Turnover or import? The legal characterisation of SEZ-DTA supplies under GST

The computation of refunds of accumulated Input Tax Credit (‘ITC’) by Special Economic Zone (‘SEZ’) units has recently become the subject of scrutiny by tax authorities. Show Cause Notices are being issued questioning the exclusion of domestic supplies while computing ‘adjusted total turnover’ for the purpose of claiming refund under Section 54 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) read with Rule 89 of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’).

At the heart of the controversy lies the legal characterisation of supplies made by an SEZ Unit to the Domestic Tariff Area (‘DTA’). While the GST framework appears to treat such supplies as taxable supplies made by the SEZ Unit, the scheme of the Special Economic Zones law conceptualises them as imports into the DTA. This conceptual divergence between the GST and SEZ regimes has begun to surface in refund proceedings, raising important questions on whether such supplies ought to form part of ‘adjusted total turnover’ for the purpose of refund computation for the SEZ unit or not. 

This article examines the statutory framework governing adjusted total turnover, the characterization of SEZ-DTA supplies under GST and SEZ law, and the tension between legal theory and practical implementation. 

Adjusted Total Turnover under Rule 89:

Rule 89 of the CGST Rules prescribes the formula for refund of unutilised ITC in cases involving zero-rated supplies. One of the variables in the prescribed formula is ‘adjusted total turnover,’ which, inter alia, incorporates ‘turnover in a State or Union Territory’ as defined under Section 2(112) of the CGST Act.

Section 2(112) defines ‘turnover in a State’ to mean the aggregate value of all taxable supplies (excluding inward supplies liable to reverse charge), exempt supplies, exports of goods or services, and inter-State supplies made from the State by a taxable person.

The expression ‘taxable supply’ is defined under Section 2(108) of the CGST Act read with Section 2(24) of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’) to mean a supply of goods or services leviable to tax under the CGST Act or the IGST Act.

The supply of goods from a SEZ Unit to a DTA Unit for a consideration falls under the ambit of taxable supply in accordance with Section 7 of the CGST Act read with Section 5(1) of the IGST Act and Section 2(108) of the CGST Act. Consequently, such supplies, in principle, form part of ‘turnover in a State’ and, by extension, be includible in ‘adjusted total turnover’ for the purposes of refund computation under Rule 89.

Interplay with the SEZ Act:

Section 30 of the Special Economic Zones Act, 2005 (‘SEZ Act’) effectively treats SEZ-DTA clearances as import-equivalent transactions. Rule 48(1) of the Special Economic Zones Rules, 2006 (‘SEZ Rules’) mandates that the DTA recipient file a Bill of Entry for home consumption. In such cases, customs duties and IGST are discharged by the DTA recipient at the time of clearance.

A conjoint reading of the GST and SEZ legislations gives rise to two conflicting interpretations:
 

1. From GST perspective: The underlying transaction remains a supply effected by the SEZ Unit. The Bill of Entry mechanism merely shifts the mode of tax collection without altering the intrinsic character of the transaction as a taxable supply in the hands of the SEZ Unit.
    
2. From SEZ perspective: By virtue of Section 30 of the SEZ Act, SEZ-DTA clearances are to be treated as imports into India, and the tax liability is effectively fastened upon the DTA Unit. Thus, such transactions assume the character of imports for the DTA recipient.
    

Section 51 of the SEZ Act confers overriding effect upon the provisions of the SEZ Act notwithstanding anything inconsistent contained in any other law. This non obstante clause further complicates the reconciliation between the two statutory regimes.

Practical implementation under GST:

In practice, SEZ Units do not report such SEZ–DTA supplies as outward taxable supplies in FORM GSTR-1 due to return-level instructions. These transactions are also excluded from turnover reporting in FORM GSTR-9 and FORM GSTR-9C.

Additionally, while computing refund under Rule 89, such turnover is generally not included in the denominator. In case these supplies were to be included in adjusted total turnover, the denominator of the refund formula would increase, thereby reducing refund eligibility. Similarly, inclusion in total turnover for Rule 42 and Rule 43 would increase proportionate reversal obligations.

Thus, the disharmony between the SEZ framework, the GST law, and their operational manifestation in the return-filing system results in a structural inconsistency that exposes SEZ Units to substantial tax and refund risks.

Way forward:

In view of the practical challenges being encountered and the subsisting litigation on the subject, it is imperative that an express and authoritative clarification be issued from the Government, particularly on whether SEZ-DTA supplies are to be regarded as forming part of the taxable turnover of the SEZ Unit for purposes of refund computation and allied turnover-based determinations.

Until this tension is resolved, the issue remains interpretational and carries attendant litigation exposure. A position must therefore be adopted after calibrated risk evaluation, balancing statutory construction against administrative practice.

[The authors are Partner, Principal Associate and Associate, respectively, in Indirect Tax practice at Lakshmikumaran & Sridharan Attorneys, Bengaluru]