1. Vide Notification No. 29/2018-Central Tax (Rate) dated 31.12.2018 Sr. No. 14 has been inserted, w.e.f. 01.01.2019, to the Notification No. 13/2017- Central Tax (Rate) which provides for the payment of tax in respect of security services under reverse charge mechanism (RCM). Same reads as under:
|Sl. No.||Category of Supply of Services||Supplier of service||Recipient of Service|
|14||Security services (services provided by way of supply of security personnel) provided to a registered person:
Provided that nothing contained in this entry shall apply to, –
(i)(a) a Department or Establishment of the Central Government or State Government or Union territory; or (b) local authority; or (c) Governmental agencies; which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services; or
(ii) a registered person paying tax under section 10 of the said Act.
|Any person other than a body corporate
||A registered person, located in the taxable territory.
2. Let us now consider some issues emanating from the above amendment.
Which service providers are covered under RCM ??
3. It is provided that the supplier of security services can be any person other than a body corporate. Hence the supplier of such services need not be registered. Thus for the specified registered recipients, payment of tax under RCM shall be required even in cases where the supplier is not registered.
4. The term “body corporate” has been defined as per Explanation (b) to the Notification No. 13/2017 (supra) as under:
“(b) “Body Corporate” has the same meaning as assigned to it in clause (11) of section 2 of the Companies Act, 2013.”
5. 2(11) of the Companies Act, 2013 defines body corporate as under:
“Sec. 2(11) “body corporate” or “corporation” includes a company incorporated outside India, but does not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;”
6. The above definition being inclusive in nature shall encompass all such entities which pass the test of it being a “body corporate”.
7. Circular No. 8/48/2(7)/63-PR, dated 24-11-1962 and Circular No. 8(26)/2(7)/63-PR, dated 13-3-1963 explains the said term as under:
“Any corporate body, i.e., a body which has been or is incorporated under some statute and which has a perpetual succession, a common seal and is a legal entity apart from the members consisting it, will come within the definition of the term ‘body corporate’.”
8. Hence all such registered suppliers which satisfy the criteria illuminated in the above referred Circular shall be regarded as a body corporate. They shall continue to discharge the tax on the security services on forward charge.
Is LLP a body corporate ??
9. With the above background, we need to examine whether a Limited Liability Partnership (“LLP”) shall be regarded as a body corporate. Sec. 3 of the Limited Liability Partnership Act, 2008 is material and hence reproduced below:
“Sec. 3.(1) A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.
(2) A limited liability partnership shall have perpetual succession.
(3) Any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.
10. Examination of the above provisions clearly reveals that the LLP satisfies the test of body corporate and hence shall not be covered under RCM as far as supply of security services are concerned. Therefore LLP shall continue to discharge GST on supply of security services on forward charge basis.
Which recipients are covered ??
11. The amendment provides that the tax in respect of security services provided by a person other than a body corporate shall be paid by the registered recipient who is located in the taxable territory. It is interesting to note that the term “registered person” is not used in any other entries (except GTA) under the said Notification. Said term is defined u/s 2(94) 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”
12. 9(3) of the CGST Act, 2017, under which notification providing for the payment of tax under RCM has been issued, provides that the Government on the recommendation of the Council can make the “recipient” liable to make the payment. As against the same Sec. 9(4) of the said Act (covering general reverse charge (presently suspended)) provides that the “registered person” can be made liable to pay the tax. Sr. No. 14 as inserted above makes only “registered recipient” liable to pay the tax. One way to look at it is that though Sec. 9(3) uses the word “recipient”, legislators have consciously only made “registered recipients” liable to pay the tax. Consider a scenario wherein a hospital has not taken any registration due to the fact that it only supplies exempted services (healthcare). However said hospital receives security services from a non body-corporate entity. Question thus comes is whether the said hospital must register first (and hence become a “registered person”) and accordingly discharge tax under the said Entry ?
Non-registered recipients ??
13. Now we have a classic chicken and egg problem. Which comes first ? This is because Sec. 24(iii) of the CGST Act, 2017 provides that any person who is required to pay tax on reverse charge basis must be compulsorily registered. If the said provision is applied to the hospital in question, one can argue that since Sr. No. 14 only casts the liability to pay the tax on the “registered recipients”, the hospital not being a registered recipient shall not be liable to pay the tax. In view of the said conclusion, Sec. 24(iii) (supra) shall not be attracted since the same is triggered only in cases where there is a liability to pay the tax. Another way to view the provision is to read Sec. 24(iii) first and then read Sec. 9(3). We favor the first view as it meets the purpose which is apparent from the conscious use of the term “registered recipient” in the said Serial No. 14. In other words, tax on the security services provided to a non-registered person shall continue to be discharged by the supplier (assuming that the threshold for registration is crossed) under forward charge.
14. It is also interesting to observe that the following proviso has been added to the column describing the category of service:
“Provided that nothing contained in this entry shall apply to, –
(i)(a) a Department or Establishment of the Central Government or State Government or Union territory; or (b) local authority; or (c) Governmental agencies; which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services;
(ii) a registered person paying tax under section 10 of the said Act.”
15. Now the question is whether the proviso talks about the supplier or the recipient ? Considering the intent of the proviso, it appears that it is in the context of the recipient. It provides that if the registered recipient is the specified Governmental Entity which has obtained registration only for the purpose of TDS or a registered person paying tax under the composition scheme, the tax on the supply of security services shall not be paid by such registered recipient. It shall hence be paid by the registered supplier.
Specified Governmental Entity ??
