All You Need to Know About GST on Supply to SEZ Units

 The Goods and Services Tax (GST) regime provides a special status to Special Economic Zones (SEZs) in India. Recognized as duty-free enclaves, SEZs are treated as being outside the customs territory of India for trade and taxation purposes. Consequently, supplies made to SEZ units or developers enjoy unique tax treatment under GST law.

Understanding SEZ and Zero-Rated Supply

Under GST, any supply of goods or services to an SEZ unit or SEZ developer is considered a "zero-rated supply", regardless of whether the transaction is intra-state or inter-state. This classification allows suppliers to claim refunds either on the Integrated GST (IGST) paid or on unutilized Input Tax Credit (ITC), provided certain conditions are fulfilled.

Conditions to Qualify as Zero-Rated Supply

To avail of zero-rated benefits, the following criteria must be strictly adhered to:

1. Authorized Operations: The supply must be for activities approved under the Letter of Approval (LOA) granted by the SEZ authorities.
2. Invoice Endorsement: The invoice must be endorsed by the SEZ specified officer, certifying receipt of goods or services for authorized operations.
3. Supporting Documentation: Suppliers must maintain records such as:
• Copy of LUT/Bond (for supplies without IGST)
• Endorsed invoice
• Proof of delivery and use

Two Options Available for Making Supplies to SEZ

Suppliers can choose one of the two methods to make zero-rated supplies:

A. Without Payment of IGST (Under LUT/Bond)

• Supplier furnishes a Letter of Undertaking (LUT) or Bond.
• No IGST is charged on the invoice.
• Supplier claims refund of unutilized ITC.

B. With Payment of IGST

• Supplier charges and pays IGST on the supply.
• Refund of the IGST paid is claimed subsequently.

Note: In both cases, the supply must be for authorized operations and properly endorsed by the SEZ officer.

Compliance and Documentation Requirements

As per CBIC Circular No. 48/22/2018-GST, certain guidelines are emphasized:

• Even intra-state supplies to SEZs are treated as interstate for GST purposes.
• Endorsement by the SEZ officer is mandatory.
• Suppliers must ensure correct reporting in GSTR-1 and GSTR-3B to avoid refund mismatches.

Common Practical Challenges

1. Delays in endorsement from SEZ officers.
2. Supplies being excluded from the LOA scope.
3. Mismatch between GSTR-1 and GSTR-3B while applying for refunds.
4. Lack of awareness among vendors leading to improper documentation.

Pro Tips for Smooth GST Compliance

• Verify the scope of the LOA before making any supplies.
• Educate clients and vendors on endorsement procedures and GST implications.
• Maintain accurate records and file timely refund claims.

Conclusion

Supplies to SEZ units under GST present significant opportunities for tax efficiency through zero-rating provisions. However, these benefits come with stringent compliance requirements. By following the correct procedures and maintaining proper documentation, suppliers can ensure smooth operations and maximize GST benefits.