Indirect Tax Laws · Import and Export Under GST

Special Economic Zones and Deemed Exports under GST

Updated 5 October 2026 · Fact-checked

Supply to an SEZ developer or unit is zero-rated: supply under LUT without IGST and claim refund of unutilised ITC, or pay IGST and claim it back. Deemed exports are supplies of goods notified under Section 147. Normal GST is paid, and either the supplier or the recipient, not both, claims the refund under Rule 89(2) conditions.

Understand Special Economic Zones and Deemed Exports

GST is a destination-based tax. Exports leave India, so no Indian GST should remain in the price. The law achieves this by making exports zero-rated: tax at 0%, with the supplier still getting back the ITC on inputs.

An SEZ is treated as foreign territory for trade, duties and tariffs, although it is physically in India. So the IGST Act gives supplies to an SEZ developer or SEZ unit the same zero-rated status as exports. A supply to an SEZ is always treated as an inter-State supply, so the tax involved is IGST. The supply must be for the authorised operations of the SEZ developer or unit.

The supplier has two options. Option 1: supply under a bond or Letter of Undertaking (LUT) without paying IGST, then claim refund of unutilised ITC. Option 2: pay IGST, then claim refund of the IGST paid. Services and goods both qualify. For supplies to an SEZ, the refund claim needs an endorsement by the specified officer of the SEZ that the goods or services were received for authorised operations.

Deemed exports are different. They are supplies of goods notified under Section 147 of the CGST Act as deemed exports, whether or not the goods leave India. They apply to goods only (manufactured in India), not services. They are not zero-rated: the supplier charges normal GST, and the refund of that tax is allowed on application. The refund can be claimed by the supplier or by the recipient, but not both. It is subject to the conditions of Rule 89(2), including the recipient's undertaking that it will not avail ITC on the supply, and it applies only to the notified category of supply.

The notified categories usually tested are: supply of goods against an Advance Authorisation; supply of capital goods against an EPCG Authorisation; supply of goods to an Export Oriented Unit (and similar units such as STP, EHTP and BTP units); and certain notified supplies of gold by a bank or public sector undertaking. Check the current notified list before the exam, because the list can change.

Key rules to remember

SEZ supply: status: Supply to SEZ developer or unit (for authorised operations) = zero-rated supply = inter-State supply; Applies to goods, services or both. Tax type is IGST.
Two routes for SEZ supply: Route 1: supply under LUT/bond, no IGST, refund of unutilised ITC | Route 2: pay IGST, refund of IGST paid; The supplier chooses. Where the supplier charges IGST, the SEZ developer or unit receives it as input tax credit on that supply.
Refund of unutilised ITC (zero-rated supply without payment of tax): Maximum refund = Turnover of zero-rated supply × Net ITC ÷ Adjusted total turnover − Tax payable on such zero-rated supplies; Net ITC means ITC availed on inputs and input services during the relevant period, other than ITC for which refund is claimed separately under the other sub-rules of Rule 89. Capital goods ITC is not included. Turnover of zero-rated supply of goods and of services are taken as separate terms. For a supply to an SEZ, take the invoice value as the turnover of zero-rated supply.
Deemed export: nature: Deemed export = supply of goods manufactured in India, notified under Section 147; normal GST is charged; refund is claimed later; No LUT route. It is not a zero-rated supply by default.
Who claims refund on deemed export: Claimant = supplier OR recipient (not both), subject to Rule 89(2) conditions and the notified category; If the recipient claims, it must give an undertaking that it will not take ITC on that supply, and the supplier must not claim the refund. Check that the supply falls in a notified category.
Time limit and relevant date: Claim within 2 years from the relevant date | Deemed export: relevant date = date on which the return relating to such deemed exports is furnished | SEZ supply: relevant date = as given in the Explanation to section 54 for that type of claim; Apply the general 2-year refund limit. Do not assume one relevant date for all SEZ supplies. It depends on whether the claim is for ITC on a supply under LUT or for IGST paid, so use the matching clause of the Explanation.

