MAY 24, 2017

By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate and K Vidhyashree, B.Com., LL.B, Advocate

AS we know, service receivers are required to pay service tax on import of services as well as certain specified services under Section 68(2) of the Finance Act, 1994 read with Notification No. 30/2012-ST dated 20-6-2012. Under the VAT law also, the dealers who purchase goods from persons who are not registered under the VAT Act, are required to pay tax at the specified rates, under the reverse charge mechanism. Hence, it cannot be said that reverse charge is a new concept that has been brought under the GST law. However, the expanded scope of reverse charge mechanism under the GST law could result in a lot of misery for assessees.

Consider these….

Sections 9(3) of the CGST Act and 5(3) of the IGST Act, which deal with reverse charge mechanism are reproduced below:

9(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both 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(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for pwaying the tax in relation to the supply of such goods or services or both.

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;

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.

We have a similar provision under Section 5(4) of the IGST Act.

Both the CGST and the IGST Acts do not define the term ‘unregistered supplier'. Hence, we need to assume that this term would mean any supplier who is not registered and would include suppliers who are not required to be registered owing to their aggregate turnover being less than Rs. 20 lakhs. We are then looking at a very large quantum of suppliers of goods and/or services who would be treated as unregistered suppliers under the GST regime.

While we need to await recommendations of the GST Council specifying the classes of goods and/or services which are to be covered under reverse charge mechanism, the very prospect for companies to pay tax under reverse charge mechanism in respect of purchase of goods and/or services from literally any supplier, located anywhere in the country and even outside the country, who is not registered, could be daunting.

RCM, for instance, could cover purchase of coffee or tea from local vendors, purchase of stationery, procurement of services from small scale service providers, etc. In fact, RCM could literally cover all expenses/debits in the Profit and Loss Account, which are not supported by suppliers' invoices or bills or where, details of the GST registration number are not incorporated in these bills of invoices. Currently, most services companies, not being registered as ‘dealers' under the VAT law, are outside the scope of RCM, in respect of goods. However, under the GST law, these service providers would get covered under RCM, in respect of purchase of goods from unregistered suppliers.

Since RCM under the GST regime also covers inter-state inward supplies of goods, the very concept of RCM would assume draconian proportions. Thus, when an employee of a Bangalore based company submits his travel claim related to his official trip to Delhi and claims a reimbursement towards his breakfast from a roadside joint in Karol Bagh, his Bangalore 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 90/-.

For medium and large companies, the very computation of the tax liability under RCM could be an enormous task given the fact that RCM could cover a very large quantum of purchase of goods and/or services from within India as well as from outside India. Even import of goods would be covered under RCM, under the GST law. Literally, RCM could apply on thousands of purchase invoices, on a month to month basis, to say the least.

The concept of reverse charge mechanism under the current VAT law is very restricted and does not cover inter-state purchases. Even under the service tax law, RCM is applicable only in respect of certain specified services. By seeking to bring all inward supplies of goods and or services from suppliers who are not registered, the GST law is taking the RCM concept to an unknown territory, to the clear detriment of Industry.

Before concluding…….

It is strange that the Industry is not protesting these draconian provisions related to RCM.

One would expect the GST Council to specify a threshold limit, for granting exemption from the applicability of RCM. Our suggestion would be a value of Rs 10,000/- per invoice. There could also be an exemption from RCM, in terms of inter-state procurement of goods and / or services.

One does expect that the Government would lessen the burden on Industry, by restricting the scope of RCM, under the GST regime.