RCM impact of supply of Security service (Personal) to RWA (CHS)

In this article we shall discuss the impact of security service (by way of personal) provided to the Co-operative Housing Society (CHS) also Resident Welfare Association (RWA). Articles and fliers on co-operative societies are available therefore not discussed here. The main discussion is when unregistered other than body corporate supplies security (services provided by way of supply of security personnel) to the Co-operative Housing Societies, which is also not registered under GST Act, then what will be the possible impact.

It is very well discussed by way of fliers issued by the Board that Co-operative Housing Society is well within the scope of term ‘Business’. For various reasons, such as to prevent the trespassers, to protect the theft of valuable in the common area or parking area etc., the CHS may avail the services of Security. The Security service (services provided by way of supply of security personnel) was brought under Reverse Charge Mechanism (RCM) provision i.e., Section 9(3) of CGST Act, 2017, as specified category of service, at Sl.No. 14 by Notification No.29/2018 dated 31.12.2018 with effect from 01.01.2019, amending principal Notification No.13/2017 dated 28.06.2017, the relevant portion of Notification is given below:-

If we pursue the above notification, if the supplier of service is body corporate, the liability of the tax is of body corporate supplying the security service (personal) regardless the recipient is registered or not, on Forward charge basis under Section 9(1) of CGST Act, 2017. The question is what if supplier of service is not registered and recipient is also not registered under GST? The views are taken that in this case, supplier has to take the registration and tax liability will be on the supplier of service, but legally, in case of Reverse Charge Mechanism (RCM) liability is on the recipient of services, then why the supplier has to take the registration, even if made, liability of recipient still exists, the department may dispute. Assuming that the supplier of service is engaged in providing security service by way of personal only, then person as per Notification No.05/2017-CT dated 19.06.2017, is not required to obtain registration.

The views are also taken that when security service (Personal) is supplied, the recipient is liable to pay tax only if recipient is registered, as the wording used at column 4 of the Notification “A registered person located in taxable territory’. At first instance it seems that view taken is correct, then question arises that if supplier is not liable to pay tax and recipient is also not liable to pay tax, and supply is taxable supply then who is liable to pay tax?

A contrary view can also be taken for that; one must take a deeper look in the terms used in the Notification along with the provisions of the Act. The recipient of service at column No.4 of the table states ‘A registered person, located in the taxable territory. The term ‘registered person’ is defined at Section 2 (94) of CGST Act and reads as under :-

“(94) ―registered person‖ means a person who is registered under section 25 but does not include a person having a Unique Identity Number”

Ongoing through above definition, it simply states person registered under section 25, therefore, we need to travel to section 25. The provision of Section 25(1) is given below:-

“(1) Every person who is liable to be registered under section 22 or section 24 shall apply for registration in every such State or Union territory in which he is so liable within thirty days from the date on which he becomes liable to registration, in such manner and subject to such conditions as may be prescribed:”

On careful perusal of above and wording used, clearly states the liability of the person to get registered under Section 22 or 24 of the Act. The Section 22 deals with the turnover, which is not be applicable in the present case, as both the supplier and recipient are below the threshold limit prescribed. Then Section 24 is to be referred and is given below: –

“24. Compulsory registration in certain cases.— Notwithstanding anything contained in sub-section (1) of section 22, the following categories of persons shall be required to be registered under this Act,––

(i)…

(ii)…

(iii) persons who are required to pay tax under reverse charge;

(iv)…..”

The Section 24 starts with “Notwithstanding” Non-obstante clause means giving overriding effect over general clauses, here the overriding effect is limited to Section 22(1) only, it means although the turnover is less than the limit prescribed in Section 22(1) the provision of section 24 is applicable. At Section 24(iii) person who are required to pay tax under reverse charge is mentioned, therefore, liability to get registered under Section 25 is casted on the person requiring to pay tax under reverse charge.

The definition of ‘reverse charge’ is given at Section 2(98) of CGST Act, 2017 and is given below for ready reference: –

“(98) ―reverse charge‖ means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub- section (4) of section 5 of the Integrated Goods and Services Tax Act;”

On plain reading of the above definition, it becomes clear that liability to pay tax is on the recipient of the goods or service under Section 9(3) of CGST Act. The heading of the Notification at column 4 also speaks “Recipient of Service”.

Now the main question arises is that liability to get registered can be decided on the basis of the term ‘A Registered person’ used in the Notification? It is beyond doubt that Notifications are issued under the provisions of the Act therefore, the Notification cannot have overriding effect on the provisions of the Act. A division Bench of High Court of Delhi in decision dated 04.03.2011 in case of Federation of Indian Airlines v. Union of India (WP (C) No. 8004/2010) observed as follows

“67. The basic test is to determine whether a rule to have effect must have its source of power which is relatable to the rule making authority. Similarly, a notification must be in accord with the rules, as it cannot travel beyond it….”

Based on the above grounds, the person receiving the taxable supply which are specified services under Section 9(3) of the CGST Act, 2017 are liable to get registered in terms of provisions of Section 24(iii) of the Act. It is but obvious that first liability is to be discharged and then applicability of Notification is to be decided.

The preamble of CGST Act, states that “An Act to make a provision for levy and collection of tax on intra-State supply of goods or services or both by the Central Government and for matters connected therewith or incidental thereto.” Moreover, various courts had held that Section 9 is charging Section. It is the rule of interpretation that Charging section should be strictly construed while the procedural sections should be liberally interpreted.

In summarizing the above discussion, we can conclude that both grounds for taking the registration and not taking the registration by the CHS receiving the taxable supply of Security service (Personal) can be advanced. Since 01.01.2019 till date no adverse action by the department is known, but clarification by the Board to remove this ambiguity is required. If the CHS is required to obtain the registration then not only RCM liability but for the other heads which are taxable supplies and within the threshold limit will be leviable to tax and will be extra burden, although ITC is available, to their members.

The CGST Act being supply based and destination based, the definitions such as Business, Person, registered person, taxable person, taxable supply, exempted supply etc., may also be referred.

It is request  that if adverse action is initiated, or any order is passed, it may please be brought to the notice by way of comment.

Please note: – The above discussion is purely for information purpose and not for any other use.