, the Government of India introduced the Goods and Services Tax (GST), which replaced the existing multiple indirect taxes. This article examines the impact of GST on SEZs in India and how it has affected businesses operating in these zones.

Overview of SEZs

SEZs are developed with the primary objective of promoting exports and generating employment opportunities. The government provides various incentives to businesses operating in these zones, such as:

Exemption from customs duty, central excise duty, and service tax on goods and services procured for the authorized operations.
Income tax exemption for the first five years, followed by a 50% exemption for the next five years.
Freedom to carry out trade transactions in any freely convertible foreign currency.
Single-window clearance for approvals and permits.

SEZs have been successful in attracting foreign investment and facilitating international trade. As of March 2020, there were 389 operational SEZs in India, employing more than 1.5 million people and generating exports worth over $100 billion.

Introduction of GST

The introduction of GST in July 2017 was a significant reform in India's indirect tax system. It replaced multiple taxes such as excise duty, service tax, and value-added tax (VAT) with a single tax. GST is levied on the supply of goods and services and is categorized into four slabs based on the rate of tax - 5%, 12%, 18%, and 28%.

Impact of GST on SEZs

The impact of GST on SEZs has been a matter of discussion and debate among businesses operating in these zones. The following are some of the key impacts of GST on SEZs:

Removal of exemptions

One of the primary concerns of businesses operating in SEZs was the removal of exemptions under GST. The government had provided various exemptions to businesses operating in SEZs under the previous tax regime, such as exemption from customs duty, central excise duty, and service tax. However, under GST, these exemptions were removed, and businesses operating in SEZs were required to pay GST on goods and services procured for authorized operations.

Refund mechanism

The government introduced a refund mechanism for businesses operating in SEZs to claim a refund on the GST paid on goods and services procured for authorized operations. However, the refund process was cumbersome, and businesses faced difficulties in claiming refunds.

Impact on exports

SEZs are developed with the primary objective of promoting exports. However, under GST, exports were subject to GST, and businesses operating in SEZs were required to pay GST on supplies made to units outside the zone. This resulted in an increase in the cost of exports, making them less competitive in the international market.

Complexity in compliance

Compliance under GST is a complex process, and businesses operating in SEZs faced difficulties in complying with the new tax regime. The government provided various exemptions and benefits to businesses operating in SEZs under the previous tax regime, which made compliance easier. However, under GST, these exemptions were removed, and businesses had to comply with the same rules and regulations as businesses operating outside the SEZs.

Conclusion

The introduction of GST has had a significant impact on businesses operating in SEZs in India. While the removal of exemptions and the introduction of a refund mechanism has posed challenges to businesses, the government has taken various measures to address these issues. The government has also provided various incentives to businesses operating in SEZs, such as exemption from GST on supplies made to units outside the zone. However, businesses in SEZs continue to face challenges in complying with the new tax regime, and the government needs to provide more clarity and simplification in the compliance process.