Under GST, supplies to the Special Economic Zones are treated as inter-state supplies and attract the levy of IGST at the applicable rate. Whereas the supplies made from domestic tariff area to SEZ area have the benefit of zero rate supply, but the supplies made by SEZ into domestic tariff area are subjected to applicability of GST
As per the provisions of the IGST Act, 2017, a Special Economic Zone is defined in line with the definition provided in the Special Economic Zones Act, 2005. It includes all SEZs notified under the provisions of the Act, including Free Trade and Warehousing Zones.
As per Section 2 (i) the DTA refers to the entire territory of India, excluding the areas designated as SEZs. Any supplies made from SEZs to the DTA are treated as supplies from a foreign territory to India.
Under the GST regime, supplies of goods or services to SEZs are considered zero-rated supplies. This means that these supplies are not subject to the levy of GST, either at the Central or State level.
The following options are available for supplying goods or services to SEZs:
1. Supplying goods or services to SEZ units without paying IGST ; or
2. Supplying goods or services to SEZ units with payment of IGST.
To supply goods or services to SEZ units without paying IGST, the supplier must carry out the supply under a Letter of Undertaking (LUT) or bond.
1. The supplier executing bond can use the input tax credit against any other domestic supply;
2. An indemnity bond in format GST RFD-11 on a non-judicial stamp paper is required;
3. Bank guarantee in form of security, is required while executing bond;
4. The bank guarantee amount does not exceed 15 % of the bond amount;
5. Bond will be acceptable by the Assistant Commissioner or Deputy Commissioner;
The taxable invoice must mention that it is a supply meant for SEZ/SEZ developer under bond without payment of integrated tax.
Further, on the top of the taxable invoice it should clearly be mentioned that ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER BOND WITHOUT PAYMENT OF INTEGRATED TAX’.
Alternatively, eligible taxpayers can opt to supply goods or services to SEZ units without paying IGST under an LUT.
LUT is accepted by the assistant or deputy commissioner and has a validity period of 12 months. Unlike the GST bond, the LUT offers a simpler option compared to the bond, as a bank guarantee is required only in case of a breach of the LUT. The eligibility criteria for LUT submission are specified under notification no. 16/2017 of the Central Tax, These conditions include being a status holder or having received foreign inward remittances of a minimum of 10% of the export turnover, among other requirements.
Further, on the top of the taxable invoice the taxpayer should clearly mention that the ‘SUPPLY MEANT FOR SEZ/SEZ DEVELOPER UNDER LUT WITHOUT PAYMENT OF INTEGRATED TAX’.
Suppliers who are unable to execute an LUT for any reason can choose to supply goods or services to SEZ units with the payment of IGST. In such cases, the supplier must clearly mention on the invoice that the supply is meant for the SEZ unit/SEZ developer with the payment of Integrated Tax. The supplier can claim a refund for the IGST charge or request that the SEZ unit claim the refund.
Further on top of the invoice it should be clearly mentioned that ‘SUPPLY MEANT FOR SEZ UNIT / SEZ DEVELOPER WITH PAYMENT OF INTEGRATED TAX’.
When an SEZ unit supplies goods or services to the DTA, it is considered as goods imported into India, and customs duties are applicable. As per the Special Economic Zones Rules, 2006, and the Special Economic Zone Act, 2005, goods cleared from an SEZ to the DTA are treated as imports and are liable for payment of customs duty, including Integrated Tax as per the Customs Tariff Act, 1975.
In summary, Supplies made to SEZs are treated as inter-state supplies, and different options are available for zero-rated supplies, either under a bond or LUT. On the other hand, supplies made by SEZ units to the DTA are subject to the levy of customs duties, including Integrated Tax.