16. It may be noted that the specified Governmental Entity will be liable to pay the tax as a registered recipient under RCM if such entity has obtained the registration as the supplier. If such entity has obtained the registration only for the TDS that the tax shall be paid by the supplier.
Composition recipients ??
17. Even in case of registered recipients who have opted for the composition scheme that the tax shall be payable by the registered supplier. If such recipient comes out of the composition scheme, tax shall be paid by such recipient and not the supplier. Hence a supplier must obtain a declaration from the recipients to the effect that they are covered under the RCM.
Exemption from registration ??
18. At this moment it is also important to understand the implications of Notification No. 5/2017 – Central Tax dated 19.06.2017. Said Notification provides that those persons who are “only” engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both are exempted from obtaining registration.
19. Combined reading will hence suggest that the security service provider (other than body corporate) providing the said services to only the registered recipients (excluding specified Governmental Entities as well as composition supplier) can claim exemption from registration henceforth. In other words if such security service provider (exceeding the registration threshold) is either supplying some other taxable services (i.e. manpower) or supplying services to a non-registered entity (e.g. hospital) or supplying services to a Governmental Authority (which have taken registration as a supplier over and above registration for TDS) or to a composition supplier shall indeed have to keep the registration and shall also discharge tax on such supplies on forward charge.
ITC challenge ??
20. Above conclusion shall also throw a challenge with respect to claim of input tax credit (“ITC”). This is because Sec. 17(2) read with Sec. 17(3) of the CGST Act, 2017 provides for restriction of ITC which is attributable to exempt supplies. Further exempt supplies includes the supplies liable for payment of tax on reverse charge basis. Hence the security service provider having partial supplies under forward charge and rest under reverse charge shall have to do intricate calculation as provided under Rule 42 & 43 of the CGST Rules, 2017 to arrive at the eligible ITC.
Services for the month of December, 2018 ?
21. Last issue to examine is of the services provided by the registered security service supplier for the month of December, 2018. The issue arises because the amendment referred above has been made applicable from 01.01.2019. If the security service provider has made the invoice for the services (which are now under reverse charge) of December 2018 in the same month itself, then the same shall clearly be under the forward charge. However if the invoice is made in the month of January, 2019 for the services rendered in December, 2018 the issue is whether the same shall be under forward charge or will the same be under the reverse charge ?
22. It must be noted that levy of tax u/s 9(1) of the CGST Act, 2017 is on the supply of goods or services. Further it provides that the same shall be collected in such manner as may be prescribed. Hence levy and collection are two different events as per law. The provisions related to time of supply dealt u/s 13 (for services) clearly provides for the time when the liability to pay the tax shall arise (collection mechanism). Relevant part of Sec. 9(1) & 13(1) is reproduced below for ready reference:
“9. Levy and collection. — (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in suh manner as may be prescribed and shall be paid by the taxable person.
13. Time of supply of services. — (1) The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section.
23. Sec. 9(3) is also relevant for the issue and hence reproduced below:
“(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both 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.”
24. Above provision dealing with the collection of tax provides that the tax levied on supply u/s 9(1) shall be paid by the recipient in certain cases. Sec. 13(3) contains provisions for fixation of the liability to pay tax in case of reverse charge. Now when can we say that the services have been provided to trigger the charge of tax u/s 9(1) ?
25. Before the implementation of GST, The Point of Taxation Rules, 2011 clearly defined the “point of taxation” (as determined by the Rules) as the point at which a service shall be deemed to have been provided (see Rule 2(e)). Hence if the point of taxation as per the Rules was invoice, the date of such invoice was considered as the point at which services was deemed to have been provided. Said fiction was necessary due to the fact that nature of services being intangible in nature makes it very difficult to determine the time at which it can be said to have been provided.
26. We don’t have a similar deeming fiction in the GST laws. The time of supply provisions as cited before only provides for the determination of time when the tax is to be paid. It does not expressly state that the said point shall be treated as the time when the services would be deemed to have been supplied.
27. If one accepts the logic prevalent in the earlier regime, in case of the invoice for the security services which is made in the month of January 2019 in respect of the services provided for the month of December 2018, it can be deemed that the services have been provided in the month of January only. Hence the levy of the same will arise only in January and accordingly tax on the same shall be paid by the registered recipient in view of Sec. 9(3).
28. However due to absence of deeming fiction one can argue that since the services have been provided only in December, the levy of tax shall arise in the month of December only u/s 9(1) and hence the collection of the same can be made only from the registered supplier. This view also gets support from the fact that Sr. No. 14 as inserted from 01.01.2019 clearly applies only when “security services are provided” on or after such date (date from which said entry is made applicable) as stated in the description column. Hence the registered recipient shall not be liable to discharge GST under RCM for such services. We favor the latter view.
29. However to avoid the above controversy, it is advisable for the suppliers to do the invoicing in the month December, 2018 only in cases where the security services are covered under RCM so that the concerned supplier can discharge the tax under the forward charge.
30. Two important issues stand out on the basis of the above discussions. One relates to the category of the recipient to which RCM has been made applicable. It is advisable for the supplier to verify/obtain suitable declaration from the recipients to ensure that they are covered under RCM before opting not to pay the tax on forward charge. Connected issue stemming from the earlier issue is about computation of eligible ITC in cases where the security service supplier has made supplies under reverse as well as forward charge. Second issue relates to the invoicing and payment of tax during the transitory period. We have given our stand on both the issues. It is now for the readers to judge whether the RCM on the security industry shall be a boon or a bane in the times to come. Those who may consider it as a bane (also due to loss of ITC) may opt to convert/carry further business in a body corporate structure.
(views are strictly personal)