SEZ Units furnishing LUT are Exempt from GST on RCM for services from DTA Supplier 

SEZ units furnishing LUT are not required to pay GST on RCM for services availed from DTA supplier

The Gujarat, AAR in the matter of M/s. Waaree Energies Limited [Advance Ruling No. GUJ/GAAE/R/2024/09 dated April 16, 2024] held that the Special Economic Zone units (“SEZ unit”) are not required to pay GST under Reverse Charge Mechanism (“RCM”) on any service received from suppliers located in the Domestic Traffic Area (“DTA”) for carrying out the authorized operation in the SEZ unit, provided that a Letter of Undertaking (“LUT”) or bond as a deemed supplier of such services is furnished as mentioned in Notification No. 37/2017-Central Tax dated October 04, 2017.

Facts:

M/s. Waaree Energies Limited (“the Applicant”) were engaged in the manufacture of solar modules and were registered under the category of the taxpayer as a SEZ Unit. The Applicant availed services such as Goods Transport Agency (“GTA”), Legal services from Advocate, Security Services, and Bus Hiring for employees (specified services) from the DTA for their SEZ Unit.

In respect of the four services they avail, the Applicant is required to pay GST under RCM in terms of Notification No. 10/2017-Integrated Tax (Rate) dated June 28, 2017.

The Applicant contended that Rule 5(5)(a) of the Special Economic Zone Rules, 2006 (“the SEZ Rules”), provides an exemption from the State Goods and Services Tax (“SGST”). Further, Rule 30(1) of SEZ Rules, enables a DTA supplier to clear services to an SEZ unit as in the case of a zero-rated supply in terms of Section 16 of the Integrated Goods and Services Tax Act, 2017 (“the IGST Act”), either under the bond or under legal undertaking or under any other refund procedure permitted under the GST law. Therefore, the aforesaid Notification cannot have any application in the case at hand.

Hence, aggrieved by the circumstances, the Applicant approached the Advance Ruling Authority.

Issue:

Whether SEZ units furnishing LUT are not required to pay GST on RCM for services availed from the DTA supplier?

Held:

The Gujarat, AAR in Advance Ruling No. GUJ/GAAE/R/2024/09 held as under:

• Observed that, as per the question in the FAQs on GST, 3^rd Edition, dated December 15, 2018, clarifies the question of payment of IGST under RCM, when received by an SEZ unit. It states that all supplies to SEZs are zero rated. However, the suppliers are given two options. In this case, the supplier is not liable to pay GST as the supply is under RCM. The recipient is considered as deemed supplier Therefore, SEZ has to pay GST in this case.
• Relied on, Portescap India (P.) Ltd. In re [Order No. MAH/AAAR/DS-RM/15/2022-23 dated January 13, 2023], where the Appellate Authority for Advance Ruling, Maharashtra held that the Appellant is not required to pay GST under RCM on any service received from suppliers located in DTA for carrying out the authorized operation in SEZ unit, provided that a LUT or bond as a deemed supplier of such services is furnished.
• Held that, the Applicant, an SEZ unit, can procure the services, for use in authorized operations without payment of IGST provided the Applicant, furnishes a LUT or bond as specified in Notification No. 37/2017-Central Tax dated October 04, 2017. This rationale was borrowed from clarification and not a circular which was given to specified SEZ unit. wherein clarification was sought, as to whether the SEZ unit is liable to pay GST in respect of legal services, sponsorship services, etc received by an SEZ unit, from a unit in DTA, which are chargeable to GST under RCM. The Tax Research Unit, CBIC, New Delhi, clarified a unit in SEZ or the SEZ developer can procure such services, where they are required to pay GST under RCM, without payment of IGST provided by the actual recipient, i.e. SEZ unit, furnishes a LUT in place of a bond as specified in the condition of Notification No. 37/2017-Central Tax dated October 04, 2017. The actual recipient of service is the deemed supplier/registered person for the purpose of fulfilling other conditions including the manner of furnishing of LUT.

Conclusion: The Gujarat AAR’s ruling provides clarity on GST obligations for SEZ units availing services from DTA suppliers. SEZ units, while exempt from SGST and entitled to zero-rated supplies, are liable under RCM if the supplier opts for it. However, they can avoid IGST payment by furnishing an LUT, as specified in Notification No. 37/2017-Central Tax.

This decision underscores the importance of understanding GST provisions in the context of SEZ operations, ensuring compliance while leveraging tax benefits. It offers valuable insights for businesses operating within SEZs, guiding them in navigating GST implications effectively.

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