SEZ & Unutilised ITC Refunds

Under Section 16 of the IGST Act 2017, a zero-rated supply includes: (a) export of goods or services out of India, and (b) supply of goods or services to a Special Economic Zone developer or SEZ unit for authorised operations. Both categories carry no GST burden on the supply itself — either because it is supplied under LUT without IGST, or because IGST is charged and later refunded. The SEZ supply must be 'for authorised operations' as approved for that specific SEZ unit or developer — a supply outside the scope of the unit's approved authorised operations does not automatically qualify as zero-rated even if the buyer is located within an SEZ.

Both routes are legally available and lead to the same net commercial outcome — zero tax cost on the SEZ supply — but they differ in cash flow and administrative burden. Supplying under LUT means no IGST is collected or paid upfront, and the refund claimed is of accumulated unutilised ITC (Rule 89(4)). Charging IGST means the supplier funds the tax upfront and claims a refund of that specific IGST amount. Businesses with healthy ITC accumulation typically prefer the LUT route since it avoids funding IGST upfront at all. Businesses with limited ITC accumulation, or SEZ recipients who prefer to see IGST charged for their own internal reconciliation reasons, sometimes prefer the IGST-paid route.

Section 54(1) of the CGST Act requires a refund application to be filed within two years from the 'relevant date.' For goods exported by sea or air, the relevant date is generally the date the ship or aircraft carrying the goods leaves India. For goods exported by land, it is the date the goods pass the frontier. For services exported, it is the date of receipt of payment in convertible foreign exchange (or Indian rupees where permitted by RBI), or the date of invoice issuance if payment is received in advance. For refund of unutilised ITC on account of an inverted duty structure, the relevant date is generally the due date for furnishing the return for the period in which the claim arises. Missing this window forecloses the claim entirely, with no condonation mechanism under the statute for ordinary delay.

Rule 89(4) of the CGST Rules computes the refund amount for zero-rated supplies (export/SEZ) without payment of tax as: Refund Amount = (Turnover of zero-rated supply of goods and services × Net ITC) ÷ Adjusted Total Turnover. 'Net ITC' means input tax credit availed on inputs and input services during the relevant period, excluding any ITC availed for which refund is claimed under specific sub-rules for capital goods, and excluding ITC that is otherwise ineligible or blocked under Section 17(5). 'Adjusted Total Turnover' broadly means the turnover in the state or Union Territory, excluding the value of exempt supplies other than zero-rated supplies, and excluding turnover of services under specified notifications, computed for the same tax period.

Rule 89(5) computes the maximum refund amount for inverted duty structure claims as: Maximum Refund Amount = {(Turnover of inverted-rated supply of goods and services × Net ITC) ÷ Adjusted Total Turnover} minus the tax payable on such inverted-rated supply of goods and services. A key distinction from the Rule 89(4) formula: for this specific calculation, 'Net ITC' is restricted to input tax credit availed on inputs only — input services are excluded from this numerator, per the rule's wording as clarified by CBIC. This distinction has been the subject of litigation, and the current position (following the Supreme Court's ruling upholding the formula's validity) is that input services are indeed excluded from Net ITC for the inverted duty structure refund calculation specifically.

The GST Council's rate rationalisation in September 2025 moved the GST rate structure to a simplified 5%/18%/40% (demerit/luxury) framework, correcting several long-standing rate inversions — including in sectors like textiles, footwear, and select consumer goods — where the input rate had previously exceeded the output rate. For businesses in these corrected sectors, the inverted duty structure refund route may no longer apply to ITC accumulating in periods after the rate change, since the rate differential that created the entitlement has been reduced or eliminated. However, ITC that accumulated in periods before the rate change, attributable to the pre-rationalisation rate structure, generally remains eligible for refund under the rules in force during that period, subject to the two-year limitation running from the relevant date of that period.

