SEZ Units as we are all aware were established for promotion of exports wherein the Government of India enacted the SEZ Act, 2005 providing for various tax exemptions. 

However one of the issues that cropped up after the introduction of the GST was whether a SEZ Unit is eligible for the Compensation CESS exemption or not as the Government of India had not issued any specific exemption notification unlike for IGST. 

SEZ Units since July 2017 continued to claim the exemption for Compensation CESS on their imports. Nonetheless the GST authorities issued demand notices denying the exemption benefit and demanded crores of Rupees of Compensation CESS. The matter then reached the Hon’ble AP High Court for its decision.

In the batch of WRIT Petitions Maithan Alloys Ltd & others vs UOI TS-677-HC(AP)-2023-GST, the High Court denied the exemption and directed SEZ Units to pay the Compensation CESS.

In my humble opinion, the SEZ Unit is eligible for exemption of Compensation CESS on import of Coal for the following reasons: –

✔The Section 16 of the IGST Act provides that supplies to SEZ Units are Zero Rated Supplies. Once supplies to SEZ are deemed to be Zero Rated, in my opinion the same treatment would apply to imports also. There is no reason not to give the benefit for imports. 

✔The Section 3(9) of the Customs Tariff Act, 1975 says that any article which is imported into India shall, be liable to the GST Compensation Cess as is leviable on a like article on its supply in India. On the domestic supply of coal to SEZ, it is Zero rated supply, no tax on it therefore same benefit must be granted at the time of import also.

✔When EOU is exempted from Compensation CESS on their imports, why can’t SEZ Unit is eligible for Compensation CESS exemption. 

✔I have seen the Office Memorandum issued by the CBIC to the Ministry of Commerce wherein it is said that field authorities may be instructed not to take any coercive methods for recovery and to maintain status quo.

For the above reasons, I believe that SEZ Unit is eligible for the Compensation CESS exemption on their Imports. 

Issuance of a separation notification is not warranted. The entire issue is revenue neutral because even if the SEZ Unit pays the Compensation CESS exemption on their Imports, they take the ITC and apply for refunds as they are exporters. 

The motto of the GST law is that exports cannot be taxed, taxes cannot be exported.

I therefore opine that the Government would not get any Naya paisa from this frivolous litigation.

(The writer is an Advocate, AP High Court, views are personal.)