Raj Jaggi
Quick Summary
When Law Meets Purpose - The Idea Behind Zero Rating In the field of taxation, certain provisions are designed purely to generate revenue, while others are structured to support larger economic objectives. The treatment of supplies to Special Economic Zones (SEZs) clearly falls into the latter cate
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FAQ :
The main purpose of zero rating for SEZ supplies is to ensure that domestic taxes do not become a cost for businesses operating within SEZs, thereby supporting their role in promoting exports, attracting investment, and driving industrial growth.
Zero rating ensures that while no tax is payable on the outward supply, the supplier can still claim Input Tax Credit (ITC) for taxes paid on inputs. Exemption, on the other hand, means no tax is payable, and ITC related to that supply cannot be claimed, effectively embedding tax into the cost.
Section 53 of the SEZ Act, 2005, deems an SEZ as a territory outside the customs territory of India for authorized operations, leading to supplies to SEZs being treated similarly to exports. Section 51 of the SEZ Act also gives its provisions precedence over other laws in case of inconsistency.
The amendment shifted the focus from a status-based approach (recipient being an SEZ unit) to a functional test, requiring supplies to be made for the 'authorised operations' of the SEZ unit or developer. This means suppliers must now demonstrate the connection of the supply to the SEZ's approved activities.
The primary method is now to supply without payment of integrated tax under a bond or Letter of Undertaking. The option to pay IGST and claim a refund has been withdrawn as the default route, streamlining the process.
Yes, Section 16(4) of the IGST Act, 2017, allows the government to specify classes of persons and supplies that can still opt for the IGST payment route with a subsequent refund claim, providing controlled flexibility.
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