SEZ Rules in GST: Complete and Updated Guide for CMA and Tax Professionals 2025

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Introduction

India’s Special Economic Zones (SEZs) are specially designed economic enclaves created to promote exports and drive foreign investments. Since the introduction of Goods and Services Tax (GST) on July 1, 2017, the tax implications for SEZ units and their suppliers have undergone significant change. The government, through GST law, has maintained the tax-neutral status of SEZs by defining specific rules under the Integrated Goods and Services Tax Act (IGST Act), Central Goods and Services Tax Act (CGST Act), and respective GST Rules.

In this updated, in-depth article brought to you by CMA Knowledge, we explore all crucial aspects of SEZ compliance under GST. From zero-rated supply to refund procedures, every detail is explained with examples, FAQs, and a compliance checklist.

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What is an SEZ? Understanding the Basics

A Special Economic Zone (SEZ) is a specifically notified area in which business and trade laws differ from the rest of the country. SEZs are governed by the SEZ Act, 2005 and SEZ Rules, 2006, which aim to simplify processes and reduce regulatory bottlenecks for export-oriented businesses.

For the purpose of GST, SEZs are treated as foreign territory in terms of taxation. This allows supplies made to SEZs to be zero-rated, even though they are technically within India’s geographical borders.

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Key Legal Provisions for SEZ under GST

To understand SEZ taxation under GST, it’s essential to refer to the following legal provisions:

• Section 16 of IGST Act, 2017: Defines zero-rated supply to SEZ unit or SEZ developer.
• Section 2(19) and Section 2(20) of IGST Act: Define SEZ developer and SEZ unit respectively.
• Section 7(5)(b) of IGST Act: States that supply to or by an SEZ is an inter-State supply.
• Rule 89 and Rule 96A of CGST Rules: Govern the refund of tax and usage of Letter of Undertaking (LUT).

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What is Zero-Rated Supply under GST?

Under Section 16(1) of the IGST Act, zero-rated supply includes:

1. Export of goods or services or both;
2. Supply of goods or services to a SEZ developer or SEZ unit for authorized operations.

Zero-rated supplies allow suppliers to either:

• Supply without charging IGST and claim a refund of unutilized input tax credit (ITC); or
• Charge IGST and later claim a refund of the IGST paid.

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Supplies to SEZ Units: Classification and Treatment

There are two main types of supplies to SEZs:

1. Supply of Goods

• Always treated as inter-State supply
• Qualifies for zero-rated benefit if used for authorized operations

2. Supply of Services

• Also considered inter-State and zero-rated
• Must be used for authorized operations to avail GST benefit
• Requires endorsement by the SEZ’s Specified Officer

Example: XYZ Industries supplies electrical goods to an SEZ developer in Gujarat. Since the supply is for infrastructure (an authorized operation), it is zero-rated.

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Supply with or without Payment of IGST

SEZ suppliers have two options for making zero-rated supplies:

Option 1: Without Payment of IGST (Using LUT)

• Supplier furnishes a Letter of Undertaking (LUT) on GST portal
• Supplies goods/services without charging IGST
• Claims refund of accumulated ITC

Option 2: With Payment of IGST

• Supplier charges IGST in the invoice
• Claims refund of IGST paid on such supplies

Important:

• In both options, supplier must ensure that goods/services are used for authorized operations only
• Endorsement from SEZ officer is mandatory

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Authorized Operations: Meaning and Importance

“Authorized operations” refer to the list of activities and services that are approved by the SEZ Development Commissioner for a unit or developer. Only those supplies which fall under the approved list are eligible for zero-rating.

Why It Matters?

• Supplies not related to authorized operations do not qualify for GST zero-rating
• Can result in tax liability and penalties

Example:

A furniture supply for a guest house located in an SEZ may not qualify if not listed under authorized operations. Always verify the endorsed list before supplying.

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Documentation Checklist for Suppliers to SEZ

To avoid litigation or rejection of refund claims, suppliers must ensure the following:

• Tax Invoice clearly mentioning: “SUPPLY TO SEZ UNIT / SEZ DEVELOPER – ZERO RATED”
• Valid Letter of Undertaking (if no IGST is charged)
• Endorsement by the SEZ’s Specified Officer on invoice
• Copy of the purchase order from the SEZ unit/developer
• Declaration regarding authorized operations
• E-way bill and delivery challans (if applicable)

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Refund Procedure for SEZ Supplies

Suppliers can claim GST refunds in the following two scenarios:

