SEZ Exemptions Aren’t Automatic: Legal Lessons for Exporters and Tax Professionals

India’s Special Economic Zones (SEZs) are designed to function as tax-neutral enclaves to promote exports and boost economic competitiveness. Recent judicial rulings and policy updates signal a clear shift in how tax exemptions and refund entitlements under the SEZ regime are interpreted and enforced. Whether it's customs duty, GST, service tax, or compensation cess, one theme is evident: SEZ benefits are not automatic; they are conditional, procedural, and must align precisely with "authorized operations" as approved under the SEZ Act, 2005. Courts and tribunals have shown increasing willingness to scrutinize claims and balance substantive eligibility with procedural compliance. GST on Real Estate & Works Contracts – Your Ultimate Guide to GST in the Real Estate Sector! Click here This article provides a detailed overview of the most critical decisions from CESTAT and High Courts in 2024-2025, alongside key policy developments such as the restoration of RoDTEP benefits. 1. The Legal Principle: SEZ Benefits Are for Authorized Operations Only Section 26 of the SEZ Act, 2005, provides for a wide range of exemptions on customs duties, central excise, service tax, and other levies for goods and services used in "authorized operations" by SEZ units and developers. However, Section 51, which provides the Act’s overriding effect, only applies within the scope of these authorized operations. Any transaction beyond that scope invites the application of general tax laws. 2. Key Judicial Rulings ATC Tires Pvt. Ltd. v. Commissioner of GST & Central Excise (CESTAT Chennai, 2025) ATC Tires claimed a refund of service tax for services used in authorized operations. The refund was partially rejected due to classification issues and procedural lapses. The Tribunal remanded the matter for reconsideration, emphasizing that procedural violations, although not always fatal, cannot be normalized. Each refund claim must align with the services approved for SEZ use and must be properly documented. Prestige Polymers Pvt. Ltd. v. Commissioner of Customs (CESTAT Delhi, 2025) Prestige Polymers imported duty-free goods into SEZ but sold them in the Domestic Tariff Area (DTA) without using them for authorized operations. CESTAT ruled that once goods are not used for SEZ-authorized activities, exemptions lapse and full customs duties apply. The SEZ’s "deemed foreign territory" status does not apply. Shapoorji Pallonji & Co. Ltd. v. CCE (CESTAT Mumbai, 2025) CESTAT held that non-filing of Forms A1 and A2, required for claiming service tax exemption under Notification No. 17/2011-ST, is a procedural lapse and not a substantive defect. As long as services are used for authorized operations, the benefit cannot be denied. Read More. Keselec Schreder Pvt. Ltd. v. CGST (CESTAT, 2025) CESTAT allowed CENVAT credit on inputs used in supplies made by SEZ developers. The Tribunal relied on High Court decisions treating such supplies as exports, reinforcing that input credits must be preserved in the chain of tax-free supplies. Read More. Geo Dynamics v. Commissioner of CE & ST (CESTAT Ahmedabad, 2025) The Tribunal ruled that non-submission of Forms A1/A2 is not a valid ground to deny SEZ service tax exemption. The absence of the forms was deemed a curable defect. Lupin Ltd. v. Commissioner of Customs (CESTAT Delhi, 2023) Lupin returned unutilized goods from SEZ to DTA and sought to treat it as a re-import exempt from customs duty. The Tribunal rejected this, holding that Rule 48(3) of SEZ Rules cannot override Section 30 of the SEZ Act, which mandates customs duty on such clearances. Syntel Solutions India Pvt. Ltd. v. Commissioner (CESTAT Mumbai, 2025) The Tribunal allowed refund claims for business support services, which were challenged on the ground that they weren’t explicitly listed in the SEZ LoA. CESTAT ruled in favor of the assessee based on Ministry of Commerce Circular No. 83, which treated such services as authorized by default. ZF Commercial Vehicle Control System India Ltd. (CESTAT – Referred to Larger Bench) This case questions whether the limitation period under Section 11B of the Central Excise Act applies to refund claims by SEZ units. The issue has been referred to a Larger Bench, highlighting an important intersection between the SEZ Act and procedural timelines under other laws. 3. High Court Positions on SEZ Tax Treatment Madras High Court on GST Refund to SEZ Units The court held that SEZ units can claim refunds even when suppliers wrongly charge GST, provided a disclaimer is given by the supplier. The judgment affirmed the zero-rated nature of SEZ supplies under the IGST framework. Read More. Karnataka High Court: FD Interest Exempt Under Section 10AA The court ruled that interest income from fixed deposits maintained by SEZ units qualifies as exempt business income under Section 10AA of the Income Tax Act. Read More. Maithan Alloys Ltd. v. Union of India (Andhra Pradesh High Court) The court ruled that the compensation cess under GST is not exempt for SEZ imports because it is not covered by the First Schedule of the SEZ Act. This clarified that cess is distinct from "duty" and outside the purview of SEZ exemptions unless explicitly included. 4. RoDTEP Policy Update: Benefits Restored for SEZs from June 1, 2025 The DGFT has reinstated RoDTEP (Remission of Duties and Taxes on Exported Products) benefits for SEZs, EOUs, and AA holders, effective June 1, 2025, via Notification No. 11/2025-26. This follows a temporary suspension of these benefits from February 5, 2025, which had caused significant disruption for exporters. Read More. 5. Compliance Imperatives for SEZ Units Ensure all exempted activities are within the scope of the unit’s Letter of Approval. File and maintain all required documentation (Forms A1, A2, LUTs, disclaimers). Track circulars and clarifications from the CBIC and the Ministry of Commerce. Monitor Larger Bench references and stay aligned with developing jurisprudence. Use restored RoDTEP benefits proactively to claim embedded taxes on exports. The government plans to replace the SEZ Act, 2005, with a new law called the Development of Enterprise and Service Hubs (DESH) Act to modernize SEZs. This aims to involve states, improve export competitiveness, make better use of existing infrastructure, and introduce easier processes like single-window clearance and IT-based customs. It may also allow SEZ and DTA units to operate together and support job work between them. Overview of Tax Incentives for SEZ Units and Developers Category of IncentiveBeneficiarySpecific Exemption/BenefitRelevant Legal Provision/ActKey Conditions/RemarksDirect TaxSEZ Units100% Corporate Tax Exemption for 5 years on export profits, 50% for the next 5 years, and 50% of reinvested export profits for another 5 years.Section 10AA of the Income Tax ActApplicable for units commencing operations between April 1, 2006, and April 1, 2021. Subject to authorized operations and specific conditions.SEZ DevelopersIncome Tax exemption for a block of 10 years in 15 years on income from SEZ development.Section 80-IAB of the Income Tax ActSunset clause effective from April 1, 2017.Indirect TaxSEZ Units & DevelopersExemption from Customs Duty on imported raw materials, machinery, and equipment for authorized operations.SEZ Act, 2005; Customs Act, 1962Reduces production costs for export-oriented sectors.SEZ Units & DevelopersZero-rated supplies under GST on goods and services purchased from domestic vendors for authorized operations.IGST Act, 2017Ensures no GST burden on exports; ITC refund mechanism available.Other Financial BenefitsSEZ Units & DevelopersSimplified Foreign Exchange transactions and fewer controls on profit repatriation.SEZ Act, 2005Mandatory Positive Net Foreign Exchange (NFE) to be achieved cumulatively for 5 years.SEZ Units & DevelopersExemption from Central Sales Tax and Service Tax (pre-GST era).SEZ Act, 2005Benefits are now subsumed under GST zero-rating. 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SEZ Exemptions Aren’t Automatic: Legal Lessons for Exporters and Tax Professionals

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