Enlarged Concept Of Reverse Charge In GST

Pravin Saraswat,  FCA, CS, DISA

Service Tax Payers had been used to  the concept of `Complete Reverse Charge (100%)’  or `Partial Reverse Charge’,  popularly known as  RCM or PRCM under the Finance Act, 1994, for last several years.  Seeing the grand success of this concept, Government has, under the garb  GST,  now extended  the scope of this concept  to the Goods  as well as, covered unorganized business sector also.  One the one hand,  GST  aims to avoid cascading effect of various duties, on the other, Government  aims  to regulate the unorganized sector through the organized sector

Confusions for RCM are compounding day by day as the 1^st July is nearing.  Therefore, this issue which is going to affect the   small businesses  significantly,  is being  analysed:

1) FIRST TYPE OF REVERSE CHARGE: SPECIFIED  GOODS OR SERVICES  TO BE NOTIFIED BY GOVERNMENT:

Section 9(3) of the CGST  Act, 2017  (with equivalent provisions in IGST / SGST also)  empowers the Govt.  to notify, on the recommendations of the Council, 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 / 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.

The GST  Council has issued a draft list of   services  under reverse charge as approved on 19 May 2017 during the 14^th  GST Council meeting held at Srinagar, Jammu &  Kashmir. List of these 18 services  is now widely available on net and most of these services were used to be under the regime of Service Tax also. The list of goods on which reverse charges would apply has not yet been issued by   GST  Council.

The effective date and  modified  list, if any, would be notified by the Government in due course  of time.  It should be noted that  even if the supplier of  goods/services is registered under GST, the  recipient would be liable to pay the tax on such services/goods  if notified under section 9(3).  Thus registration is mandatory in the case of recipient of service and the supplier may or may not have the registration.            

2) SECOND TYPE OF REVERSE CHARGE:  MANDATORY  ON SUPPLIES FROM UNREGISTERED TO REGISTERED PERSON:

Section 9(4) of GST  Act, 2017 which almost threatens to kill the small businesses lays down:

“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”

Thus this provision is very straightforward and clearly lays down that tax on  taxable goods or services (i.e. other than non-exempt service or Nil rated Goods) would be paid by  recipient, though the saving grace is that the recipient would be entitled to input credits of such taxes.

However,  this saving grace is not going to save the small businesses. For example, composition dealer is also liable for tax payment from unregistered dealer without any credit of ITC.  Further  E-Commerce operators such as Flipkart, Amazon etc. have asked for not to make supplies after 30/06/2017, if the supplier does not hold GST  Registration Number.   Even small vendors such as Office Tea Vendor or Stationary Supplier or even house-maid for cleaning, would be affected and in the long run small businesses would be confined to Business to Consumer or to a limited extent from one unregistered entity to another unregistered entity.

Interestingly Section 5(4) of the IGST Act which is pari-materia with Section 9(4) of the GST Act, also provides that Integrated Tax i.e. IGST on supply of goods or services or both provided by a non-registered person to a registered person in course of interstate trade, tax on such goods/ services shall be paid by the recipient on reverse charge basis. However Section 24 of the GST Act, 2017 provides for mandatory registration in case of interstate supplies. So if an unregistered dealer cannot make interstate supplies then how can a registered person purchase goods/ services in the course of interstate trade or commerce from unregistered dealer? So the question of paying the tax on reverse charge under IGST does not arise  at all. The purpose of adding Section 5(4) in the IGST Act is still unknown.

3) Accounting is going to be Changed significantly:  Now,   every  GST  registered  person would  divide the accounting heads as per the  registered supplier and unregistered supplier(under RCM) besides  RCM Payble service heads  so as to work out the monthly details for submitting relevant details in  returns and pay taxes

4) Tax Invoice for supplies under RCM: Just like the invoices for outward supplies, the invoice in three copies would be  prepared  for RCM supplies.  Tax invoices would indicate whether the tax is payble under RCM.

5) RCM Tax Payment: Just like the present provisions,  RCM  Tax is to be paid in cash and not by way of adjustment out of ITC Balance.  Such paid amount would be available for ITC