Priming SEZs for global competitiveness: the Indian perspective

India was the first country in Asia to pilot the concept of dedicated export-processing zones as an effective instrument for export promotion. The Special Economic Zones Act, 2005 (the SEZ Act) designated special economic zones (SEZs) as a duty-free enclave with trade facilitation mechanisms to propagate export-led growth.

With this objective in mind, the government of India directed the development and implementation of the SEZ Online system, which functions as an integrated interface for uniform and electronic validations of significant transactions in the SEZ ecosystem. The entire process for approvals and permits has been funnelled through a single-window clearance mechanism connecting various state agencies.

In tandem with these efforts, the SEZ Online system implemented a module exclusively for the tax exemption framework promised under the SEZ Act. To this end, the intersection of the SEZ Act, the Integrated Goods and Services Tax Act, 2017 (the IGST Act), the Central Goods and Services Tax Act, 2017 (the CGST Act), and the Central Goods and Services Tax (CGST) Rules, 2017 (the CGST Rules) attains primordial significance.

This article analyses the practicalities of implementation for, and challenges being faced by, businesses while using the SEZ Online system.

With regard to taxation benefits, sections 7 and 26 of the SEZ Act enumerate the tax exemptions available to every developer and entrepreneur. To ensure the smooth implementation of these tax benefits, the GST regime was aligned with the SEZ Act and all supplies made to SEZ units for authorised operations are liable to IGST at a zero rate (Section 16 of the IGST Act was amended with effect from October 1 2023 to specify that only supplies made to SEZ units for authorised operations would be treated as zero-rated supplies).

While supplies made to SEZ units enjoy nil rating as a policy, this benefit is actualised through refunds under Section 54 of the CGST Act read with Rule 89 of the CGST Rules. The benefit of nil rating of supplies made to SEZ units is parallelly supervised by the authorities constituted under the GST regime, which are to administer the tax refunds.

The Special Economic Zone Rules, 2006 (the SEZ Rules) required proof of export, in that any goods procured by an SEZ unit from a supplier in the domestic tariff area (DTA) had to be endorsed by the authorised officer that the goods had been admitted into the SEZ unit (see Rule 30(4) of the SEZ Rules). In respect of services procured from the DTA, there was no such mandate for an endorsement, perhaps because of the intangibility of service transactions.

Recognising the above lacuna, the SEZ Online system introduced the DTA Service Procurement Form (DSPF) for the endorsement of services procured from DTA suppliers (Notice No. NDML/SEZ Online/2019/2, dated September 5 2019). The SEZ units/developers had to record all service invoices to enable the SEZ authorities to review, validate, and approve the DSPFs for the tax benefits to endure to the suppliers.

The DSPF is an interactive module, operating entirely on the SEZ Online system. Certain challenges have cropped up in the day-to-day working of the DSPF module, leading to the taxing authorities denying the benefits of zero rating, citing deficiencies.

For one, there is no understanding if a due date was prescribed for furnishing the DSPFs. In contrast, an endorsement for the procurement of goods from the DTA had to be furnished to the tax officer concerned within 45 days. Doubts persist over the periodicity for filing a DSPF, compounded by the SEZ Online database allowing DSPFs to be filed monthly, and every DSPF could cover a maximum of 100 service invoices.

Additionally, though the mandate of the DSPF came into effect from October 2019, there have been instances where units have been asked to produce endorsed DSPFs for periods prior to September 2019. In more frivolous instances, endorsements have been refused for reasons such as goods having been delivered via a courier or an insistence on physical submission of all invoices despite the DSPF module being operated online. Crucially, an SEZ unit/developer had no avenues to escalate and redress these issues.

It also remains uncertain if endorsements are required to be obtained for DSPFs regarding services that featured on the default list of services (Notification bearing F. No. 12/19/2013-SEZ, dated January 2 2018, issued by the Ministry of Commerce & Industry, Department of Commerce) notified and updated from time to time.

One issue ensued out of an instruction issued by the Madras Export Processing Zone (MEPZ) in the context of general insurance business services. The instruction decreed that group insurance of employees and their family members procured by an SEZ unit was not “for authorised operations” and thus would not be eligible for zero rating. The instruction directed that all DSPFs that carried endorsements ought to be withdrawn (Instruction No. 1/2024 (SO-MEPZ), dated July 2 2024). This instruction put all SEZ units in a fix, leading to a flurry of litigation across various high courts. The High Court of Madras deemed it fit to stay the operation of the instruction by observing that the instruction curtailed the scope of the default list of services (order dated August 1 2024 in writ petition No. 22132 of 2024).

The SEZ Online system has ushered in the next era of e-administration, with automation and minimal paperwork as its cornerstone. There is a renewed drive on enabling businesses, with reduced supervision. While zero-rated supplies under the IGST Act offer substantial opportunities for businesses to reduce tax burdens, businesses must be mindful that careful planning and due compliance with specific regulations is essential to fully capitalise on these benefits.

It is important for businesses to obtain clarity on the DSPF modalities for smoothing the flow of tax benefits. Entrepreneurs should maintain diligent documentation to ensure that the tax incentives under the SEZ Act are conscientiously availed. It is also imperative that all contracts and transactional deeds carry strategic guardrails so that the economic advantages assured under the SEZ Act trickle down to the intended beneficiaries.

In the absence of a forum for redressing issues, developers and businesses must build a constructive dialogue with the administrators for remedying practical problems. By proactively seeking timely clarifications and adopting robust compliance strategies, entrepreneurs can effectively leverage the SEZ portal to optimise their operations and ensure seamless compliance.

The DSPF portal was introduced to ease and automate the endorsement procedure for invoices issued for services. However, the on-ground practicalities reflect a different reality. As a significant driver of India’s economic growth, it is of supreme importance that the administrative processes are streamlined to ensure the continued success of SEZs as a business model. The SEZ Online system is certainly a step in the right direction as it fosters automation and minimal oversight, and contributes to a business-enabling environment. However, some dissonance between the GST Rules and the SEZ Rules portends legal disputes. By refining the framework, businesses would be put at significant ease.

By addressing these challenges and fostering a conducive regulatory environment, India can further leverage the potential of SEZs to attract investment, create jobs, and boost exports.