For a supplier's refund claim on a supply made to an SEZ developer or unit, the tax invoice (or a statement) must carry an endorsement from the specified officer of the SEZ confirming that the goods or services were received by the SEZ unit or developer for authorised operations. This is in addition to — not a substitute for — the SEZ unit's own declaration that it has not availed input tax credit on the tax paid by the supplier (to avoid a double benefit). The endorsement is issued by the SEZ authority, not by GSTN or the supplier's jurisdictional GST officer, and SEZ authorities process these requests on their own administrative timeline, which does not always align with the supplier's filing deadline.

Not always. Rule 89(2)(m) requires a CA or Cost Accountant certificate in Annexure 2 confirming that the incidence of tax has not been passed on to any other person, where the refund amount claimed exceeds the notified self-certification threshold. Below that threshold, a self-declaration by the claimant suffices in place of the CA certificate. Certain categories of refund (such as refund of excess balance in the electronic cash ledger) generally do not require this certificate at all, since there is no question of unjust enrichment on cash-ledger balances. PNPC confirms the applicable requirement for each specific claim category and amount before assembling the filing package.

A deficiency memo is issued by the proper officer within 15 days of the ARN if the application or the supporting documents are found deficient in some respect. On issuance of RFD-03, the original application is treated as not having been filed for the purposes of the two-year limitation period — meaning the applicant must file a fresh, complete RFD-01 application after rectifying the deficiency, and this fresh application must itself fall within the two-year window from the relevant date. This is a critical point often missed: a deficiency memo does not pause the limitation clock, it resets the filing requirement, so refiling promptly matters.

A deficiency memo (RFD-03) relates to the completeness of the application — missing documents, unclear statements, formula errors apparent on the face of the filing — and requires refiling a complete application. A show-cause notice (RFD-08) is issued when the officer, after examining a complete application, proposes to reject the refund claim wholly or partly on substantive grounds — for example, disputing the eligibility of certain ITC, questioning the SEZ endorsement's validity, or disagreeing with the formula computation. The claimant must respond to a show-cause notice in Form RFD-09, typically within 15 days, and may request a personal hearing. A show-cause notice is a more serious procedural stage than a deficiency memo — it means the officer has substantively reviewed the claim and is contemplating rejection, not just requesting completion.

Yes. Section 56 of the CGST Act entitles the claimant to interest at the notified rate if the refund is not sanctioned within 60 days of the receipt of a complete application. Interest runs from the date immediately after the expiry of 60 days until the date the refund is actually paid. This is a statutory entitlement — it does not require a separate application in most cases, though claimants should specifically request it and track the computation if the department's sanction order does not automatically include it.

No — refund applications must generally be filed period-wise (or for a consolidated range of consecutive tax periods within a single financial year, subject to portal functionality and specific CBIC clarifications on clubbing periods across financial years). You cannot bundle several years of accumulated but unclaimed ITC into a single application spanning multiple financial years in most circumstances. Each period or permitted period-range must independently satisfy the two-year limitation from its own relevant date. This is precisely why businesses that delay filing for several years risk losing the ability to claim the earliest periods once the two-year window on those periods closes.

The SEZ unit or developer receiving the zero-rated supply must furnish a declaration confirming it has not availed input tax credit on the tax paid by the supplier (relevant specifically to the IGST-paid route). This exists to prevent a double benefit — the supplier claiming a refund while the SEZ recipient simultaneously claims ITC on the same transaction. If the SEZ unit has, in fact, availed such credit, the supplier's refund claim on that specific invoice will be denied or need to be corrected. Coordinating this declaration with the SEZ recipient before filing avoids a rejection discovered only after filing.

There is no statutory mechanism to compel an SEZ officer to issue the endorsement faster, but a few practical steps help: maintaining a clear, invoice-referenced request log with the SEZ unit's compliance team from the date of supply (not waiting until refund filing time); escalating through the SEZ unit's own management if the delay is on the unit's side rather than the SEZ authority's side; and, where the endorsement genuinely cannot be secured in time for a specific period's filing, considering whether that invoice can be carried into a later filing period (subject to the two-year limitation) rather than delaying the entire claim.

