No Exemption on SEZ units from Compensation Cess: HC

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

This decision came in the case of Maithan Alloys which was involved 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  SEZ Act, 2005, are the three main provisions that allow the SEZ units to claim exemptions of duties, taxes, cess, concessions and certain drawbacks.

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 under the provisions of the said Act and not elsewhere.

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

The AP high court noted that there is a difference between the terms ‘tax/ duty’ and ‘cess’. On considering Section 26(1)(a) and 2(zd) of the SEZ Act along with Section 2(15) of the Customs Act, it becomes apparent that the ‘duty of customs’ used in Section 26(1)(a) pertains only to the duty of customs and not any cess, much less the GST Compensation cess.

Furthermore, there is no exemption provided for compensation cess either under the Customs Act or the GST Act. Respectively, the AP high court stated that the GST compensation cess does not exempt on import of goods (the case under consideration dealt with the import of coal) by an SEZ unit.

According to the sources, the order is expected to have an unfavourable effect on imports by SEZ units and act as a critical point for raising GST demands.

The industry may represent the government for a retroactive exemption from paying the GST compensation cess in case of importing goods by a SEZ unit.