Comprehending applicability of GST on supplies from unregistered persons

The concept of reverse charge mechanism (RCM) took birth in erstwhile Service Tax law. Generally, tax is payable by the person who provides Services but under RCM the liability to pay tax has shifted to recipient of services. Under GST regime too the concept of RCM has been continued but in a way much wider than previous Service Tax regime. Under GST, RCM is applicable on both the supply of services and goods. Therefore, under RCM the liability to pay GST has been fixed on the recipient of supply of goods or services.

Definition of Reverse Charge: Sec 2(98) of CGST Act, 2017 defines reverse charge as '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 sub-section (4) of section 5 of the IGST ACT.'

What does Sub-section (3) and (4) of section 9 of CGST Act 2017 says?

Section 9(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.

Section 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.

What does Sub-section (3) and (4) of section 5 of IGST Act 2017 says?

Section 5(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.

Section 5(4): The integrated 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.

From a plain reading of above sections of CGST Act & IGST Act, it is very clear that RCM has been primarily divided under two categories:

1. Those cases covered by section 9(3) of CGST Act and section 5(3) of IGST Act. (For which notifications have been issued)
2. And those cases covered by section 9(4) of CGST Act and section 5(4) of IGST Act. (under which taxable supply of goods or services from unregistered persons are covered)

Some of the Relevant Notifications issued so far in relation to above sub-sections:

Rules relating to invoicing under RCM:

Clause (f) of sub-section (3) of section 31 of CGST Act states that 'a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both.'

And Clause (g) of sub-section (3) of section 31 of CGST Act states that 'a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue a payment voucher at the time of making payment to the supplier.'

Further Rule 46 of CGST Rules 2017 read with section 31(3)(f) prescribes to issue a consolidated invoice at the end of the month for supplies covered u/s 9(4) of CGST Act, the aggregate value of such supplies exceeds Rs. 5,000/- in a day from any or all the suppliers. [NB: consolidated invoice can also be issued in cases where the value of supplies of goods or services or both are less than Rs. 200/-]

Input Tax Credit under RCM: The recipient of supply of goods or services or both, shall be eligible to avail input tax credit provided such goods or services are used or intended to be used for business or furtherance of business and the liability of tax under RCM has to be paid in cash only, that means Input Tax Credit cannot be used for discharging liability under RCM. After making tax payment under RCM in cash, the same is entitled to become ITC of the recipient of supply.

NB: There is lack of clarity as to when the ITC of tax paid under RCM would be available to recipient, but logically if the liability under RCM is discharged in one month then the same would be ITC for subsequent month; as the reporting of same needs to be done in GSTR-1, GSTR-2 & GSTR-3 in one month pursuant to which it would be added to Electronic Credit Ledger and the same can be utilized in subsequent month.

Time of Supply of Goods or Services under RCM:

According to sub-section (3) of section 12 of CGST Act, 2017, time of supply of goods in respect of RCM cases shall be earliest of the following dates:

1. The date of receipt of goods; or
2. 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
3. The date immediately following 30 days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.

According to sub-section (3) of section 13 of CGST Act, 2017, time of supply of services in respect of RCM cases shall be earlier of the following dates:

1. 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
2. The date immediately following 60 days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a) or (b), the time of supply shall be the date of entry in the books of account of the recipient of supply.

Case Study: A Ltd has made a payment of commission in the month of September for an amount of Rs. 1 Lac to Mr C. The payment is made to an unregistered person. Therefore, the supply of service would attract RCM under sec 9(4) of CGST Act. As per discussion made above, the liability of Rs. 18,000/- [Rs. 9,000 CGST + Rs. 9,000 SGST] would be required to be discharged by making payment in cash under respective heads (cgst & sgst) by 20th October (being due date for month of September). After making payment, A Ltd need to issue an invoice and a payment voucher to Mr. C pursuant to sec 31(3)(f) & 31(3)(g). The invoice shall be the basis on which claim of ITC for tax paid under RCM would be available to A Ltd. The details of said invoice need be reported in GSTR-1, GSTR-2 & GSTR-3 for the month of September. After filing the respective return for September, it shall be eligible for ITC in the month of October. While computing tax liability for the month of October, the amount of Rs. 18,000/- [Rs. 9,000 CGST + Rs. 9,000 SGST] shall be adjusted against respective liability for the said month and balance if any to be paid by 20th November (being due date for month of October).

Certain Misconceptions about RCM:

1. There is a general misconception that liability of RCM is to be deducted from payment made to unregistered person. The stand is incorrect, as the same would be available as ITC subsequent to payment in cash. The payment for supply of goods or services or both shall exclude the tax under RCM. Thus tax would be computed on whole amount paid to unregistered person and has to be paid from the pocket of recipient of supply.

For instance in above case study- if Mr C is paid Rs. 1 Lac as commission then GST need be computed on Rs. 1 Lac and Mr C shall be paid Rs. 1 Lac (instead of Rs. 1 Lac minus Rs. 18,000). The liability of Rs. 18,000/- need to be paid in cash and it would be eligible as ITC in subsequent month.

2. The ITC of taxes paid under RCM is not available. This is also incorrect. As the ITC of taxes paid under RCM would be eligible after making its payment in cash