Reverse Charge- an onerous requirement despite 8/2017-CTR
JULY 03, 2017
By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate
Section 9(4) of the CGST Act reads:
"9(4) The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient 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."
Similar provisions exist under the SGST Acts, as well.
The Central Government has issued Notification No. 8/2017-Central Tax (Rate) dated June 28, 2017 which is reproduced below -
G.S.R. (E).- In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts intra-State supplies of goods or services or both received by a registered person from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017):
Provided that the said exemption shall not be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day.
2. This notification shall come into force with effect from the 1st day of July, 2017.
A plain reading of this notification would suggest that the exemption from paying tax u/s 9(4) would not be available in cases where the aggregate value of goods or services or both, that are received by the registered person exceed Rs.5,000/- in a day.
The manner in which this notification is worded could lead to a lot of confusion. For instance, assuming that the unregistered tea vendor raises a monthly invoice for supply of tea, coffee, etc. for an amount of Rs.30,000/-, will this be treated as a daily supply of Rs.1,500/- (assuming a 20 working day month) or a supply of Rs.30,000/- on the day the bill is raised by the unregistered tea vendor. I would presume that the latter view would be more appropriate. There could be some confusion in respect of claims for reimbursements that are submitted by the employees of a company. Similarly, an employee could be on travel and might submit his travel claim, after his return. Since the employee is deemed to be procuring the goods or services on behalf of his employer, I would presume that the dates of these invoices/bills issued by the unregistered vendors would be the basis for recognizing the RCM liability by the employer/registered person, though these invoices/bills could get booked in the books of accounts at a much later date.
However, in some cases, the unregistered vendors might not issue invoices/bills at all. In these cases, I would presume that the date of payment of cash by the registered person would be the basis for applying the exemption notification No. 8/2017-CTR.It would be better if the Government can clarify that the exemption would be based on dates of invoices issued by the unregistered persons or on the basis of cash entries when there are no bills/invoices, so as to avoid litigation with the Department.
Fortunately, transactions between two unregistered persons would not attract Section 9(4). Also, supplies by a registered person who is covered by the composition levy and who, consequently, does not charge tax, would also require the recipient registered person to pay tax under this section.
It is not difficult to understand the mischief that section 9(4) can create for companies and other registered persons. Virtually, all purchases or expenses that are paid for by the registered person which are not supported by invoices or bills that carry the GSTIN of the suppliers would get covered under the reverse charge mechanism, including the hundreds (or perhaps, thousands) of transactions involving petty purchases and expenses that any large corporate would incur and pay for. These could involve Xeroxing/photocopying charges, procurement of coffee/tea/food items from vendors and small-time hotels, purchase of stationery items from shops, expenses involving payments to small time service providers like cleaning maids, helpers, gardeners, etc., wherein, the suppliers are not expected to be registered under the GST law.All of these transactions would now have to be covered under section 9(4), requiring the registered person to pay tax, subject to the exemption given in Notification No. 8/2017-CTR.
We can think of two situations where Section 9(4) could apply. Either the registered person could directly procure these goods or services from unregistered persons and directly pay for these procurements of goods or services or these could be procured by the employees or agents of the registered person/employer who could claim reimbursements from the registered person/employer. In both these cases, the registered person would be liable to pay tax under reverse charge basis, under section 9(4), as these procurements/expenses are booked by the registered person/employer and are claimed as expenses for purposes of income tax (possibly under section 37(1) of the Income Tax Act). The claim for reimbursements by the employees, though in relation to employment, cannot absolve the employer from being required to pay tax under Section 9(4), as these goods or services are ultimately for the benefit of the registered person/employer, in my view.
Considering the sweeping nature of Section 9(4) of the CGST Act, the exemption that is conferred by Notification No. 8/2017-CTR would not benefit most medium to large industries. Perhaps, a much higher daily limit of, say, Rs.50,000/- would be more relevant.
Be that as it may…. meeting the requirements of Section 9(4) of the CGST Act, which has already come effect, is going to be a highly onerous responsibility on the registered person. While paying tax under reverse charge, the registered person would be required to determine the tax rate for each of the goods items that is booked in his accounts and then determine the tax liability under the Section and this by itself, could cast a huge burden on the registered person. It would have been better if a standard rate of tax for transactions covered under Section 9(4) had been prescribed.
Taking this discussion forward…section 24 (iii) of the CGST Act requires any person required to pay tax under reverse charge in respect of notified services under Section 9(3) to compulsorily obtain registration and thus, business entities having annual aggregate turnovers of less than Rs. 20 lakhs would be required to obtain registration. Once these entities have taken registration in terms of section 24(iii) read with section 9(3), they would be covered by the onerous requirement prescribed under section 9(4) and consequently, even small business entities would be subjected to the rigours of reverse charge mechanism under section 9(4), subject of course, to the exemption granted by Notification No. 8/2017-CTR.
The requirements of section 9(4) could create a lot of issues on the ground, especially in relation to employee related expenses. For instance, it is common for progressive companies to allow their employees to have office outings/parties in hotels, resorts, etc. In many of these cases, the team leader or one of the employee could be paying the invoice of the hotel, etc. who could charge tax under GST, being an air-conditioned hotel (let us assume). When the team leader/employee claims a reimbursement from his employer company, will this transaction trigger levy of tax under section 9(4)? While the employee would be exempted from paying tax as the reimbursement is in relation to employment, can the employer be treated as procuring services from an unregistered person being the employee and thus be required to pay tax on reverse charge basis under Section 9(4), subject to the exemption?
The mischief that section 9(4) could create would not end with the payment of the tax under reverse charge by the registered person. Under section 17(3), the registered person would also be required to reverse the input tax credit attributable to the value of goods or services procured from unregistered taxable persons, by treating these as 'exempt supplies'. Surely, section 9(4) is going to create a lot of issues for registered persons including loss of ITC.
A reading of the exemption notifications suggests that, the exemption would be lost if the aggregate value of receipts from unregistered registered persons exceeds Rs.5,000/- in a day. Thus, if such value is, let's say, Rs.5,550/- in a day, the registered person would be liable to pay tax under RCM, on the entire amount of Rs.5,550/-.
One wonders if the framers of the notification are aware of practical challenges that the Industry would face in implementing these provisions. I don't think, any intelligent accounting software would be able to compute the RCM liability under Section 9(4), which, it would seem, would have to be a manual exercise. It would further seem that the accountants and auditors of companies would have to spend considerable time in working out the liability under section 9(4), especially, after the issuance of Notification No. 8/2017-CTR, the exemption in terms of which, is to be computed on the basis of daily accounting entries.
Certainly, the Accounting professionals would be overburdened but at the same time cannot be unhappy for GST has thrown open a sea of opportunities!
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