Specific Reverse Charge under GST Regime – An analysis on RCM

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Specific Reverse Charge under GST: Reverse charge is a not nearly as new as our recollection of service tax being required from the service recipient. Reverse charge is how customs duties are collected. Reverse charge is how excise duty was collected in case of molasses in some instances. GST only makes good use of this form on administering tax. It can’t be said better than the words of Sir Maurice Gwyer In re the Central Provinces and Berar Act XIV of 1938 the learned JJ said “Subject always to the legislative competence of the taxing authority, a duty on home-produced goods will obviously be imposed at the stage which the authority find to be the most convenient and the most lucrative, wherever it may be; but that is a matter of the machinery of collection, and does not affect the essential nature of the tax”

Specific Reverse Charge

Specific Reverse Charge

Reverse charge is provided in the case of intra-State supplies listed vide notification 4/2017-Central Tax (Rate) dated 28 June, 2017 with respect to supply of goods and 13/2017-Central Tax (Rate) dated 28 June, 2017 (“the notification’) with respect to supply of services.

GST defines ‘reverse charge’ very plainly that the ‘recipient of supply’ is liable to pay tax in cases specifically provided by section 9(3) and in other cases provided by section 9(4) of the CGST Act. It is interesting to see that there are two separate provisions to recover GST from the recipient. Reverse charge is defined as:

2(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 subsection (4) of section 5 of the Integrated Goods and Services Tax Act

First Step

Supply Ingredients for Supply
section 7(1)(a) All forms of supply For consideration In business
section 7(1)(b) Import of services For consideration NA
section 7(1)(c) Specified in sch I NA In business
section 7(1)(d) Specified in sch II NA Only if required in an entry

So, it is very important that this ‘first step’ must be taken relating to levy of GST before proceeding to recover this levy from the recipient. Recovery of tax from the recipient is provided as follows:

9. (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 such manner as may be prescribed and shall be paid by the taxable person.

(2) ……………….

(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.

That the supplier – taxable person – who is liable to pay has now passed on to the recipient to pay. Every recipient is required to identify under which limb of section 7(1) does the levy stand attracted. In other words, it is possible that a transaction resembling a supply may not actually be liable because it missed the ingredients of all four limbs of section 7(1) such that this ‘first step’ never existed for the rest of the law to apply.

Second Step

After the levy has attracted, the next step would be to identify the recipient in order to fasten this liability. Recipient is defined as:

2(93) “recipient” of supply of goods or services or both, means-

  • (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
  • (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and
  • (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied; So, it is an important ‘second step’ to correctly identify the person who is required to discharge the liability. Please note that GST introduces us to the concept of ‘distinct person’ which sub-divides the person into multiple distinct persons. And the responsibility to pay the tax resides not on the person but on the distinct person concerned. It is not uncommon for payments to be centralized in large corporations. In such cases, the manner of reporting compliance must demonstrate to have been discharged by the distinct person concerned.

Third Step

Once the liability to pay GST is placed on the shoulders of the recipient, then it must be recognized that that liability never resided on the shoulders of the supplier. The ‘third step’ is to exonerate the supplier from this liability. What this means is that this path of reverse charge is a ‘without recourse’ path. In the event of default by the recipient, the liability does not get restored on to the supplier. Once the supply is notified by the Government under section 9(3), then the liability to pay permanently resides on the recipient including consequences and remedies. And the supplier is immune from the levy. Support to this interpretation from the words ‘as if’ used in the section.

‘As if’ demands that a certain state of fiction be visualized and the administration follow this path of fiction ‘as if’ it were the reality. When a fiction is required to be considered ‘to be’ the reality, then the ‘reality’ is required to be displaced and dispatched out of consideration.

There is no recourse back to the supplier in any circumstance.

Third Step Modified

Now, the notification identifies the supply in column (4) the person liable to pay tax is identified in column (5) in the case of goods (and in the case of services, column (3) and column (4) respectively). Interestingly, there seems to be some filtration that is built in the notification because it does not stop at saying ‘recipient’ but uses expressions like ‘business entity’ (in s. no. 2) or ‘company or body corporate’ (in sl. no. 6) of notification for services. As a result, it is not that all supplies listed in the notification require payment of tax by the recipient but only a sub-set of cases, that is, where the supply is notified and the recipient is of the kind specified in the same notification will the liability now reside on the said recipient.

Though a supply may be specified in the notification, but if the recipient does not fit the description in the notification, then the third step stands ‘reversed’. That is, the liability to pay tax reverts back to the supplier.

Please note that the liability to pay tax always resides on the taxable person who is the supplier:

  • 2(107) “taxable person” means a person who is registered or liable to be registered under section 22 or section 24
  • 2(105) “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied

But, where the mechanism of reverse charge is put into operation, then the supplier will be supplemented with the recipient for discharging the liability to deposit tax levied. Care should be taken to identify if the recipient fits the description of description in the notification. For example, tax on GTA services provided to a non-corporate will have to be discharged by the GTA and not the recipient and all conditions attached in the notification prescribing the rate of tax will apply to the GTA while paying the tax.

Next Article – General Reverse Charge

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