How to solve Special Economic Zones and Deemed Exports questions

Use this order for any SEZ or deemed export question. It stops you from mixing up the two concepts.

1Identify the recipient. SEZ developer or SEZ unit points to zero-rated supply. EOU, Advance Authorisation holder or EPCG holder points to deemed export. A normal domestic buyer is neither.
2Check the nature of supply. Deemed exports cover goods only. A service supplied to an EOU is not a deemed export. A service to an SEZ unit can be zero-rated if it is for authorised operations.
3For an SEZ supply, fix the place of supply and tax type: it is inter-State, so IGST applies.
4State the supplier's option: LUT without IGST (refund of unutilised ITC) or payment of IGST (refund of IGST).
5For a deemed export, state that normal GST (CGST+SGST or IGST) is charged and refund is claimed afterwards.
6Identify the refund claimant. SEZ: the supplier, with SEZ officer endorsement. Deemed export: the supplier or the recipient, not both, subject to Rule 89(2) conditions, the recipient's no-ITC undertaking and the notified category.
7If numbers are given, compute using the refund formula: zero-rated turnover × Net ITC ÷ adjusted total turnover. Exclude capital goods ITC. For an SEZ supply, use the invoice value as the zero-rated turnover.
8Close with the time limit: 2 years from the relevant date. For a deemed export, the relevant date is the date on which the return relating to such deemed exports is furnished. For an SEZ supply, use the relevant date clause of the Explanation to section 54 that fits the claim. Write a one-line conclusion.

Quickest way: Two-question filter

When to use it: Use it in MCQs and short case scenarios where you have under two minutes.

Ask: Is the buyer inside an SEZ as developer or unit? If yes, it is zero-rated, IGST, LUT or pay-and-refund.
If not, ask: Is it goods to an Advance Authorisation holder, EPCG holder or EOU? If yes, it is a deemed export, normal tax, refund on application.
For refund-claimant questions, remember: SEZ goes to the supplier; deemed export goes to the supplier or recipient under Rule 89(2) conditions, never both.
If a number is needed, use zero-rated turnover × Net ITC ÷ adjusted total turnover and skip capital goods ITC.

Common mistakes in Special Economic Zones and Deemed Exports

Treating deemed exports as zero-rated supplies that can be made under LUT without tax.
The word 'export' suggests the same treatment as actual exports.
Fix: Deemed exports carry normal GST. Refund is claimed afterwards. The LUT option is for zero-rated supplies such as exports and SEZ supplies.
Saying services supplied to an EOU or Advance Authorisation holder are deemed exports.
Students remember the list but forget that it covers goods.
Fix: Deemed exports are supplies of goods manufactured in India. Services do not qualify.
Allowing both supplier and recipient to claim the deemed export refund.
The rule says 'supplier or recipient', which sounds like both.
Fix: Only one claims, and only for a notified category of supply. If the recipient claims, it gives an undertaking not to avail ITC, as required under Rule 89(2), and the supplier does not claim.
Charging CGST and SGST on a supply to an SEZ unit in the same State.
Students look at the locations of supplier and recipient, not at the rule.
Fix: A supply to an SEZ is treated as inter-State. IGST applies, or the supply is made under LUT without tax.
Including capital goods ITC in 'Net ITC' while computing refund of unutilised ITC.
All ITC looks the same on the credit ledger.
Fix: Net ITC means ITC on inputs and input services only. Capital goods ITC is excluded from the formula.
Ignoring the 'authorised operations' condition for SEZ supplies.
Students assume any supply to an SEZ unit qualifies.
Fix: Mention that the supply must be for authorised operations, and that the refund claim needs the SEZ officer's endorsement.

Worked examples

Example 1

Shree Components Ltd, a registered manufacturer in Delhi, supplies goods worth ₹10,00,000 to an SEZ unit in Noida for its authorised operations, under an LUT without paying IGST. Its other turnover (domestic taxable supplies) in the period is ₹30,00,000. Net ITC on inputs and input services is ₹3,20,000. Capital goods ITC of ₹50,000 was also availed. Compute the maximum refund of unutilised ITC.

