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Impact of GST on the Special Economic Zone (SEZ)

Sakshi Jain
Sakshi Jain at March 18, 2023

Special Economic Zones Details

The introduction of the Goods and Services Tax (GST) greatly impacted the Special Economic Zones (SEZs). There have been various implications on SEZs after the introduction of GST. On the other hand, the government has provided various incentives and facilities to the SEZ, too.

Following topics have been discussed in this article:


1. What is an SEZ?

A Special Economic Zone (SEZ) is a geographically bound area in India which is not treated as a part of the nation and is focused on increasing exports. An SEZ is subject to economic regulations more liberal from the rest of the nation. These zones provide businesses with simpler taxation, import, export, and legal regulations to comply with.

Activities of operational units set up in an SEZ may include manufacturing, processing, assembling, repairing, reconditioning, trading of goods, etc. Other activities may include making jewelry out of gold, silver, platinum, or other metals, etc.

SEZs aim at increasing the economic growth rate of a nation by providing additional tax and legal incentives. This helps in attracting foreign currencies and advancing technology. Special Economic Zones may be inclusive of:

  • Export Processing Zone (EPZ)
  • Free Trade Zone (FTZ)
  • Free Economic Zone or Free Zone (FEZ or FZ)
  • Industrial Estate or park (IE)
  • Bonded Logistics Park (BLP)
  • Urban Enterprise Zone
  • Free Ports

Although SEZs are located within the national borders of India, they are treated as foreign customs territory when it comes to compliance with legal and tax-related regulations. All goods and services supplied from normal areas to an SEZ in India are considered as imports. All goods and services supplied to normal areas from an SEZ are considered as exports.

2. Objectives of an SEZ

There are various objectives of an SEZ:

  • To increase foreign trade by promoting export of goods and services
  • To increase foreign investment
  • To create domestic jobs
  • To improve effective administration and procedures for compliance
  • To improve infrastructural facilities

Various financial policies have been established to facilitate entrepreneurs to set up their operational units in SEZs. These policies are inclusive of simplified and promotional offers related to taxation, investing, customs, quotas, and labor regulations. Special tax holidays are also offered to operational units which are set up in these zones.

3. Impact of GST on SEZ

The introduction of the Goods and Services Tax (GST) brought along with it various implications on the operating units in SEZs. These units had been enjoying various exemptions from various taxes under the VAT regime, including various reliefs in Services Tax, Central Sales Tax, and even Value Added Tax (VAT) in some cases. However, the units may not enjoy similar benefits under the GST regime.

All goods and services supplied from an SEZ to Domestic Tariff Area (DTA) are considered as imports. Therefore, to such supplies, the Basic Customs Duty (BCD) and Countervailing Duty (CVD) are levied accordingly.

The government is also planning to subsume SAD and CVD under GST. Therefore, Integrated Goods and Services Tax (IGST) and BCD will charged on supplies made to DTAs from SEZs. The buyer will be able to avail the credit on IGST so as to set off the CGST and SGST liability, under certain prescribed conditions.


4. Incentives Provided to SEZs

The various incentives which have been provided to the units which are operating in SEZs are:

  • Exemption from excise duty and customs duty for SEZs development for operations authorized by the Board of Approval
  • Exemption from Income Tax for income earned from SEZ development in a block of 10 years in 15 years (Income Tax Act, Section 80-IAB)
  • Minimum Alternate Tax exemption (Income Tax Act, Section 115 JB)
  • Dividend Distribution Tax exemption (Income Tax Act, Section 115 O)
  • Central Sales Tax exemption
  • Service Tax exemption (SEZ Act, Schedule II, Section 7 and Section 26)

There are various other policies established by the Government of India for operation of the Indian Special Economic Zones.

5. Other Facilities Expected by SEZ

SEZs are eyeing the Government to provide various other facilities such as:

  • GST exemption on supplies exported to SEZs, and be considered as exports to a foreign nation
  • Easy procedures for refund of input GST paid on any goods and services procured
  • Minimal compliance requirement and return filing procedure
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GST Verification API
GST Verification API integrates with your application to validate GST taxpayer details.

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