SEZ Supplies and the Authorised Operations Test

SEZ Supplies explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Two questions on every SEZ supply, and they have different answers. The first decides the head of tax; the second decides whether tax is payable at all.

Question one — is it inter-State? Always. Section 7 of the IGST Act deems a supply to or by a Special Economic Zone developer or unit to be inter-State, and s.8 excludes it from intra-State — whatever the geography. So IGST applies. Question two — is it zero-rated? Only if it is for authorised operations. Section 16(1)(b) zero-rates the supply of goods or services "to a Special Economic Zone developer or a Special Economic Zone unit for authorised operations". A supply not for authorised operations is inter-State but taxable, with no refund.

Question one: always inter-State

A supplier in Karnataka supplying an SEZ unit in Karnataka charges IGST. Not CGST and SGST — the geography is irrelevant, because s.7 deems the supply inter-State and s.8 excludes it from intra-State.

And the same applies to supplies by an SEZ unit. An SEZ unit supplying into the domestic tariff area makes an inter-State supply under s.7, though the DTA clearance carries its own customs consequences under the SEZ regime.

The recurring error is charging CGST and SGST on a local supply to an SEZ unit — a wrong-head payment corrected under s.77 of the CGST Act with s.19 of the IGST Act, with no interest on the tax subsequently paid correctly, but with the recipient's credit stranded in the meantime. Section 77 → Sections 7 and 8 →

Question two: authorised operations

Section 16(1) of the IGST Act zero-rates two things:

• (a) export of goods or services or both;
• (b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit for authorised operations.

The qualifier — "for authorised operations" — is the whole of the second limb.

What it means: the operations authorised for that developer or unit under the Special Economic Zones Act, 2005 and the approval granted to it. A unit's authorised operations are specified in its letter of approval, and a developer's in the approval for the zone.

So a supply to an SEZ unit that is not for its authorised operations — a personal purchase, an item outside the approved list, a service not connected with the authorised activity — is:

• inter-State, so IGST applies;
• not zero-rated, so the tax is a real cost;
• and no refund arises, because s.16(3) refunds attach to zero-rated supplies.

The endorsement

The endorsement by the specified officer of the SEZ is what evidences that the supply was received for authorised operations, and it is the document on which the zero-rating and any refund rest.

Rule 89(2) lists the documentary evidence to accompany a refund application, and for a supply to an SEZ it includes the endorsement by the specified officer evidencing receipt of the goods in the SEZ, or evidencing that the services were received for authorised operations, together with a declaration by the SEZ developer or unit that it has not availed input tax credit of the tax paid by the supplier. Rule 89(2) → Refund on SEZ supplies →

Two practical consequences.

The supplier depends on the recipient. The endorsement is obtained from the specified officer of the zone, and the declaration comes from the SEZ unit. A supplier that has not built this into its contract and its collection process will find refund claims held up by documents it cannot obtain unilaterally.

And the declaration matters. Where the SEZ unit has taken credit, the supplier cannot claim the refund — the two are alternatives, and the parties must agree which route is used before the supply, not afterwards.

The two routes, and which to use

Section 16(3) gives a zero-rated supplier the same two routes for an SEZ supply as for an export:

Under a LUT, without payment of tax. The supplier furnishes a Letter of Undertaking, charges no tax, and claims a refund of unutilised input tax credit under Rule 89(4). Rule 96A → Rule 89(4) →

With payment of IGST. The supplier charges IGST and claims a refund of the tax paid, supported by the endorsement and the recipient's declaration.

Which to use.

The LUT route avoids the cash outflow entirely and is usually preferable where the supplier has accumulated credit — the refund is of unutilised credit, computed under the Rule 89(4) formula.

The with-payment route is simpler where the supplier has little accumulated credit and wants a refund of a specific amount, but it requires the tax to be paid first and recovered later, and the endorsement and declaration are then indispensable.

And note the practical asymmetry with an SEZ unit's own position. An SEZ unit receiving a zero-rated supply under a LUT bears no tax and takes no credit. Under the with-payment route it bears IGST and, if it takes credit, the supplier cannot claim the refund. So the LUT route is generally cleaner for both sides, and it is worth agreeing at the contract stage.

What the supplier should build

1. Flag SEZ customers in the master, so the tax determination applies IGST regardless of geography.
2. Hold the letter of approval for each SEZ customer, and understand its authorised operations — because that defines what can be zero-rated.
3. Agree the route — LUT or with-payment — in the contract, along with responsibility for the endorsement and the declaration.
4. Build the endorsement into the delivery process, so it is obtained at the time of supply rather than months later when a refund is filed.
5. Furnish the LUT before the supply, and track its validity, since Rule 96A applies consequences where the conditions are not met.
6. Reconcile SEZ supplies separately in the GSTR-1 zero-rated table, since they are reported distinctly from exports.
7. Where a supply is not for authorised operations, charge IGST and account for it as an ordinary taxable supply — do not zero-rate it on the strength of the customer being in an SEZ.

Key takeaways

• Every supply to or by an SEZ developer or unit is inter-State under s.7, and excluded from intra-State by s.8.
• IGST applies regardless of geography — a local supply to an SEZ unit is still inter-State.
• Zero-rating under s.16(1)(b) applies only to supplies for authorised operations.
• A supply not for authorised operations is taxable with no refund.
• The endorsement by the specified officer and the SEZ unit's declaration of not having taken credit are the supporting documents.
• The LUT route is generally cleaner for both sides, and should be agreed in the contract.

Read next

• Sections 7 and 8: The Two-Step Inter-State Test
• Refund of Tax on Supplies to SEZ and the Endorsement
• Rule 96A: LUT and the Fifteen-Day Consequence
• SEZ Unit or Developer: Separate Registration Requirement

Disclaimer: Positions stated as on 5 September 2026, based on the IGST Act and the CGST Act and Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition). The authorised operations of a particular developer or unit are those specified in its approval under the Special Economic Zones Act, 2005.