GST on Supplies to SEZ Units and Developers

A supply to a Special Economic Zone looks like a domestic sale. The buyer is in India, often in your own city, and pays you in rupees. GST treats it very differently. It is a zero-rated supply, taxed as inter-state, and the tax either never gets charged or comes back to you as a refund. That only works if the recipient really is an SEZ unit or developer, the supply is for its authorised operations, and the paperwork is right. This guide covers each of those conditions and the choice between the two routes.

Why a supply to an SEZ is zero-rated

Section 16(1) of the IGST Act defines two kinds of zero-rated supply: exports of goods or services, and supplies of goods or services to an SEZ developer or an SEZ unit. The policy is that SEZs work like territory outside India's customs area. Units in a zone are meant to be export-focused, and the law does not want domestic tax built into their costs.

Zero-rated is not the same as exempt. On an exempt supply you lose the input tax credit on your purchases for that supply. On a zero-rated supply you keep it. Section 16(2) lets you take credit on a zero-rated supply even though the supply itself carries no net tax. That credit is what you later recover as a refund. Our input tax credit rules guide covers the general conditions, and those still apply. Credit blocked under section 17(5) does not become refundable because the output went to an SEZ.

Why it is IGST even inside your own state

Normally a supply where the supplier and the place of supply are in the same state attracts CGST plus SGST. SEZ supplies are an exception. Section 7(5)(b) of the IGST Act says a supply of goods or services to or by an SEZ developer or unit is a supply in the course of inter-state trade or commerce.

So a manufacturer in Chennai supplying a unit in an SEZ elsewhere in Tamil Nadu uses the IGST head, even though both GSTINs start with the same state code. This catches people out in both directions. Suppliers charge CGST and SGST out of habit, and buyers' accounts teams flag a same-state IGST invoice as an error. The difference between CGST, SGST and IGST and the place of supply rules both explain why the head matters. If you charge the wrong head, the recipient cannot use it and you have to correct it.

The authorised operations condition

The Finance Act, 2021 amended section 16 so that only supplies for authorised operations of the SEZ developer or unit are zero-rated. The amendment took effect on a date notified later, so check the commencement date on cbic-gst.gov.in if a supply from around that time is in dispute. Authorised operations are the activities the zone's approval allows the unit or developer to carry on. These are set under the SEZ framework, not under GST.

In practice, the recipient being located in a zone is not enough. Raw materials for the unit's approved manufacturing clearly qualify. Goods or services the unit takes for purposes outside its approved activity may not qualify, and those are taxed like any other supply. The zone's specified officer decides this when endorsing the goods or services as received for authorised operations. If the endorsement is not there, the zero rating has no evidence behind it.

The two routes: LUT or payment of IGST

Section 16(3) of the IGST Act gives a supplier to an SEZ the same two options as an exporter.

Route 1: under a Letter of Undertaking, without payment of IGST. You furnish an LUT in Form RFD-11 on the portal. The process is covered in our LUT filing guide. You then invoice the SEZ with the tax shown as nil. No output tax is paid, so input tax credit builds up, and you claim the unused credit back as a refund.

Route 2: with payment of IGST. You charge IGST on the invoice, pay it from your credit or cash ledger through your return, and then claim a refund of the tax paid. The Finance Act, 2021 also gave the government power to limit this route to notified classes of taxpayers or supplies. Check the current position on cbic-gst.gov.in before you use it.

Unlike an export of goods, there is no shipping bill on an SEZ supply. That means nothing like the automatic export refund, where the shipping bill counts as the refund application. On both routes you file RFD-01 yourself. Most regular suppliers use the LUT route, because it keeps cash in the business. The payment route can suit someone who already has output liability to absorb the credit, or who supplies an SEZ only now and then.

Invoice, endorsement and GSTR-1 reporting

The tax invoice follows the normal GST invoice format, with an endorsement that shows the zero rating. Rule 46 requires wording to the effect of "supply meant for SEZ unit or SEZ developer for authorised operations under bond or letter of undertaking without payment of integrated tax", or the equivalent "on payment of integrated tax" wording on the payment route. On the LUT route, quote the LUT reference and show the tax fields as nil instead of leaving them blank.

Keep three records for every SEZ supply:

• The endorsed invoice, with the specified officer's endorsement that the goods were admitted in full, or the services received, for authorised operations.
• The recipient's registration details, showing the SEZ taxpayer type at the date of supply.
• Proof of the LUT, if you supplied without payment, with its acknowledgement reference.

In your return, SEZ supplies go in Table 6B of GSTR-1, not the ordinary B2B table. The invoice type is SEZWP for supplies with payment of tax and SEZWOP for supplies without payment. Our GSTR-1 filing guide covers the table layout. Report the invoice under the recipient's SEZ GSTIN. The refund is checked against what you filed, so the invoice number, value and GSTIN need to match across GSTR-1, the endorsed invoice and the refund claim.

Some supplies that look similar are treated differently. Supplies to an Export Oriented Unit or against an Advance Authorisation are not SEZ supplies. They can qualify as deemed exports, which follow different rules for refunds and for who can claim them.

Claiming the refund, and who can claim it

Refunds on SEZ supplies are claimed in Form GST RFD-01, which has separate categories for supplies to SEZ units or developers with payment of tax and without payment of tax. Under Rule 89, the supplier files the application:

• For goods, after the goods have been admitted in full into the zone for authorised operations, as endorsed by the specified officer.
• For services, with evidence of receipt of the services for authorised operations, endorsed by the specified officer.

On the LUT route, the refund is not your whole credit balance. Rule 89(4) splits Net ITC in the ratio of zero-rated turnover to adjusted total turnover, and SEZ supplies count as zero-rated turnover. So a supplier with large domestic sales recovers only the SEZ and export share. On the payment route, the refund is the IGST you paid on the SEZ invoices. On the without-payment route, the application also includes a declaration that tax was not collected from the SEZ unit or developer. Check the current form of each declaration in Rule 89 before filing.

The general refund time limit in section 54 is two years from the relevant date. After filing, the claim follows the usual steps: acknowledgement, any deficiency memo, provisional sanction and a final order. Our GST refund process guide goes through each step.

The other direction works differently. When an SEZ unit supplies goods into the Domestic Tariff Area, the clearance is treated like an import. The DTA buyer files a bill of entry and pays customs duty plus IGST on it, as for goods arriving from abroad. It is not a normal domestic invoice with CGST and SGST.

Verify the recipient is really an SEZ unit

All of the above rests on one fact: the recipient is an SEZ unit or developer. An SEZ unit takes a GST registration separate from any business the same company runs outside the zone, and the portal records its taxpayer type as SEZ Unit or SEZ Developer. A common mistake is a buyer quoting its group's ordinary GSTIN, or its DTA registration in the same state, on a purchase order meant for its SEZ unit. If you zero-rate a supply to that GSTIN, you are zero-rating a supply to a normal taxpayer. The IGST is then owed, with interest.

Before you raise the first zero-rated invoice, and again periodically for regular customers, check three things on the GSTIN: the taxpayer type is SEZ Unit or SEZ Developer, the registration is active, and the legal name and address match the entity and zone on the purchase order. You can check one GSTIN at a time with the free GST number search, which allows five lookups a day without signing up. If you onboard many customers, the GSTIN verification API returns the taxpayer type, status and filing history in one call for ₹0.50 per verification. Save the result with the invoice as evidence of what you checked and when.

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