Units in the special economic zones (SEZs) may not be required to pay the integrated goods and services tax (IGST) on specified services taken from domestic tariff area (DTA) on reverse charge mechanism, if a ruling by the Gujarat-based Authority for Advance Rulings (AAR) sets a precedent.

For availing such an exemption, the units will have to furnish a letter of undertaking (LUT) or a bond.

These services include services from a goods transport agency, legal services from advocates, security services, and hiring buses for employees.

Normally, providers of services have to pay Goods and Services Tax (GST) to the government, but it is the recipient of services who pays tax to the government on the reverse charge mechanism.

The AAR gave the ruling in a case related to the availment of services by Surat-based SEZ unit—Waaree Energies Limited—which is engaged in the manufacture of solar modules.

Frequently asked questions (FAQs) issued by the government in 2018 state that while the supplier of services in these cases is not liable to pay GST as the supply is under reverse charge mechanism, SEZ has to pay IGST since the recipient is considered a deemed supplier.

The issue becomes complicated since the Tax Research Unit (TRU) at the Central Board of Indirect Taxes and Customs (CBIC) clarified that a unit in SEZ can procure such services where they are required to pay GST under reverse charge mechanism without payment of integrated tax (IGST) provided the unit in SEZ furnishes a letter of undertaking. The clarification by CBIC was given in a case relating to legal services, sponsorship services received by an SEZ unit in International Financial Services Centre (IFSC) in Gandhinagar from a unit in DTA.

AAR observed that this clarification was given to a specific SEZ unit and is not a circular but there is no bar in borrowing the rationale of the clarification.

Hence, the authority ruled that Waaree Energies Limited can procure the services without payment of IGST provided it furnishes LUT or bond as specified by the government.

Sandeep Sehgal, partner at tax and consulting firm AKM Global, said this is a pivotal decision for businesses operating within SEZs.

"It aligns with the zero-rated intent of the GST Act as clarified by the TRU, allowing SEZ units to source services without the burden of Reverse Charge Mechanism (RCM). This ruling not only eases compliance for SEZ-based businesses but also fosters a more conducive environment for growth and investment in SEZs," he said.