Introduction
Checking tax leakage has always been a crucial task for any tax enforcement authority. Goods and Service Tax (‘GST’) law has been structured not only to bring a new Indirect Tax code in the country, but to also embolden the revenue authorities in their war against tax evasion. One such provision is section 9(4) of the Central Goods And Services Tax Act, 2017 (‘Act’). [The said section is similar to section 9(4) of corresponding State GST and section 5(4) of Integrated Goods And Services Tax Act, 2017]
Section 9(4) of the Act imposes liability on a registered person to pay tax on reverse charge basis where he takes any taxable supply of goods and services from an unregistered person.
The said provision has been widely misinterpreted by the industry to mean that tax on reverse charge basis shall be payable in all transactions between a registered and unregistered person. In this article, an attempt has been to bust certain myths surrounding this provision.
Analysis of the provision
Section 9(4) of the Act provides that:-
“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.”
On bare perusal of the aforementioned provision, one can infer that tax on reverse charge basis shall be payable only when all the following conditions are satisfied simultaneously:
1. There must be some supply of goods or services
2. Supply must be of taxable goods or services
3. The supplier of goods or services is an unregistered person
4. The recipient of goods or services must be a registered person
Thus, to trigger the liability of recipient of goods or service to pay tax on reverse charge basis, all the four conditions specified above must be satisfied cumulatively.
Condition 1: There must be ‘supply’ of goods or service
Scope of ‘Supply’ under the Act is provided under section 7 which, inter alia, provides that the expression ‘’supply’’ includes :-
“all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;”
On bare perusal of section 7 of the Act, it can be concluded that to constitute supply of goods or service, it must be made by a person in the course or furtherance of his business.
Thus, to fall within the scope of supply provided under section 7 of the Act, fulfilment of following conditions shall be essential:-
a. Supplier should be engaged in a ‘business’
Existence of ‘business’ is sine qua non to constitute to constitute a valid ‘supply’. It is essential that the supplies should be made by a supplier who is engaged in a ‘business’. (‘Business’ as defined in section 2(17) of the Act)
b. Supply should be ‘in course or furtherance of business’
This implies to constitute a valid ‘supply’ of goods or services, it must be ‘in the course or furtherance of his business’. Thus supplies which are not ‘in course or furtherance of business’ would not qualify as ‘supply’ for levy of tax.
Example: When Ms. X, a salaried individual not registered under GST, sells her jewellery to a Jeweller registered under GST, the jeweller will not be under obligation to pay tax on Reverse Charge Basis on the jewellery purchased from Ms. X. This is because the transaction of sale of jewellery by Ms. X has not been made in the course or furtherance of business.
Under such cases, it will be important for the Registered Person to maintain appropriate documentation including declaration from supplier of goods or services to substantiate his claim that there was no obligation to pay tax on reverse charge basis on ground that the supplier was not acting in the course or furtherance of business.
Condition 2: Supply must be of ‘taxable’ goods or services
Supply must be of some taxable goods or services to trigger the obligation to pay tax on reverse charge basis under section 9(4) of the Act. Thus, when a good or service on which tax is not levied or is levied at NIL rate, the provisions contained in section 9(4) of the Act shall remain dormant.
This is a logical condition as tax on reverse charge is to be paid at rates applicable on the goods or service being supplied by the unregistered person to the registered person. And when the good or service being supplied is not taxable, there would be no obligation to pay any tax thereon.
Condition 3 and 4 : Supply of goods or services by an unregistered person to a registered person
‘Registered person’ as defined in section 2(94) of the Act means a person who is registered under section 25.
Section 25 of the Act deals with the procedure for registration and inter alia, provides that every person liable to registration under section 22 or 24 must apply for registration within specified time and in prescribed manner. Section 22 of the Act deals with person liable for registration and section 24 deals with the cases where registration shall be compulsorily required.
Conclusion
Section 9(4) of the Act is not self-triggering on all or any transaction between a registered and unregistered person. Satisfaction of all the aforementioned conditions shall be essential to obligate a registered person to pay tax on reverse charge basis under section 9(4) of CGST Act.
(The author is a practicing Chartered Accountant based in Delhi and can be reached at [email protected] or +91 9711107317)
Declaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. The author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied without express written permission of the author.
Author Bio
COMMENT FROM AUTHOR OF THIS ARTICLE
I wish to further submit that my interpretation in this article has now been certified by Finance Ministry through a Press Release dated 13 July 2017 ( https://taxguru.in/goods-and-service-tax/gst-sale-jewellery-gold-ornaments-reverse-charge.html )
Text from the Press Release –
“Sale of old jewellery by an individual to a jeweller will not make the jeweller liable to pay tax under reverse charge mechanism on such purchases;
However, if an unregistered supplier of gold ornaments sells it to registered supplier, the tax under RCM will apply.