Show the solution

The supply is to an SEZ unit for authorised operations, so it is a zero-rated supply and inter-State. Supply under LUT without IGST is allowed.
Tax payable on the zero-rated supply is nil, because it was made without payment of IGST.
Net ITC covers inputs and input services only: ₹3,20,000. The ₹50,000 capital goods ITC is excluded.
Turnover of zero-rated supply = invoice value = ₹10,00,000.
Adjusted total turnover = ₹10,00,000 + ₹30,00,000 = ₹40,00,000.
Maximum refund = ₹10,00,000 × ₹3,20,000 ÷ ₹40,00,000 − 0 = ₹80,000.

Answer: The maximum refund of unutilised ITC is ₹80,000. The supplier must apply with the SEZ officer's endorsement, within 2 years from the relevant date given in the Explanation to section 54 for this type of claim.

Example 2

Bharat Alloys, a registered supplier in Pune, supplies goods worth ₹5,00,000 to an Export Oriented Unit in Pune. The supply is intra-State and GST is 18%. The EOU wants to claim the refund itself. Is it a deemed export, what tax is charged, and who can claim the refund?

Show the solution

Goods are supplied to an EOU. This is a notified category, so it is a deemed export. It is a supply of goods, so the goods condition is met.
It is not a zero-rated supply. Normal GST is charged. Supply is intra-State, so CGST 9% and SGST 9% apply.
GST = ₹5,00,000 × 18% = ₹90,000, split as ₹45,000 CGST and ₹45,000 SGST.
Refund of this tax can be claimed by either the supplier or the recipient, not both, subject to the Rule 89(2) conditions. The EOU can claim it, but it must give an undertaking that it will not avail ITC on this supply. Bharat Alloys must then not claim the refund.
Time limit: 2 years from the relevant date, which for a deemed export is the date on which the return relating to such deemed exports is furnished.

Answer: It is a deemed export in a notified category. GST of ₹90,000 (₹45,000 CGST + ₹45,000 SGST) is charged. The EOU can claim the refund of ₹90,000 under Rule 89(2) only if it gives the no-ITC undertaking and the supplier does not claim. The claim must be filed within 2 years from the relevant date, being the date on which the return relating to such deemed exports is furnished.

Exam tips

Write the two options for SEZ supply every time: LUT without IGST, or pay IGST and claim refund. Examiners award marks for both.
In deemed export answers, name the notified category and state that it covers goods only. This is a frequent scenario trap.
Always state who claims the refund and the condition: recipient's no-ITC undertaking for deemed exports; SEZ officer endorsement for SEZ supplies.
In refund computation, exclude capital goods ITC from Net ITC and show adjusted total turnover separately.
Use provision-facts-conclusion form in written answers. In MCQs, find the recipient first, then the type of supply.

Practice questions from Import and Export Under GST

Special Economic Zones and Deemed Exports in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Special Economic Zones and Deemed Exports: frequently asked questions

Is supply to an SEZ zero-rated under GST?

Yes. Supply of goods or services or both to an SEZ developer or SEZ unit for authorised operations is a zero-rated supply. It is treated as an inter-State supply, so IGST is the relevant tax.

Should I supply to an SEZ with or without payment of IGST?

You can choose either. Under an LUT you supply without IGST and claim refund of unutilised ITC. Otherwise you pay IGST and claim refund of the IGST paid.

What are the notified deemed exports under GST?

The usual list covers supply of goods against an Advance Authorisation, capital goods against an EPCG Authorisation, goods to an EOU or similar units, and certain notified gold supplies by banks or PSUs. Always check the latest notification, since the list can be amended.

Who can claim refund on deemed exports under GST, and from when does the time limit run?

Either the supplier or the recipient can claim, but not both, and only for a notified category of supply. The Rule 89(2) conditions apply. If the recipient claims, it must give an undertaking that it will not avail ITC on the supply, and the supplier cannot claim the refund. The claim is made within 2 years from the relevant date. For a deemed export, that is the date on which the return relating to such deemed exports is furnished. For a supply to an SEZ developer or unit, use the relevant date clause of the Explanation to section 54 that fits the claim.