Special Economic Zones (For short ‘SEZ’) are governed by the Special Economic Zones Act, 2005 (For short ‘SEZ Act’) and accordingly, all the other acts were aligned with it i.e. Central Excise Act, Service Tax Provisions as well as the Customs Act and now GST Act w.e.f. 01.07.2017.

As per Section 2(19) of the Integrated Goods and Services Tax Act (For short ‘IGST’), SEZ shall have the same meaning as assigned to it in clause (za) of Section 2 of the Special Economic Zones Act, 2005.

Clause (za) of Section 2 of the SEZ Act provides that “Special Economic Zone in GST” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone.

Cause (i) of Section 2 of the SEZ Act provides that “Domestic Tariff Area” means the whole of India but does not include the areas of the Special Economic Zones.

Section 2(m) of the SEZ Act provides that “Export” means –

1. Taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or
2. Supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or
3. Supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone.

In view of the above, it is clear that SEZ is an area considered to be situated outside India and any supply to SEZ is at par with EXPORT.

Further, Notification No.18/2017- IGST (Rate) dated 5 July, 2017 exempts import of services by the SEZ Unit from IGST and Notification No.64/2017-Cus. dated 05.07.2017 provides exemption from IGST on import of goods by SEZ Unit.

Further, in terms of Section 16 of the IGST Act, domestic procurements by SEZ are considered as zero-rated supply. Accordingly, following two options can be followed by the suppliers while supplying goods/ services to SEZ Units:

• Supply under the Letter of Undertaking (For short ‘LUT’) without payment of IGST;
• Supply of goods on payment of IGST and claim refund of IGST paid.

Thus, it is evident that the suppliers making supplies to the SEZ Units can claim benefits equivalent to the exporters exporting goods outside India.

It was held in the matter of M/s. Vaachi International India Private Limited [2020 (36) G.S.T.L. 538 (Appellate Authority-A.P.)] that since, the GST exemption is available to the supplier while supplying goods/ services to SEZ Unit, either by way of LUT or refund of IGST, SEZ Unit therefore, cannot claim the refund of IGST charged by the suppliers by under Section 54 of the GST Act.

Whereas, the Hon’ble High Court of Gujarat in the matter of Britannia Industries Ltd. Vs. UOI held that the SEZ Unit is entitled to claim the refund of GST transferred by its another unit under Input Service Distribution mechanism (For short ‘ISD’) on the ground that the SEZ Unit has no means to utilise the GST ITC.

Kindly note that facts in both the matters are different. In the present matter, the ITC of GST was transferred by ISD.

Considering the above judgements and the provisions of GST, it can be seen that the supplier making supplies to the SEZ Units have two options available, i.e. either pay IGST on supplies to SEZ and claim refund or supply without IGST by obtaining LUT. Under the circumstances, if the supplier is charging GST to the SEZ Units, and SEZ Units are also suffering the GST burden and therefore, the question of SEZ Unit claiming GST refund mechanically arises. Principally, the Refund of GST shall be allowed to the SEZ Unit if the burden of GST is suffered by it but, the possibility of denial of refund claim by the Revenue cannot be overruled especially under the circumstances where, the supplier can easily claim the refund or supply without payment of IGST to SEZ Units.

At the same time, the Notification No.03/2019-CT dated 29.01.2019 also cannot be ignored in the context. Vide the said Notification, the Central Government has substituted a declaration w.e.f. 01.02.2019 in the form of Documentary evidence to be provided by the supplier of SEZ Unit while claiming refund of IGST paid on SEZ supplies which is akin to the declaration specified for refund on account of supplies in case of deemed exports i.e. EOU Unis. The substituted declaration reads as under:

“(f) that tax has not been collected from the Special Economic Zone unit or the Special Economic Zone developer, in a case where the refund is on account of supply of goods or services or both made to a Special Economic Zone unit or a Special Economic Zone developer;”.

Before substitution, the declaration was read as under:

“a declaration to the effect that the Special Economic Zone unit or the Special Economic Zone developer has not availed the input tax credit of the tax paid by the supplier of goods or services or both, in a case where the refund is on account of supply of goods or services made to a Special Economic Zone unit or a Special Economic Zone developer”.

The obvious question arises on plain reading of the old and substituted declaration, whether the SEZ Unit can make the payment of GST to the suppliers of goods/ services and claim the ITC and if, ITC claimed, whether the SEZ Unit can claim the refund of the same.

Thus, it seems that the entire situation is blurred and needs urgent clarification.

The practical issue being faced by almost all the SEZ Units throughout India i.e. Banks deducting GST along with its service charges while remitting amount to the bank accounts of the SEZ Units. In other words, the Banks are still charging GST to the SEZ Units and SEZ Units are also paying GST to the Banks. Following questions are popping up:

1. Whether the ITC of GST is eligible to the SEZ Unit or not.
2. If yes, whether the SEZ Unit can claim refund under Section 54 of the GST Act read with Rule 89 of the CGST Rules or not.
3. Whether the Departmental Officers will allow refund to the SEZ Units especially under the circumstances, where the supplier is entitled for refund of IGST charged to SEZ Units or supply under LUT without IGST.

In our sincere view, the refund is allowed to every person who has suffered the tax burden, be it an end consumer or the SEZ Unit. Thus, if Banks are charging IGST to the SEZ Units, SEZ Units shall get the refund, but, the possibility of divergent views from the Departmental Officers cannot be overruled for the reasons discussed in the foregoing paras.

In view of the above discussion, it can be advised that the SEZ Units or Developers, instead of claiming GST ITC and seek refund under Section 54 of the GST Act, pay only principal amount of the invoice to the suppliers and the supplier shall claim the refund of IGST charged in the Invoice. Further, if Banks have deducted GST while remitting payments to the Bank Accounts of SEZ Units, the SEZ Units shall claim refund of GST from the Bank and insist Banks to claim refund from the GST Department on account of supplies of services to SEZ Units which is easily available to the Banks in terms of GST Provisions.