Applicability of Reverse Charge Mechanism (RCM) on transactions involving ‘government’ entities is one of the most complex yet one of the least focused area in GST practice. Having said that, taxpayers and the GST consultants/ professionals on various instances miss to analyse the applicability of RCM on certain government transactions more often than not.
Taxpayers ultimately have to suffer on account of such non-payment. The downside being:
i. levy of interest u/s 50 @18% p.a. which causes an additional burden to the working capital when such payments are identified during assessment at a later stage;
ii. also, on some of the occasions, taxpayers tend to lose out on ITC on such payments under RCM due to the restriction provided by section 16(4) of the CGST Act, 2017 to avail ITC by 30th November of next financial year.
In the ensuing paragraphs, author would focus on some of the most frequent transactions which are not usually scrutinized while undertaking GST compliances.
While a significant number of services involving transactions with government have been exempted vide notification number 12/2017 – Central Tax (Rate) dated 28th June 2017 (hereinafter referred to as ‘exemption notification’), two major entries relevant for the purpose of being considered for applicability of RCM are presented below (relevant extract):
1. Entry number 9
Services provided by Central Government, State Government, Union territory or a local authority where the consideration for such services does not exceed five thousand rupees
2. Entry number 47
Services provided by the Central Government, State Government, Union territory or local authority by way of-
(a) registration required under any law for the time being in force;
(b) testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, including fire license, required under any law for the time being in force
As per entry number 9, government services are not exempt from GST if the consideration exceeds INR 5000/-. This aspect is one of the most ignored compliance activity which taxpayers engage in while filing GSTR-3B. Also, as per entry number 5 of notification number 13/2017 – Central Tax (Rate) dated 28th June 2017 (hereinafter referred to as ‘RCM notification’), taxpayers are required to deposit tax under RCM on services received from Central Government, State Government, Union territory or local authority.
On conjoint reading of both the entries, it is apparent that taxpayers are required to deposit tax under RCM on government services for which consideration exceeds INR 5000/- (unless transaction has been specifically exempt from levy of tax by exemption notification). Given below is a list of some services which are not covered in the exemption notification and accordingly are eligible for the purpose of payment of tax under RCM:
- Fees paid on MCA portal for ROC related filings such as
√ annual filing fees pertaining to AOC-4, MGT-7;
√ director amendment forms;
√ change in authorised share capital etc.
- DGFT payments required to be made for various purposes eg. Advance authorisation license
- Application fees paid to government department w.r.t. tender filing
- Renting of immovable property from government entities by a registered person
Services listed above have been presented on an illustrative basis only and various other similar services (as the case may be) shall need to be analysed separately in order to determine applicability of RCM.
However, entry number 47(a) of the exemption notification (supra) provides significant relief to the taxpayers on a variety of payments to government departments related to fees paid for registration related to drug license, food license, walkie talkie license in manufacturing plants etc. An important aspect related to entry number 47(a) of the exemption notification is that it exempts levy of GST on payment related to registration required under any law in force, however, it is silent about the exemption on renewal charges paid annually pertaining to said registration.
As per a school of thought based on rule of literal interpretation of law, GST is liable to be paid under RCM on renewal charges paid with respect to various types of licenses mentioned above since entry number 47(a) exempts only the payment related to registration required under any law in force and not renewal.
However, in author’s view, along with registration charges, RCM may not be applicable on renewal charges also on account of the following:
- ‘Renewal’ is just an extension of ‘registration’.
- The act of renewal each year effectively keeps the registration active. It is just the nomenclature which is getting changed to ‘renewal’, in fact, in case the taxpayer fails to pay the renewal fees, what ultimately would happen is that registration would cease to exist.
- It can well be considered to be an act of getting registered each year.
Additional point for consideration
It is pertinent to note that payments made by registered persons with respect to pollution board applications, payment for maintenance charges to industrial area development agency (eg. RIICO) etc. are exempted vide entry number 4 and 5 of the exemption notification which cover activities provided by said agencies under article 243W and 243G of the Constitution.
Conclusion
In light of the above, it is suggested that taxpayers thoroughly analyse their statement of profit and loss while filing GSTR-3B to identify all such expenses specifically incurred in relation to government services. Detailed interplay of exemption notification and RCM notification is required to be made in order to determine RCM applicability.
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Disclaimer : The views expressed by the author in the above article are based on detailed analysis and practical experiences of the author gained during GST compliances. The author would in no way be responsible for any adverse view taken by the authority in relation to any decision taken by the reader based on views expressed in article.
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