The CA/CMA certificate under Annexure 2 is evidence supporting the claimant's position that the tax incidence was not passed on to another person, but the officer retains the authority to examine the underlying facts and can reject the claim if evidence contradicts the certificate — for instance, if pricing or contractual documents show the tax was effectively recovered from the customer. This is uncommon in SEZ and export refund claims specifically (since zero-rated supplies by definition do not carry the tax being refunded in the price charged to the recipient), but it is a more live issue in certain other refund categories.

Maintain, for each claim period: the underlying tax invoices, the GSTR-1 and GSTR-3B as filed, the GSTR-2B as it stood at the time of the claim, the formula computation workings, the SEZ endorsement or shipping bill/EGM/BRC as applicable, the CA/CMA certificate where obtained, and all correspondence with the department (RFD-02 acknowledgment, any RFD-03/RFD-08 and the responses filed, and the final RFD-06 order). GST records generally must be retained for the period prescribed under Section 36 of the CGST Act (currently a minimum retention period tied to the annual return due date, extendable further if proceedings are pending) — refund-specific records should be retained at least that long, and longer if litigation is ongoing.

A pending audit or investigation does not automatically bar filing a refund claim, but the officer may withhold sanction of the refund under Section 54(10) or Section 54(11) where the registered person has defaulted in furnishing returns, has any outstanding demand, or where the Commissioner is of the opinion that grant of the refund is likely to adversely affect revenue in a pending appeal or proceeding — in which case the refund can be withheld until the proceeding concludes, or adjusted against any confirmed demand. Each situation is fact-specific and should be assessed before filing during an active audit or investigation.

Yes. Both SEZ developers (who develop and maintain SEZ infrastructure) and SEZ units (who operate within the SEZ for approved manufacturing or service activities) can be recipients of zero-rated supplies, and both categories require their suppliers' SEZ endorsement processes to function correctly. We also separately advise SEZ developers and units themselves on their own GST obligations — since being a recipient of zero-rated supply does not exempt an SEZ entity from its own registration and compliance obligations for any of its own taxable outward supplies or DTA (Domestic Tariff Area) clearances.

Duty drawback (under the Customs and Central Excise Duties Drawback Rules) refunds customs duty and, in the case of the 'Composite Rate' or 'All Industry Rate,' can include a deemed component for certain input taxes. Claiming a drawback at the composite/higher rate that already factors in GST-paid inputs generally bars a simultaneous GST ITC refund claim for that same component, to prevent double benefit. Exporters must choose between claiming the higher drawback rate (which precludes a parallel ITC refund on the deemed component) or claiming the lower drawback rate plus a separate GST ITC/IGST refund — whichever combination yields a better net outcome for their specific cost structure.

There is no statutory minimum threshold that must accumulate before filing — refund claims can be filed for any period in which unutilised ITC or the qualifying rate-differential exists, subject to the practical de minimis consideration that very small claims may not justify the reconciliation and documentation effort relative to the amount recovered. Most businesses with a recurring pattern of zero-rated supply or inverted duty structure benefit from filing on a monthly or quarterly cycle rather than waiting for a large accumulated balance, since regular filing keeps the reconciliation manageable and avoids the limitation-period risk of batching claims.

Yes. Under Section 54(10) of the CGST Act, if the claimant has any outstanding tax, interest, penalty, fee, or other amount payable under the Act that remains unpaid, the proper officer may withhold the refund and adjust it against such outstanding demand, rather than crediting it in cash. The claimant is entitled to be informed of this adjustment, and it should be reflected transparently in the RFD-06 order.

Rule 96 governs the automated refund of IGST paid on the export of goods, where the shipping bill itself is treated as the refund application once the corresponding Export General Manifest and valid GSTR-1/GSTR-3B are filed — refund processing here is substantially automated through ICEGATE-GSTN data matching rather than a manual RFD-01 filing. Rule 89, by contrast, governs the RFD-01-based application process used for refund of unutilised ITC (zero-rated supply or inverted duty structure) and for IGST-paid refunds on SEZ supplies specifically, since SEZ supplies do not have a shipping bill in the same sense as physical exports to a foreign country.

