Goods and services tax (GST) is introduced stating that it is good and simple tax but whether it is or not is the most unanswered question. It’s been half a decade still lacks a clarity on various aspects under GST. Let us discuss the applicability of Reverse charge mechanism (RCM) under Goods and Services Tax from the view point of suppliers who are supplying only exempt goods or goods which are liable to tax under reverse charge only.
Whether RCM would still be applicable to a person who is supplying goods which are exempt from tax? Let us understand with an example, a company which is supplying exempt goods or services, pays a director sitting fees which is liable to RCM, however the company has not been registered as they are supplying exempt goods which are not liable to GST. The question is whether the company is liable to register for the services received which are liable to RCM, i.e. as the sitting fees is liable to RCM, In other words just for the sake of reverse charge applicability whether the company is required to register under the provisions of GST law or not. As per section 24 of the CGST Act,2017 among other things a person who is required to pay tax under reverse charge is mandatorily required to get registered. Therefore, based on the above provision a person is liable to register even though he does not have any outward supply which is liable to tax. Now what happens to the tax paid under reverse charge, whether he can claim any input tax credit (ITC), the answer would be no in such cases as the company is providing only exempt goods/services, therefore it is not eligible for claiming ITC.
Similar issue was recently made by the Innovative Nutrichem Pvt Ltd before the Karnataka Advance Ruling Authority, the company is into the business of supplying animal feed which is exempt under GST but the company is availing the services of Goods transport agency and also security services which are liable to RCM. The court held that “GST is levied on the supply of service and liability is fastened independently for each of the supplies. Levy of tax or otherwise on a particular supply does not have a bearing on the taxability of other supplies received or provided by a taxpayer.” Thus, the exemption provided to the outward supplies of the company does not have a bearing on the GST liabilities under reverse charge basis on the supplies received by the company. Therefore the company will be liable to pay tax under RCM.
RCM liability affects the costing of the company’s products, RCM liability should be kept in mind while calculating the cost of the product especially the companies whose liability is under RCM and their outward supplies are exempt.
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