Reverse Charge Under GST
A draconian provision under GST?
1. Sections 9(3) and Section 9(4) of the CGST Act and 5(3) and Section 5(4) of the IGST Act, deal with reverse charge mechanism
2. As per Section 2(98) of the CGST Act, “reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub- section (4) of section 5 of the Integrated Goods and Services Tax Act;
3. Under the definition u/s.2(98) of the term ‘reverse charge’ it would be the liability of the recipient to pay tax on the supply of such notified service
4. As per Section 9(4) of the CGST Act, the central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this 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.
5. We have a similar provision under Section 5(4) of the IGST Act.
6. The syndrome that we have to face is that both the CGST and the IGST Acts do not define the term ‘unregistered supplier’. Therefore perforce one has to assume that this term would mean any supplier who is not registered under GST and would include suppliers who are not required to be registered owing to their aggregate turnover being less than Rs. 20 lakhs under Section 22 of the Act. What does this mean in the real world? We have to look at an ocean of such unregistered suppliers of goods or services or both who are bound to be treated as unregistered suppliers and then go through the legal provisions to be GST compliant.
7. Imagine this RCM will cover purchase of coffee or tea from local vendors, purchase of stationery, procurement of services from small scale service providers, etc. Your profit and loss account will show it all and if the expenses you debit in P&L account are not supported by tax invoices from the registered dealers, then on such supplies you are statutorily required to pay tax on RCM notwithstanding the fact that you are or are not entitled to ITC under Section 16 to Section 18 of CGST Act or SGST Act.
8. Since RCM under the GST regime also covers inter-state inward supplies of goods, the very concept of RCM would assume draconian and very serious proportions. Thus, when an employee of a Delhi based company submits his travel claim related to his official trip to Chandigarh and claims a reimbursement towards his breakfast from a roadside joint in Karnal, his Delhi based employer would be required to discharge tax liability under the IGST Act in respect of this inward supply (of idli and dosa), of the value of say, Rs. 200/-. Imaging such bills are 200 per month amounting to Rs. 500,000/- then reverse charge has to be paid by Delhi based employer as per applicable rates for all such invoices – notwithstanding the fact that ITC may not be available for such expenses. Imagine the enormous task for computing tax liabilities under such provisions. Further on Import of goods too RCM is applicable. And if you do not charge RCM and deposit, you violate the law and your return becomes invalid under Section 39 – you have not paid full tax.
9. Every business has to ensure that its suppliers, of both goods and services, are paying the right amount of taxes on time. This is accomplished through the reverse charge mechanism.
10. Further the Central government has the power to notify categories of supplies against which service recipient has to discharge the tax liability. Hence, all the provisions of the Act will now be applicable to the recipient of such goods or services as if he is the supplier of such goods or services.
11. The serious implication of such a mechanism is that when a person becomes liable to pay tax on the reverse charge, certain provisions like threshold exemption, time of supply, availing of input credit changes. There is a threshold limit for turnover aggregating to Rs.20 Lakhs for registration for normal tax payers under section 22 of the CGST Act but under reverse charge, there is no such limit under Section 24 of the CGST Act. The person has to be registered under GST irrespective of the aggregate limit. Therefore, it will not be unwise to say that through this mechanism the gimmick of Rs. 20 lakhs threshold limit withers away and virtually the Government is forcing all and sundry to come for registration or face penalties under the GST Law. Even services supplied by an Electronic Commerce Operator will attract reverse charge.
12. My worry is that time of supply and point of sale under reverse charge will also be different and too technical to appreciate. Thus majority of the taxable persons will violate this provision.
13. The service recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services. The only condition is that the goods and services are used or will be used for business or furtherance of business. Unfortunately, ITC cannot be used to pay output tax, which means that payment mode is only through cash under reverse charge.
14. The supplier has to mention in his tax invoice that the tax is payable on reverse charge.
15. Image GTA services; Directors; individual advocates or firm of advocates, taxi drivers or rent a cab operators( through e commerce operations), insurance agents, sponsorship services; author or music composer, photographers, artists, importers – the services provided by such persons to the service recipients will invoke reverse charge. What a voluminous work really?
16. If you run a business, you need to hurry and ensure that all the entities who supply you goods and services are registered for GST. If they aren’t, you will have to pay the GST on their behalf. This will increase your paper-work and can cause cash-flow issues as well.
17. To pay tax on reverse charge basis, first master the classification of goods art when you procure goods or services from unregistered persons ( not defined in law), decide whetehr you would be entitled to ITC as per law ( that is decide whether the procurement is in the course of or furtherance of business) and then decide the tax rates based on which you pay RCM. And further through Section 31(3) requires you to issue an invoice in respect of goods/services procured from unregistered vendor and issue of a payment voucher in such cases at the time of making payment to such unregistered supplier.
18.Now imagine the scope of such a draconian provision ; cooperative housing societies; higher educational institutions, consultants working full time in the corporate sector; infra sector projects; builders – all facing huge compliance work.
19.My Take is that small traders or service providers will lose money – the big registered tax payers will charge a hidden tax component from such unregistered persons and then pay the same tax to the Government ( not from their pocket) and claim back ITC.
20.Lastly remember RCM must be paid and paid in cash through Electronic Cash Register notwithstanding the fact you may or may not claim ITC and as per strict time or supply and point of sale rules.
Get ready for a huge litigation on this issue.