1. Refund of ITC on Supplies Made Under LUT

• File Form GST RFD-01 on portal
• Must submit statement of invoices (Annexure B), SEZ endorsements, and GSTR-2A reconciliation
• Refund can be claimed within 2 years from relevant date

2. Refund of IGST Paid on Supply to SEZ

• Reflect the invoice in GSTR-1 (Table 6) and IGST amount in GSTR-3B
• System auto-processes refund based on return filing

Tips for Faster Refund:

• Avoid errors in GSTIN, invoice mismatch, or incomplete endorsements
• Respond promptly to notices under Rule 92

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Input Tax Credit for SEZ and Their Suppliers

For Suppliers to SEZ:

• Eligible to claim ITC on all inputs used to make zero-rated supply
• Refund of ITC available even if there is no outward tax liability

For SEZ Units:

• Cannot claim ITC on inward supply used for zero-rated activities
• Must maintain separate records for taxable and non-taxable activities

Capital Goods ITC:

• Refund of ITC on capital goods is not allowed when supplying under LUT (as per Rule 89(4))

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SEZ Supplies to DTA (Domestic Tariff Area)

Supplies made by SEZ to DTA are treated as imports into India. Hence:

• Buyer in DTA needs to pay Basic Customs Duty (BCD) + IGST
• These are not zero-rated supplies under GST
• SEZ must issue Bill of Entry for such transactions

Example:

An SEZ unit supplies components to a manufacturer in Mumbai. The buyer must file Bill of Entry and pay applicable customs duty and IGST.

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E-Way Bill Requirements for SEZ

• Mandatory for movement of goods to or from SEZ
• Applies regardless of consignment value
• SEZ must generate e-way bill if supplying to another SEZ, DTA, or vice versa

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Reverse Charge Mechanism (RCM) and SEZ Units

RCM is applicable to SEZ units for certain specified services such as:

• Legal services by advocate or firm
• Sponsorship services
• Goods Transport Agency (GTA)
• Import of Services

Even though SEZ units are entitled to zero-rated supplies, RCM liability still exists and must be discharged using the unit’s GSTIN.

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GST Registration for SEZ Units

Each SEZ unit must obtain a separate GST registration, even if the parent company has GST registration elsewhere. This is due to:

• Unique location treatment under SEZ Act
• Separate compliance and return filing requirement

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Compliance Checklist for SEZ Units & Suppliers

For SEZ Units:

• Get approval for authorized operations
• Keep a copy of endorsements and POs
• File GSTR-1 and GSTR-3B (if making outward taxable supplies)
• Discharge RCM if applicable

For Suppliers to SEZ:

• Execute LUT (if supplying without IGST)
• Prepare correct invoice format
• Maintain ITC records for refund
• File timely refund applications

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Practical Example: A Case Study

Company: SoftCore Pvt. Ltd., based in Pune
Customer: ABC Tech, SEZ Unit in Hyderabad

• SoftCore opts to supply services under LUT
• Charges 0% IGST and files RFD-01 to claim ITC refund
• Ensures all documentation, invoice endorsement, and GSTR-1/GSTR-3B filing is correct
• Refund is processed within 40 days

This case highlights the importance of process adherence and accurate documentation.

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Common Mistakes to Avoid

• Submitting invoice without endorsement by SEZ Officer
• Missing or incorrect HSN/SAC codes in invoice
• Late filing of LUT or refund application
• Making supply not listed under authorized operations
• Using wrong return table in GSTR-1 for SEZ supply

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FAQs on SEZ Rules in GST

Q1. Are SEZ supplies exempt from GST?
No. Supplies to SEZ are zero-rated, not exempt. Input tax credit is claimable.

Q2. Can refund be claimed if IGST is charged?
Yes. Supplier can claim refund of IGST paid.

Q3. Can SEZ units claim refund of ITC?
Only for eligible outward taxable supplies or RCM payments. Not on zero-rated inward supplies.

Q4. Can a single company use the same GST registration for SEZ and DTA?
No. SEZ unit must have a distinct GST registration.

Q5. What is the time limit for claiming refund?
Within 2 years from the relevant date under Section 54 of CGST Act.

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Conclusion: Key Takeaways for Professionals and Businesses

The SEZ provisions under GST law are designed to maintain a tax-neutral export ecosystem. However, the benefits come with strict compliance responsibilities. For CMAs, Chartered Accountants, and businesses, understanding the nuances of zero-rated supply, documentation, refund mechanisms, and audit preparation is essential.

Always ensure:

• You validate authorized operations list
• File timely and correct returns
• Maintain comprehensive records

By adhering to SEZ rules in GST, you not only ensure legal compliance but also unlock significant tax efficiencies and faster refund inflows.

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