Relevance for UPSC: GS II (Polity – Constitutional Provisions), GS III (Economy – Taxation, Infrastructure) | Source: Indian Express ; Supreme Court of India

Context

The Supreme Court has held that customs duty cannot be levied on electricity supplied from a Special Economic Zone (SEZ) to the Domestic Tariff Area (DTA) unless there is explicit statutory authorisation. The ruling granted relief to Adani Power against duty demands on electricity generated at its Mundra SEZ (Gujarat).

Key Legal & Constitutional Findings

• Electricity may qualify as “goods”, but taxation requires a clear charging provision in law.
• Executive interpretation cannot create a tax liability.
• Reaffirmed Article 265 of the Constitution:
  “No tax shall be levied or collected except by authority of law.”
• Customs duty demands without legislative backing were declared ultra vires.

SEZ Framework – 

• SEZs are deemed foreign territory for trade operations, not for sovereignty.
• Governed by the SEZ Act, 2005 and SEZ Rules, 2006.
• Supplies from SEZ to DTA are treated as imports, but tax incidence must be expressly provided by statute.
• Electricity is outside the GST framework, creating regulatory and fiscal overlap.

Why the Judgment is Significant

• Ensures fiscal certainty for power and infrastructure projects in SEZs.
• Prevents retrospective and arbitrary taxation, strengthening the rule of law.
• Enhances investor confidence and India’s credibility as a stable investment destination.
• Clarifies the constitutional limits of executive taxation powers.

Governance & Policy Implications

• Highlights the need for harmonisation between SEZ law, customs law, and indirect taxation policy.
• Signals that revenue considerations cannot override constitutional safeguards.
• Encourages legislative clarity over administrative discretion.

“The judgment reinforces constitutional fiscal discipline by placing clear limits on executive taxation in SEZ–DTA transactions.”

Q. With reference to Special Economic Zones in India, consider the following statements:

1. SEZs are deemed foreign territory for trade operations.
2. Supplies from SEZ to DTA automatically attract customs duty, even without statutory backing.

Which of the above is/are correct?
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2