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.
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 firstname.lastname@example.org 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.