SEZ units are not exempt from compensation cess under GST

The Andhra Pradesh High Court has held that no exemption from payment of compensation cess under the Goods and Services Tax (GST) is available on import of goods by units in Special Economic Zones (SEZs).

This decision was taken in the case of Maithan Alloys which was engaged in the business of manufacturing ferro alloys and was established as an SEZ unit.

The high court observed that Sections 7, 26 and 50 of the SEZ Act, 2005, are the three main provisions which allow the SEZ units to claim the exemptions of duties, tax, cess and certain drawbacks and concessions.

The SEZ Act is a self-contained law that provides exemptions from various taxes and duties, including those on goods imported and exported by developers and units in SEZs. Therefore, the exemptions have to be looked into from the provisions of the said Act and not from elsewhere.

The key requirement for Section 7 to apply is that the law which imposes the tax, duty, or cess must be referenced in the First Schedule of SEZ Act. Goods and Services Tax (Compensation to States) Act, 2017 is not mentioned in the First Schedule.

The AP high court noted that there is difference between the terms ‘tax/duty’ and ‘cess’. On considering Section 26(1)(a) and 2(zd) of SEZ Act along with Section 2(15) of the Customs Act, it becomes clear that ‘duty of customs’ used in Section 26(1)(a) pertains only to duty of customs and not any cess much-less the GST Compensation cess. Further, there is no exemption provided for compensation cess either under Customs Act or GST Act. Accordingly, the AP high court held that GST Compensation cess is not exempt on import of goods (the case under consideration dealt with import of coal) by an SEZ unit.

According to an expert, the order is likely to have an adverse impact on imports by SEZ units and act as a trigger point for raising of GST demands. The industry may represent to the government for a retrospective exemption from payment of GST compensation cess in case of import of goods by an SEZ unit.