Yes. Where a refund claim is rejected via RFD-06 and the rejection is not legally sustainable, PNPC prepares the appeal memorandum and grounds of appeal for filing before the Appellate Authority under Section 107 of the CGST Act, coordinates the mandatory 10% pre-deposit of the disputed amount, and represents the client at the appellate hearing. For matters that proceed further — to the GST Appellate Tribunal (as constituted under the CGST Act) or to writ proceedings before the jurisdictional High Court — we work alongside briefed counsel while continuing to manage the underlying reconciliation and factual record.

PNPC agrees a fixed professional fee for the reconciliation, formula computation, documentation, and filing of each refund claim, confirmed in writing before work begins, with the fee scaled to the complexity of the reconciliation (number of periods, SEZ endorsement coordination, inverted-duty computation complexity) rather than a percentage of the refund amount. For recurring clients on a monthly or quarterly filing cycle, we offer a retainer structure covering the ongoing reconciliation and filing cadence at a predictable monthly cost.

In our experience, it is a mismatch between the ITC claimed and what actually appears in GSTR-2B for the period — followed closely by incomplete SEZ endorsement documentation and formula computation errors (particularly the input-services exclusion in Rule 89(5) inverted-duty claims). Each of these is entirely preventable with a disciplined pre-filing reconciliation. The claims we see rejected or endlessly stuck in deficiency-memo cycles almost always trace back to one of these three root causes rather than a genuinely disputable legal question.

Yes. A registered person whose registration is cancelled can still claim refund of unutilised ITC lying in the electronic credit ledger as on the date of cancellation, subject to Section 54(3) conditions and the same two-year limitation period. This is a commonly overlooked entitlement during business closure or restructuring — the credit balance does not automatically lapse, but it also does not automatically get refunded; a proactive claim must be filed.

No. The Rule 89(4)/89(5) formulas specifically apportion the Net ITC across Adjusted Total Turnover using the ratio of zero-rated (or inverted-rated) turnover to total turnover for the period. Only the proportionate share of ITC attributable to the zero-rated or inverted-rated supply, as computed by the formula, is refundable — the remainder of the ITC pool remains available in the electronic credit ledger for utilisation against domestic output tax liability in the normal course.

Many of our clients supply to SEZ units or export to UAE-based buyers as part of a broader India-UAE business flow. Our Dubai office coordinates with our Chennai, Bangalore, and Hyderabad teams so that the commercial and banking documentation on the UAE side (payment realisation, buyer confirmations) aligns cleanly with what the India-side GST refund claim requires — particularly for service exports where the Bank Realisation Certificate and the underlying UAE-side invoice and contract terms need to be consistent.

There is no statutory minimum, but as a practical matter, very small claims may not justify the reconciliation effort relative to the professional cost and time involved, particularly for a one-off small SEZ transaction. For businesses with recurring SEZ or export turnover, however, even individually modest monthly claims compound into a meaningful annual cash-flow benefit when filed consistently, which is why we generally recommend a recurring filing discipline rather than a one-off assessment based on a single period's amount.

If the SEZ unit's Letter of Approval has lapsed or its authorised operations have changed during the relevant period, supplies made during the lapsed period may not qualify as zero-rated supply to an SEZ, since the zero-rating is tied to the recipient's valid SEZ status and authorised operations at the time of supply. This is a due-diligence point suppliers should verify periodically with recurring SEZ customers, not merely at the start of the commercial relationship.

Yes. For clients who prefer to build internal capability, PNPC can set up the GSTR-2B reconciliation template, the formula computation workbook, and a documented SEZ-endorsement tracking process, train the in-house finance team on the mechanics, and retain a review-and-file role rather than doing the full reconciliation from scratch each period. This hybrid model works well for businesses with high transaction volume and an in-house finance team that has the bandwidth to do first-pass reconciliation.