No Exemption for SEZ Units from Compensation Cess under GST

The Andhra Pradesh High Court has recently delivered a judgment that has significant implications for the Special Economic Zone (SEZ) units in India. The court has held that SEZ units are not exempt from paying compensation cess under the Goods and Services Tax (GST) regime on imported goods. This decision may affect the cost and competitiveness of SEZ units and their exports.

What is compensation cess?

Compensation cess is a levy imposed by the Goods and Services Tax (Compensation to States) Act, 2017 to provide compensation to the states for any loss of revenue due to the implementation of GST. The cess is levied on certain specified goods, such as coal, tobacco, aerated drinks, automobiles, etc. The cess is collected by the central government and distributed among the states as per a formula.

Why SEZ units claimed exemption?

SEZ units are special zones that are deemed to be foreign territories for the purposes of trade operations, duties and tariffs. SEZ units are entitled to various incentives and benefits under the SEZ Act, 2005, which is a special law that overrides the general laws such as the Customs Act, 1962 and the GST Acts. SEZ units are exempt from payment of customs duty, integrated GST and compensation cess on imported goods under Section 7 of the SEZ Act, 2005.

How the court denied exemption?

The Andhra Pradesh High Court rejected the claim of exemption by SEZ units and upheld the demand of compensation cess by the customs authorities. The court observed that the SEZ Act, 2005 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 court further noted that the key requirement for Section 7 of the SEZ Act, 2005 to apply is that the law which imposes the tax, duty or cess must be referenced in the First Schedule of the SEZ Act. The court found that the Goods and Services Tax (Compensation to States) Act, 2017, which levies compensation cess, is not mentioned in the First Schedule. Hence, Section 7 does not apply to compensation cess and no exemption is available for SEZ units.

The court also distinguished between the terms ‘tax/duty’ and ‘cess’ and held that they are not synonymous. The court referred to Section 26 of the SEZ Act, 2005 and Section 2 of the Customs Act, 1962 and concluded that ‘duty of customs’ used in Section 26 pertains only to duty of customs and not any cess, much less the GST compensation cess. The court also pointed out that there is no exemption provided for compensation cess either under the Customs Act or the GST Acts.

How does this affect businesses?

The judgment of the Andhra Pradesh High Court is likely to have an adverse impact on imports by SEZ units and could lead to GST demands by the customs authorities. The imposition of compensation cess will increase the cost of imported goods for SEZ units and reduce their profitability and competitiveness. This may also affect their exports as they may not be able to pass on the increased cost to their customers in foreign markets. The industry may seek a retrospective exemption from payment of GST compensation cess for imports by SEZ units from the government. Alternatively, the industry may challenge the judgment before the Supreme Court or seek a clarification from the GST Council on this issue.