The Authority for Advance Rulings (AAR) in Gujarat has recently ruled in favor of SEZ units, providing them with potential relief from paying integrated goods and services tax (IGST) on certain services obtained from the domestic tariff area (DTA) through the Reverse Charge Mechanism (RCM). This ruling, issued in the case of M/S. WAAREE ENERGIES LIMITED, dated 16th April 2024, sheds light on an important aspect of taxation for SEZ operations.

Key Points from the Ruling

1. SEZ units, which operate within special economic zones, may be exempt from paying IGST on specified services sourced from the domestic tariff area (DTA) through the Reverse Charge Mechanism (RCM).
2. This exemption is subject to the condition that SEZ units furnish a Letter of Undertaking (LUT) or bond as specified in condition (i) of notification No. 37/2017-Central Tax dated 4th October 2017.

Background of the Case

In this specific case, M/S. WAAREE ENERGIES LIMITED, engaged in the manufacture of solar modules, availed various services such as Goods Transport Agency (GTA), Legal services, Security Services, and Bus Hiring for employees (specified services) from the Domestic Tariff Area for their SEZ Unit.

The applicant contended that as an SEZ unit, they are not liable for GST under RCM. They cited Section 7 of the SEZ Act 2005, which provides for exemption to all services procured from a DTA or foreign suppliers specified in the first schedule. Additionally, they referred to Section 51 of the SEZ Act, 2005, which states that the provisions of the SEZ Act override those of any other act, including taxation laws.

Issue Addressed

The applicant sought clarification on whether they, as an SEZ unit, are required to pay tax under the reverse charge mechanism on specified services as per notification No. 10/2017-IT(Rate) dated 28th June 2017, as amended from time to time.

Ruling by AAR, Gujarat

The AAR, Gujarat, made the following observations:

1. According to FAQs issued by the government, while the supplier of services is not liable to pay GST under RCM, the SEZ has to pay IGST since the recipient is considered a deemed supplier.
2. Notification No. 37/2017-CT allows a unit in the DTA to supply services to an SEZ unit without payment of IGST, subject to furnishing of LUT to the jurisdictional Commissioner.
3. The Tax Research Unit (TRU), CBIC, in a letter dated 18th December 2017, clarified that an SEZ unit can procure services where they are required to pay GST under RCM without payment of IGST, provided the unit furnishes a letter of undertaking.

Conclusion

As a result of this ruling, SEZ units like the applicant can procure specified services for use in authorized operations without payment of IGST, provided they furnish a LUT or bond as specified in condition (i) of notification No. 37/2017-Central Tax.

This ruling offers significant relief to SEZ units, reducing their tax liabilities and promoting ease of doing business within these zones. It also underscores the importance of understanding the intricacies of taxation laws for businesses operating in special economic zones.