Whether the SEZ Units and developers liable to discharge GST under RCM? The legal answer to this question appears to be unearthed but the practical answer is yet to see light of the day. Let’s deep dive into the background and gradual developments on the subject matter.

The SEZ Developers and Units are enjoying the special status under the GST regime also. The supplies to them are treated as ‘zero-rated supplies’ and the GST benefits are extended to such supplies. The import of services by the SEZ Developers and Units, for which, in general, the GST is payable under Reverse Charge Mechanism (RCM), are also exempt from the levy of IGST vide Notification No. 18/2017-Integrated tax (rate) dated 05.07.20217. Now the question is what will be the impact for local procurement of services by SEZ i.e. will GST be payable under RCM?

It is clarified under the TRU letter bearing No. F. No. 334/335/2017-TRU dated 18.12.2017 that the intention of the Legislature is not to tax supplies to a unit in SEZ or a SEZ Developer. Therefore, SEZ Developer and unit can procure such services without payment of IGST provided the actual recipient, i.e., unit in SEZ or SEZ developer, furnishes a Letter of Undertaking (LUT) as per notification No. 37/2017-CT.

CBIC also issued a FAQ dated 15.12.2018 wherein it is answered the question ‘Whether SEZ unit or developer needs to pay IGST when it received supplies which are under  reverse charge mechanism?’ 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 reverse charge mechanism. The recipient is considered as deemed supplier. Therefore. SEZ has to pay GST in this case. This position has been followed by the Advance Ruling Authorities in various States and ruled that as long as the recipient SEZ developer or unit has executed the necessary LUT or Bond prescribed under the GST Law, there is no GST liability under RCM.

Execution of LUT as recipient of supply, is it envisaged under GST Law?

Section 16 of the IGST Act provides that a registered person making a zero rated supply is eligible to claim refund of unutilised input tax credit on supply of goods or services or both, without payment of IGST under bond or LUT, in accordance with the provisions of Section 54 of the Central Goods and Services Tax Act, 2017 or the rules made thereunder. This enables the supplier to execute the LUT and supply the goods or services or both to SEZ without payment of IGST. In terms of Section 9(3) of the IGST Act, the Central Government is empowered to notify categories of supply of goods or services or both, the tax on which shall be paid under RCM by the recipient of such goods or services or both and all the provisions of the IGST Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Combined reading of Section 16 and Section 9(3) of IGST Act evidence that the recipient in SEZ would take the colour of supplier, with respect to those supplies on which GST is payable under RCM. Now, the question is how the procedural conditions would be followed by SEZ i.e., execution of LUT for receipt of service. The clauses in LUT/Bond, as prescribed in Form RFD 11, worded as if it is executed by the exporter or supplier to SEZ and does not contain the clauses to cover the receipt of services under RCM. Therefore, presently, the LUT as executed by SEZ Developer or Unit, in the Form RFD 11, for export of goods or services or for supplies to another SEZ Developer or unit as Zero rated supply, does not contain the clauses to cover receipt of services for which RCM liability is attracted.

The provisions as exist does not contain clarity on the following.

  1. Whether the SEZ Developers and units should execute a modified LUT/Bond to cover the receipt of services for which RCM liability is attracted?
  2. Should they execute a fresh LUT only for receipt of services for which RCM liability is attracted?
  3. What about the RCM liability for past periods?
  4. Whether the Bond-cum-LUT executed under the SEZ Law for duty free import and local procurement can be sufficient for the receipt of services with Zero rated benefit?

Unless the clarity on above is provided, ambiguity and litigation with respect to RCM liability on the registered person in SEZ would continue.

Parting remarks….

As said above, there is still some clarity required on availing the Zero-rated benefit for the receipt of services by the SEZ developer or unit for which RCM liability exist on them. Unless a suitable enabling provisions and/or clarification is provided by the Government, the issue would be prone to litigation. The trade and industries may represent before the authorities for bringing clarity and to avoid future litigations.


[Views expressed in the article are strictly personal]

Mr. Kalirajan D
Associate Partner


Lakshmikumaran & Sridharan