The Goods and Services Tax (GST) has been a transformative reform in the Indian taxation landscape, aiming to simplify and unify indirect taxation. However, for intermediaries facilitating services such as e-journals and online resources for educational institutions exempt under GST, certain provisions have created significant operational and financial challenges. This article aims to shed light on the issues faced by intermediaries, the legal framework governing these challenges, and suggestions for relief.
Legal Framework: GST and Exempt Educational Institutions
Under Notification No. 2/2018 - Integrated Tax (Rate), dated 25 January 2018, the supply of online educational journals or periodicals to specific educational institutions is exempt from GST. These institutions typically include:
- Colleges and universities providing education recognized by law to grant degrees.
Key Legal Provisions Impacting Intermediaries
- Reverse Charge Mechanism (RCM):
- As per Section 5(3) of the IGST Act, 2017, RCM applies to the import of services, including OIDAR (Online Information and Database Access or Retrieval Services), which encompass e-journals.
- Intermediaries facilitating these supplies are required to pay GST under RCM on the gross invoice value issued by foreign publishers.
- Input Tax Credit (ITC) Restrictions:
- Under Section 17(2) of the CGST Act, 2017, ITC is not available for inputs (including RCM GST) used in exempt supplies.
- Rule 42 of the CGST Rules:
- For intermediaries with mixed supplies (both taxable and exempt), ITC is allowed only proportionate to the taxable turnover. The ITC attributable to exempt supplies must be reversed.
Challenges Faced by Intermediaries
1. Financial Burden of RCM on Exempt Supplies
Intermediaries are required to pay 18% GST under RCM on the gross invoice value of services imported from foreign publishers, even when the supply to educational institutions is exempt. Since ITC is unavailable for exempt supplies, this becomes a direct cost for the intermediary, often eroding margins or leading to losses.
Example:
- Gross Invoice Value from Publisher: ₹1,00,000.
- RCM GST Paid: ₹18,000.
- Supply to Exempt Institution: No GST charged.
- Net Loss: ₹18,000 (as ITC cannot be claimed).
2. No Cooperation from Exempt Institutions
Educational institutions, particularly government or exempt entities, often refuse to acknowledge the intermediary's financial burden. They cite their exemption status under Notification No. 2/2018 and are unwilling to reimburse the GST costs or modify the procurement process to alleviate the intermediary's tax burden.
3. Cash Flow Crunch Due to Excess ITC Accumulation
In cases of mixed supplies (e.g., ₹10,00,000 total supplies with ₹6,00,000 taxable and ₹4,00,000 exempt):
- RCM GST on Gross Import Value (₹10,00,000): ₹1,80,000.
- Output GST on Taxable Supply (₹6,00,000): ₹1,08,000.
- ITC Adjustment: Only ₹1,08,000 of the RCM GST can be adjusted, leaving ₹72,000 as excess ITC, which cannot be utilized against exempt supplies.
- This results in perpetual negative cash flow, as the excess ITC keeps accumulating without a feasible way to offset it, severely impacting the intermediary's financial viability.
4. Inconsistent Practices in the Market
Due to the lack of clarity and unsustainable provisions, some intermediaries adopt non-compliant practices, such as:
- Paying RCM GST only on the margin rather than the gross value.
- Avoiding full disclosure of taxable value to minimize tax liability.
These inconsistencies create an uneven playing field and expose compliant intermediaries to unfair competition and audit risks.
5. Lack of Relief Despite Industry Advocacy
Major consulting firms and industry associations have repeatedly approached the GST Council to address these issues. However, no concrete relief or clarifications have been provided, leaving intermediaries in a precarious situation.
Suggestions for Relief
To ensure the sustainability of intermediaries and fair treatment under GST, the following measures can be considered by the GST Council and appropriate authorities:
1. Exemption from RCM for Intermediaries
- Intermediaries facilitating exempt supplies to educational institutions should be exempted from paying RCM GST on imports of OIDAR services.
- This can be achieved through an amendment or a specific notification under Section 5(3) of the IGST Act.
2. Allow ITC for RCM GST Paid on Exempt Supplies
- Amend Section 17(2) of the CGST Act to allow ITC on RCM GST paid for inputs used in exempt educational supplies.
- This would relieve intermediaries from the financial burden while maintaining compliance.
3. Simplified Compliance for Intermediaries
- Introduce a special scheme or mechanism for intermediaries dealing with exempt supplies, similar to the Simplified Registration Scheme for OIDAR Suppliers.
- Allow intermediaries to calculate RCM liability only on their margin, ensuring that GST compliance aligns with their actual value addition.
4. Encourage Collaboration Between Stakeholders
- The government should encourage educational institutions to cooperate with intermediaries by:
- Reimbursing a portion of the RCM GST.
- Structuring contracts to include a service fee for intermediaries.
5. Clarification and Consistency in GST Rules
- Issue a clarification from the GST Council on the treatment of RCM and ITC for intermediaries handling exempt supplies.
- Standardize practices to ensure a level playing field for all market participants.
Conclusion
Intermediaries play a vital role in providing educational institutions with access to critical resources like e-journals. However, the current GST framework disproportionately burdens them, particularly when dealing with exempt supplies. A collaborative approach involving policymakers, intermediaries, and educational institutions is essential to address these challenges.
By implementing the suggested measures, the government can ensure fair treatment for intermediaries while supporting the broader goal of providing quality educational resources to institutions across India.
Call to Action:
- Industry stakeholders are encouraged to continue advocating for relief through representations to the GST Council and other relevant authorities.
- Policymakers must prioritize this issue to ensure the long-term sustainability of intermediaries and uninterrupted access to educational resources.
The author is a Consultant & Advisor and possesses 18 years of Experience in Direct & Indirect Taxation.
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