HC holds GST Compensation Cess is not exempt on import of goods by SEZ

This tax alert summarizes a recent decision of the Andhra Pradesh High Court (HC)[1]. The issue involved was whether exemption from payment of Compensation cess under Goods and Services Tax (GST) is available on import of goods by Special Economic Zone (SEZ) units.

HC observed that Section 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.

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.

HC 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, HC held that GST Compensation cess is not exempt on import of goods by SEZ.

Comments

• The ruling is likely to have an adverse impact on imports by SEZ and act as a trigger point for Department to raise demand.

• The industry may represent to the Government for a retrospective exemption from payment of GST Compensation Cess in case of import of goods by SEZ. This may align Cess with other custom duties including IGST from SEZ perspective.
  

[1] TS-677-HC(AP)-2023-GST