SEZ units exempt from GST reverse charge on legal services with proper undertaking under Notification 37/2017-CT

AAR Gujarat ruled that an SEZ unit is not liable to pay GST under reverse charge mechanism on legal services received from advocates. The unit can procure such services without paying IGST for authorized operations, provided it furnishes a Letter of Undertaking or bond as specified in Notification No. 37/2017-CT. The ruling applied the rationale from a CBIC clarification regarding similar services, determining that SEZ units are exempt from RCM obligations on specified services under Notification No. 10/2017-IT(Rate) when proper undertakings are provided.

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Issues Involved:
1. Whether an SEZ unit is required to pay tax under reverse charge mechanism (RCM) on services received from an advocate.
2. If affirmative, under which tax head (IGST or CGST and SGST) should the tax under RCM be paid.

Summary:

Issue 1: Tax Liability Under Reverse Charge Mechanism
The applicant, an SEZ unit, sought clarification on whether it is required to pay GST under RCM on services received from an advocate as per Notification No. 10/2017-Integrated Tax (Rate). The applicant argued that supplies to SEZ units are zero-rated u/s 16 of the IGST Act, 2017, and thus should be exempt from GST under RCM. They referenced Rule 5(5)(a) and Rule 30(1) of the SEZ Rules, 2006, and Notification No. 18/2017-IT (Rate) which exempts services imported by an SEZ unit for authorized operations. Additionally, they cited Section 51 of the SEZ Act, 2005, which has an overriding effect over other laws.

The Authority for Advance Ruling (AAR) noted that the FAQs on GST clarify that SEZ units must pay IGST under RCM when receiving supplies. However, Notification No. 37/2017-CT allows SEZ units to procure services without payment of IGST by furnishing a Letter of Undertaking (LUT) or bond. The AAR also referred to a clarification from the Tax Research Unit, CBIC, which supports the applicant's position.

Ruling:
The AAR ruled that the applicant, an SEZ unit, is not required to pay GST under RCM on specified services in accordance with Notification No. 10/2017-IT (Rate), subject to furnishing a LUT or bond as specified in Notification No. 37/2017-CT.

Issue 2: Tax Head for Payment Under RCM
Given the ruling on the first issue, the second question regarding the tax head under which the RCM payment should be made was rendered infructuous.

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