Security services under GST law – Transition to RCM

Security service is a service wherein a person supplies security personnel to another person for a consideration. In the erstwhile Service tax regime, security services provided by individual, HUF or partnership firm to a body corporate were covered under Reverse Charge Mechanism (RCM). However, with the enactment of Goods & Services Tax Act, 2017, the concept of RCM on security services was abolished and the supplier of security service was made liable to pay GST.

After a span of 1.5 years, considering the obstacles in tax collection from small security service providers, such service has been retrieved under the purview of RCM. The Government vide Notification No. 29/2018 – Central Tax (Rate) dated 31^st December, 2018 specified security services provided by a person other than body corporate to a registered person under RCM. The relevant extract of the notification is reproduced as below:

Having said that the service recipient would be liable to pay tax under RCM w.e.f. 01^st January, 2019, the perplexity has cropped up in the industry as to who would pay tax for supplies made during the transition phase i.e.in cases, wherein security service has been rendered upto 31^st December, 2018, however, neither the invoice has been issued nor payment has been received till that date. The moot question arises as to who will be liable to pay tax in such cases.

In order to elucidate the above surfaced issue let us dive into the provisions of GST Act, 2017 (CGST/SGST Act). Section 9(1) of the Act states that GST is levied on ‘supply’ and shall be paid by a taxable person. In case of supply of services, the time at which the liability to pay tax arises is determined as per the provisions contained in Section 13 of the Act: Time of Supply of services. The relevant extract of the Section is reproduced as below:

“Time of supply of services

13. (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.

(2) The time of supply of services shall be the earliest of the following dates, namely:—

(a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed

under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or

(b) the date of provision of service, if the invoice is not issued within the period prescribed under  sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or

(c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply:

(ii) …..

        Explanation.––For the purposes of clauses (a) and (b)––

(i) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment;

(ii) …..

(3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the  time of supply shall be the earlier of the following dates, namely:––

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:”

On perusal of supra provision, it is evident that prior to determining the ‘time of supply of a service’, one has to determine whether tax is to be paid by supplier or a recipient on reverse charge basis as Section 13(1) would cover cases of forward charge and Section 13(2) would cover reverse charge scenarios. The Government using the powers of Section 9(3) specifies the categories of supplies on which recipient shall be liable to pay tax on reverse charge basis. Once the person liable to pay tax is assessed, ‘time of supply’ provisions would be applied accordingly.

In the instant case, the Government brought into effect reverse charge on security services w.e.f. 01^st January, 2019, meaning thereby from the said date, the time of supply of security service would be governed by Section 13(2). Hence, in case any of the conditions prescribed under Section 13(1) gets fulfilled upto 31^st December, 2018, the supplier of the service would pay tax. The cases wherein supply was completed by 31^st December, 2018, however neither of the condition of Section 13(1) got satisfied upto 31^st December, 2018, the provisions of Section 13(2) pertaining to time of supply of services covered under RCM would apply and the recipient would pay tax accordingly.

To illustrate, in a monthly retainer agreement of security service, the supplier raises invoice on every 7^th of the month succeeding the month of rendering service and receives payment thereafter. For the services rendered during December, 2018 the invoice would be raised on 7^th, January, 2019 and payment would be received thereafter. In such a case, RCM would apply and the service recipient would be liable to pay tax at the time of supply as determined under Section 13(2).

Hope the above article would be helpful in understanding the transition of security service from forward charge to reverse charge. Kindly note that the department may take a view otherwise and may made the supplier liable to pay tax in the above discussed case.