JANUARY 07, 2020

By Nitum Jain, Advocate

LOOKING at the sheer number of circulars issued by the CBIC since the advent of the GST regime, it is clear that the revenue authorities have shown utmost willingness to guide taxpayers. One such example is the recent amendment and circular in respect of reverse charge on renting of motor vehicles.

The reverse charge was first introduced with effect from 1 st October 2019 vide amending Notification no. 22/2019-Central Tax (Rate) and reads as below:

There is no gainsaying that the above entry was a source of much confusion amongst the industry. What is the exact kind of services which are covered? Will it apply to cab aggregator services such as Ola and Uber? How to check the applicability, basis the invoices received from various vendors? This resultant pandemonium compelled the authorities to not only amend the notification but clarify the same by way of a circular.

The question which remains:

While many of the aforesaid questions stands answered or clarified, the focus of this article is going to be the one issue which, instead of being clarified, stands further complicated by the new amendment. This issue is whether there is a reverse charge when the services are received from an unregistered non-body corporate supplier?

It is noteworthy that the requirement for the supplier under the erstwhile entry was that such person must be paying GST at the rate of 5% on the instant services with input tax credit only of input services in the same line of business. This paved way for the logical corollary that the supplier necessarily has to be a person registered under the GST regime for the reverse charge to attract on the recipient in the specific circumstances outlined in the notification.

Position under the entry substituted by Notification 29/2019-CTR dated 31.12.2019

We may now refer to the above new entry wherein the supplier is required to be "any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6 per cent. to the service recipient".

It can be seen that the "supplier" for the purposes of levy under reverse charge has changed from the previous positive requirement of the supplier otherwise levying tax at the rate of 5% to a negative requirement of him not issuing an invoice charging GST at the rate of 12%. The problem here is that unlike the erstwhile positive requirement, the new negative requirement does not per se rule out an unregistered supplier. An unregistered supplier will also not be issuing an invoice charging GST at the rate of 12% on the body corporate recipient and, therefore, on a literal reading of the reverse charge entry, would qualify as "supplier" for the purpose thereof.

On a strict reading of the two entries together, one can contend that relevant supplies from unregistered persons would not have attracted reverse charge under previous iteration of the notification entry up till 30th December 2019. From 31 st December 2019 onwards, reverse charge would apply when such services are received from unregistered suppliers as well.

What the CBIC says:

However, the conundrum is compounded by the last paragraph of the accompanying Circular no. 130/49/2019-GST which states that the present amendment is merely clarificatory in nature and, therefore, for the period 01.10.2019 to 30.12.2019 also, the clarifications given in the said circular shall apply.

Therefore, as per the circular, the legal implications as regards reverse charge remain the same as they were from 1st October 2019, wherein the requirement for supplier have always been that he "(a) is other than a body-corporate; (b) does not issue an invoice charging GST @12% (6% CGST + 6% SGST) from the service recipient; and (c) supplies the service to a body corporate".

Here, one can say that the circular posits that right from inception of the levy of reverse charge on renting of motor vehicles, it was attracted on all suppliers not issuing invoices charging GST at the rate of 12%, which would include unregistered persons. However, this would be an extremely simplistic reading of the circular, as would be discussed in the succeeding paragraphs.

Possible interpretation:

It is noteworthy that the circular clearly envisions only two scenarios, i.e. one where the supplier is charging GST at the rate of 5% and second where the supplier is charging 12%. It categorically states that the GST Council, in the 37th meeting, sought to bring the first scenario under reverse charge, pursuant to which the erstwhile entry was inserted. At no point does the circular consider supplies from unregistered suppliers as within the ambit of the entry.

Thus, one can say that the intent here is to bring under reverse charge only registered suppliers who are otherwise charging GST at the rate of 5% on non-body corporate recipients and not if the supplier raises an invoice charging 12% GST.

Clarity required:

Unfortunately, as discussed above, the wording of the new entry does not per se exclude unregistered persons and, thereby, keeps the potential of controversy alive.

[The author is Senior Associate, Lakshmikumaran & Sridharan, New Delhi and the views expressed are strictly personal.]