Artcile on RCM Applicability for SEZ Unit

RCM Applicability for SEZ Unit

A special economic zone, often abbreviated as SEZ, is a demarcated geographic area within a country's borders where the business and trade regulations are distinct from those applicable in the surrounding regions. A Special Economic Zone (SEZ) is a specifically designated area where businesses benefit from streamlined tax regulations and simplified legal requirements. SEZs are situated within a country's boundaries, but they are treated as if they are outside the country for taxation purposes. In this article we are going to analyse the applicability of GST provisions on units located in SEZ Area.

As per section 7(5) of IGST Act 2017 the supply of goods or services to or by a Special Economic Zone developer or a Special Economic Zone unit shall be treated as inter state supply. Further as per section 16 of IGST Act 2017 zero rated supply means export of goods or services or both; or supply of goods or services or both for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit.

Hence under GST laws the supplies made to sez units are treated as zero rated supplies, accordingly the supplies made to sez units can be done either on payment of integrated tax or on LUT basis. The supplier who supplies the goods or services to sez units shall be eligible for the benefits which are normally available for the exporters since it is considered as zero rated supply. Under Rule 30 of SEZ Rules 2006 the same is also reiterated that DTA supplier supplying goods or services to a Unit or Developer shall clear the goods or services, as in the case of zero-rated supply as per provisions of section 16 of the IGST Act, 2017 either under bond or legal undertaking or under any other refund procedure.

Further section 7 of SEZ Act 2005 states that any goods or services exported out of, or imported into, or procured from DTA by SEZ unit or Developer would be exempt from the payment of taxes, duties or cess. It is also important to note that in respect of SEZ units an exemption has also been provided vide Notification No. 18/2017 -Integrated Tax (Rate) which dictates that services imported by a unit or a developer in the Special Economic Zone for authorised operations would be exempt from the whole of the integrated tax leviable thereon under section 5 of the IGST Act, 2017.

From the above provisions and discussion it is clear that the SEZ unit or SEZ developer can procure the goods or services without payment of taxes and duties. Now the main question that arises here is that whether SEZ unit or developer who has been exempted from the payment of taxes or duties or cess, would be liable to pay tax under RCM if said unit has procured any goods or services on which RCM is applicable?

On the same question the Maharashtra Authority for advance ruling in case of Portescap India Private Limited [2021(12)LCX0067(AAR)] pronounced a ruling. The facts of the case and the findings of advance ruling authority in the said case are summarised below;

The applicant M/s Portescap India Private Limited is an SEZ Unit and has taken on lease, immovable property from the Seepz SEZ Authority (Local Authority). The applicant has sought an advance ruling in respect of the question that whether applicant is required to pay tax under RCM on availment of service of renting of immovable property from Seepz Special Economic Zone Authority (Local Authority) in accordance with Notification No. 13/2017 CT (Rate). In this respect the advance ruling authority held that the RCM would be applicable in this on said services. Being aggrieved from the said ruling the applicant has filed appeal before the appellate authority [2023(01)LCX0085(AAAR)]. The higher authority in respect of the said case has observed that from the provisions of section 16 (1) and Section 5 (3) of IGST Act it is clear that the intention of the legislature is not to tax the supplies made to a unit in SEZ or a SEZ developer. By virtue of deeming provision under section 5 (3) of the IGST Act, 2017, the levy on procurement of services specified in Notification 13/2017 CT (Rate) falls upon the unit in SEZ or SEZ developer. Therefore, a unit in SEZ or SEZ developer can procure such service for use in authorised operation without payment of integrated tax provided the actual recipient i.e. SEZ unit or SEZ developer, furnishes a LUT or bond as specified in the Notification No. 37/2017-CT. The actual recipient here in the subject supplies is a deemed supplier for the purpose of aforesaid condition. The appellant will not be required to pay any GST under RCM on the impugned supply of renting of immovable property services if appellant furnishes LUT.

On same issue the Gujarat Authority for advance ruling in case of Abans Alternative Fund Manager LLP [2024(04)LCX0057(AAR)] pronounced a ruling. The facts of the case and the findings of advance ruling authority in the said case are summarised below;

The applicant being an SEZ unit has availed the service from Advocate towards execution of lease agreement for premise. The applicant has sought an advance ruling in respect of the question that whether applicant (SEZ Unit) is required to pay tax under reverse charge mechanism on services received from advocate by virtue of Notification No. 13/2017-Central Tax (Rate).
The advance ruling authority has observed that as per Notification No. 37/2017-Central Tax, a unit in DTA can supply services to a unit in SEZ without payment of IGST subject to furnishing of LUT to the jurisdictional Commissioner. Accordingly the advance ruling authority in this case held the applicant an SEZ unit is not required to pay GST under RCM on said services subject to furnishing a LUT or bond as specified in the Notification No. 37/2017-CT.

There is another ruling of Gujarat Authority for advance ruling in case of Waaree Energies Limited [2024(04)LCX0056(AAR)] in the said ruling it was also held that the applicant being an SEZ unit is not required to pay GST under RCM, subject to furnishing a LUT or bond as specified in Notification No. 37/2017-Central Tax dated 4.10.2017.

Thus from the above detailed discussion we can reach the following conclusion;

Conclusion: SEZ unit or SEZ developer can procure the goods or services without payment of taxes and duties. If any service on which RCM is applicable then SEZ unit or developer is not required to pay tax under RCM subject to furnishing a LUT or bond as specified in Notification No. 37/2017-Central Tax dated 4.10.2017.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.