This post addresses posers on Reverse Charge Mechanism (RCM)
1) Does a recipient of goods or services below Rs. 20 lakhs turnover require registration if the goods or services or both are supplied by a non-registered unit?
Ans: In terms of section 9(4) of the CGST Act and corresponding provisions in IGST and SGST Acts, All recipients of goods & services from unregistered suppliers are liable to pay GST under RCM irrespective of their turnover, provided such recipients are business entities, and goods & services so supplied are not exempt. All such recipients of taxable non-exempt goods are required to be registered in terms of section 24(iii) of CGST Act & corresponding provisions of SGST & IGST Acts. The extract of section 9(4) of CGST Act is given below.
9(4): 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.
In view of the express words “”all the provisions of this Act shall apply to such recipient”, exemption provided under this Act shall apply and no tax liability will arise in respect of exempt supplies under RCM.
2) Is ITC in respect of inward supply under RCM available to recipients?
Ans: Since the unregistered supplier’s invoice is received without GST shown as paid, no ITC will be available to the recipient (under RCM or otherwise).
3) Can the credit of the GST paid by the recipient under RCM be used for payment of GST under RCM?
Ans: In terms of section 49 (4) of the CGST Act, the credit available can be used for making payment of output tax only. The extract of the relevant provision is cited hereunder.
49(4): The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.
The ‘output tax’ has been defined in section 2 (82) of the CGST Act as follows:
“Output tax” in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis;
It can thus be seen that section 2 (82) ibid excludes RCM from the scope of ‘output tax’, meaning thereby that the tax paid under RCM cannot be called output tax. Therefore, the credit available to the recipient paying GST on RCM basis cannot be used for paying such RCM tax. Such credit can be used only for paying output tax.
4) In case a recipient from an unregistered dealer is a composition dealer, will he pay GST at composition rate or at full rate under RCM?
Ans: Even if recipient is composition dealer, under RCM, he has to pay GST at full rate without ITC in view of the exception provided in the composition levy scheme under section 10(1) of the CGST Act. The relevant extract of said section is cited below:
10. (1) Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed seventy five lakh rupees, may opt to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not exceeding,––
Sub-sections (3) and (4) of section 9 ibid deal with taxability of recipients under RCM. Thus, it is patently clear that the RCM provisions shall prevail over composition levy scheme. Consequently, composition dealer is fastened with full tax liability under RCM scheme.
[Note: The proposition that the composition dealer ought to receive inputs only from composition dealers or registered dealers, and not any unregistered dealer/supplier in order to make the scheme work appears prima facie to be an unwarranted restriction considering that the supply from a registered dealer implies a tax burden (which in generality of cases may be 18%) that has to be borne by the composition dealer without being passed on. Hence, the scheme does not encourage him to get his supply from a registered dealer. Since composition scheme does not apply in respect of the supply from unregistered dealers in view of the exclusion of RCM scheme from its scope, the only viable option that a composition dealer is left with is to get his supply from another composition dealer. The policy makers may not have foreseen such obscurantist implication of the scheme, and need to review it at the earliest]
5) Is an advocate or a firm of advocates liable to pay GST under RCM for receiving legal service from an unregistered advocate or firm of advocates?
Ans: In terms of Entry No. 15 (b) of erstwhile exempt services, since continued, the legal service provided by an advocate or a firm of advocates to another unregistered advocate or firm of advocates is exempt from GST. Hence, the recipient advocate or firm of advocates is not liable to pay GST under RCM on said exempt service.
The provisions of section 9(4) of the CGST Act and corresponding provisions in SGST Acts mandating tax liability for even a small recipient unit having total turnover within exemption limit have rendered said exemption wholly nugatory. More so when it is not conceivable that an unregistered unit having less than Rs. 20 lakhs turnover, shall receive their entire input supply from registered units only and consequently absorb the duty incidence in its output price without ITC. This would nullify any price advantage to an exempt unit or its buyers. Besides, the taxes being absorbed in the material cost, there would be cascading effect at the buyer’s end. Thus the incentive for the exempt unit would lie in the procurement of tax-free supply from another unregistered / exempt unit only. But that incentive will be completely lost if the recipient unit is fastened with tax liability, even though otherwise exempt.
There is yet another dimension to the problem. The threshold exemption of Rs. 20 lakhs may be a non-starter inasmuch as there may not be any unit, however small, that receives its entire supply from registered units with tax invoices, for a single taxable supply from an unregistered unit will deprive it from the benefit of threshold exemption. The policy makers may not have conceived this anomalous situation. Section 9(4) of the CGST Act and corresponding provisions in SGST Acts merit immediate review.