Special Economic Zones - Related Issues Under GST

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The special economic zone, or SEZ, is an area that is one of the best-conceived for businesses. It is one of those regions that has economic laws that are very liberal when it comes to taxation, trading, labour regulations, customs, and quotas. Businesses in SEZ also enjoy special tax holidays. There are zones or duty-free areas where trade operations are non-taxable. The Special Economic Zone under GST is given SEZ tax benefits by the Indian government under the special economic zone act. They are not only given tax holidays but are also exempt from many taxes and allowed deductions. But there are many issues in SEZ GST.

What is a Special Economic Zone under the GST?

SEZ is a place that is within the borders of India and is dedicated to promoting business. Under the special economic zone scheme, businesses enjoy many benefits because they are in SEZ compliance. These are provided to boost the development and growth of the nation. The government has given SEZ benefits no other area or region has. SEZ in GST too has special privileges when it comes to tax payments. So what exactly is a SEZ under GST?

SEZ is deemed a foreign territory, but one that lies within the borders of India. It is a region that is dairy-free and does so with the goal of enhancing trade. The SEZ GST policy was first introduced in April 2000. By 2005, the services under the SEZ Act in India were formed, which means ways to identify the GST number of the SEZ and other details were worked out. The SEZ GSTIN, or SEZ in GST, came into play in 2006 after getting many suggestions on the rules. Currently, there are 22 states in India where SEZs under the GST are operational and notified.

These duty-free zones for supply to and from SEZ under GST have been created for the free flow of services and goods and to attract investments from foreign investors as well as local investors, or both. Some of the SEZs are specific to a certain domain or sector, like logistics, biotechnology, information and technology, etc. The primary objective is to increase economic activity, promote exports, create employment, and develop and improve infrastructure in India.

Issues faced by SEZ under GST

While SEZs under GST enjoy many benefits, they also face many issues. Here are some of them:

Refund of Input Tax Credit, ITC for Inward Supplies

SEZ units can get goods or services in two ways; after paying IGST without a Letter of Understanding (LUT) and claiming ITC, or with a LUT without paying IGST. The LUT is issued to supply to the SEZ without payment of tax. If they don’t do that, they have to collect IGST and later get a refund of such ITC under GST. Many suppliers, after the introduction of GST, supplies to SEZs but do not give LUT and collect IGST from SEZs. The SEZ unit in GST then has to claim a refund. This means there is an increase in compliance for SEZ units, and their capital also gets blocked. For instance, an SEZ unit purchases goods from a supplier for Rs 1 lakh without LUT and pays 18% GST, which is Rs 18,000. The SEZ can claim a refund, but this will take some time, and hence the working capital gets blocked until the refund.

Confusion in Bill-to-ship-to Transactions

In a bill-to-ship-to transaction, supplies are shipped to a place under the supervision of a supervisor from another place. The bill is presented in the name of the person giving instructions, and the supply is made to the other person. No GST is imposed on these zero-rated supplies if LUT is given. However, if LUT is not issued, then IGST is applicable with a refund option. But there are some transactions where there are issues with GST because the supply is not made to the SEZ unit.

The Dilemma in LUT execution by SEZ

There is confusion among SEZ units when it comes to the execution of LUT by SEZ. There is no conclusion as to whether LUT for SEZ compliance is enough for GST to do exports without IGST payment.

Inaction on Change in Incorrect Registration

During the registration process, many SEZ developers select the wrong heading and are chosen as regular taxpayers. There are many benefits of a SEZ unit under the GST that others cannot claim. If you have not registered as a regular taxpayer, you will miss out on these benefits. The GST department has been asked to send an email on its ID to rectify, but many applications are pending with no action taken.

Liability to Reverse Charge

There are a few supplies or purchases from SEZ under GST for which the recipient is liable for paying tax and discharging compliances, which are known as ‘Reverse Charge’. These include sponsorship services, legal services, etc. Whether such services are subject to GST or not is a matter of confusion that needs clarification.

As you can see from the above, SEZ sales under the GST have many issues despite the many benefits they enjoy. GST is an India-wide law and covers most areas of indirect taxation. But these issues need to be ironed out to help SEZs make better use of the special economic zone benefits India offers and give economically back in return.

Frequently Asked Questions

Who comes under the Special Economic Zone?

The SEZ category covers a broad range of types of SEZ, which include free zones, industrial estates, export processing zones, free ports, free-trade zones, urban enterprise zones, and more. The goal of these SEZs is to increase investment by foreign investors, which are typically multi-national companies or international businesses.

Who is eligible for SEZ?

Any partnership firm, company, cooperative society, or individual can file for the establishment of an SEZ. The respective state governments and the BOA, the board of approval in the Department of Commerce, will make a decision.

What are the first 4 special economic zones?

The first SEZs were created in 1980 in China’s SouthEastern coastal area. It was in the cities of Xiamen in Fujian, Shenzhen, Shantou in Guandong, and Zhuhai.

What is the area limit for SEZ?

An SEZ other than one for health, biotech, or IT/ITEs should have land of more than 50 hectares.

What is the rule for SEZ?

There are many rules for SEZ, and the main rules were published in the Gazette of India. The last amendment was made on December 2022.

What are the features of SEZ?

Four main features define SEZ: It is physically secured and geographically delineated. It has a single administration and management. It has a streamlined and separate customs area. It offers investors benefits within the SEZ.

How many SEZ zones are there in India?

There are as many as 270 operational SEZs as of January 2023. Most of these are centred around 5 states, which include Karnataka, Tamil Nadu, Maharashtra, Telangana, and Andhra Pradesh.

Who manages SEZ?

The Department of Commerce, Government of India, manages SEZ, and each zone is led by a Development Commissioner.