In the GST Ki Master Class held yesterday, in one of the replies given to an on-the-spot-question, it was informed that purchase of old gold jewellery by a jeweller from a consumer will be subject to GST @ 3% under reverse charge mechanism in terms of the provisions contained in Section 9(4) of the CGST Act, 2017.
On further examination, it is felt that the issue needs to be clarified.
Section 9(4) of the said Act mandates that tax on supply of taxable goods (gold in this case) by an unregistered supplier (an individual in this case) to a registered person (the jeweller in this case) will be paid by the registered person (the jeweller in this case) under reverse charge mechanism. This provision, however, has to be read in conjunction with section 2(105) read with section 7 of the said Act. Section 2 (105) defines supplier as a person supplying the goods or services. Section 7 provides that a supply is a transaction for a consideration by a person in the course or furtherance of business.
Even though the sale of old gold by an individual is for a consideration, it cannot be said to be in the course or furtherance of his business (as selling old gold jewellery is not the business of the said individual), and hence does not qualify to be a supply per se. Accordingly, the sale of old jewellery by an individual to a jeweller will not attract the provisions of Section 9(4) and jeweller will not be liable to pay tax under reverse charge mechanism on such purchases. However, if an unregistered supplier of gold ornaments sells it to registered supplier, the tax under RCM will apply.”
In my view the article placed in Taxguru portal should have been properly vetted by a Team of Experts. The Author have not properly understood the definition of Business as contained in Sec-2(17). On a perusal of sub clause (c), even a solitary transaction of sale of personal jewellery by Ms. X to the Jeweller will constitute business and RCM will be applicable.
As per above article we understand that day to day expenses do not come under reverse charge.
Such as printing and stationery, etc
Plz correct if wrong.
I would like to know whether partnership finance concern should be registered with GST
sir, well, it all comes down to how you interpret the words of the act. some interpret this as you have with due respect but most of the people interpret this as every transaction is going to come under the purview of this. Need a clarification on this, the jewellers community, is there a clear difference between consumer and unregistered person.
Interestingly enough, the
Tallysoftware, the new version with GST allows a distinct grouping of Unregistered person and consumer.
What would be scene in case of we are engaged exclusively in the business of exempted goods but take the advocate services (once in a year only for Rs. 20,000) which are under reverse charge.
Do we need to take registration as per section 24 to take registration if we are paying tax under reverse charge.????
Jewellery shop will use this jewel for furtherance of Business Only, hence it will also be treated as Supply under GST – As per My View
Suppose restaurant services are taxable service. Guest of company given lunch facility in unregistered restaurant for 200/-. Do we required to pay GST on 200/- on RCM basis
levy of tax under section 9(4) of CGST is a legal fiction. no doubt it fixes the liability on recipient and all the provisions of the act, shall apply to the recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both, therefore in order to attract gst the supply should be in the course or furtherance of business. the expression “all the provisions of this shall apply” should be made applicable to the word “supply” therefore if the supply is not in the course or furtherance of business of person not registered, the registered person cannot be made liable for tax under section 9(4) of the act. a legal fiction should be made applicable only to their logical extent and not beyond that.
Sir,
Rent of Building/ land is taxable service, but most of the individual landlords are not registered , will this rent service will come under GST reverse charge under unregistered supply/service.
It is not correct. The phrase business or in furtherance of business is a limb of section 7(1) (a) only. For other sub-section of the section 7, the provisions treat supply as deemed supply. As regarding the example of jeweller buying gold from a salaried individual, it is covered by the Clause 1 of Schedule II referred in Section 7(1)(d)
. My view . Open for discussion.
Sir,what will the position,if 100% liabillity is of Service receiver,Like GTA or Legal Service
In such situation all the jwellers says we purchased the material not from the dealer but from the person who is not doing business but his house hold articles can be sold then how it to be proved can the dealer take any documents in this regard pl clarify
I salute to your lawfully clearifications on reverse chage machanism ,which shall help businesscomunity &pratctioners to take it in a right way where no body finds time now a days to analyse properly.
very well explained &I fully endorese your views.
Interpretation of law is wrong, the author left the the term business defined U/s 2(17) which includes any private person sells gold to the RP is in business sec. 2(17)(f). Pls give your opinion.
must be made by a person in the course
or furtherance of his business.
When you say this in your article, is it not that you are inporting the word “his” which is not there in the text of the section. Cann’t it be that the expression “in the course or furtherance of business” is with reference to the supply and apply to either of the two parties, supplier and recipient.
GST training required