DEFINITION
Agent: As per Section 2(5) of CGST Act, "Agent" means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called,who carries on the business of supply or receipt of goods or services or both on behalf of another.
However, the term "Recovery Agent" has not been defined in the GST Law and hence the term "Recovery Agent" can be derived from the general parlance used in the industry ie Agent, covers a person who iscarrying the business of recovery of debt on behalf of another person.
- SAC CODE: 998592: Collection agency services.
- GST RATE: 18%
REVERSED CHARGED
As per Section 9(3) of CGST Act, the following service has been specified under RCM i.e. the recipient of service needs to pay GST under RCM.
- Type of Service: Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company.
- Service Provider: A recovery agent.
- Service Recipient: A banking company or a financial institution or a non-banking financial company, located in the taxable territory.
From the above provision it is concluded that if the recovery agency service provided to Banks & NBFC & financial Institute only covers under RCM and if such service provided to other than Banks, NBFC, Financial Institution covered under forward charge mechanism.
INPUT TAX CREDIT
Section 17(2) of CGST Act, 2017 Provides that if the registered person engaged in business of taxable supply (Including Zero Rated supply) as well as Exempt supply then such registered person can take ITC restricted to such taxable supply only.
Further Section 17(3) talks about exempt supply which includes the supply of service on which the recipient is liable to pay tax on RCM basis.
Hence Recovery agency service is covered under Exempt service and thus registered person can not avail the ITC attributed to such exempt service.
GST ON INPUT SERVICE OR SUB-CONTRACT SERVICE INCREASE THE COST TO RECOVERY AGENT
For providing Recovery agency service registered person may avail various input services as well as sub-contractor service. These suppliers or sub-contractors render recovery agent's service to recovery Agent, who in turn renders such service to the its clients who are Banks, NBFCs or Financial Institutions. In the course of rendering services to the recovery agents, such sub-contractors levy GST under forward charge on their service because their services are supplied to recovery agent and not to Banks, NBFCs, or Financial Institutions.
When, the Recovery Agent, in turn, bills its clients, i.e., Banks, NBFCs or Financial Institutions, GST cannot be levied because the same is covered under Reverse Charge Provisions as discussed above. Consequently, in terms of Sub-section 3, of Section 17, the outward supply of services of Recovery Agent becomes exempt supply.
In terms of Sub-section 2 of Section 17, the Recovery Agent is not eligible to take the Input Tax Credit of the GST charged to it by its sub-contractors because the output services of the Recovery Agent are treated as exempt supplies. This results in a situation where such GST charged by the sub-contractors of the company becomes a cost for the company. In order to maintain its profitability, the Recovery Agent is constrained to increase the price of outward supplies of its Services rendered to the Banks, NBFCs or Financial Institutions, to the extent of GST charged to it by the sub-contractors.
DOUBLE TAXATION (I.E. TAX ON TAX)
Case 1: The clients of the Recovery Agent i.e.the Banks, NBFCs or Financial Institutions are required to pay the GST on the Recovery Agent's services under Reverse Charge provisions. Consequently, they would pay GST @ 18% on a service value which includes the GST charged by the sub-contractors of the company.
Hence here we can see that Banks, NBFCs and Financial Institution pay Tax on Tax.
Case2: Further Section 17(4) specified that Banks, NBFCs, or Financial Institutions who are engaged in supply of services by way of accepting deposit, extending loans or advance have option to either comply the provision of section 17(2) OR avail 50% of the eligible ITC and balance 50% shall lapsed.
Thus, Banks, NBFCs or Financial Institutions suffer a double impact of higher input costs as a result of,
- The increased cost of the company due to unabsorbed GST levied by the sub-contractors on their services to the company. AND
- The higher GST paid on the increased cost which is not entirely available as Input Tax Credit to the Banks, NBFCs or Financial Institutions due to restrictions set in Section 17(4).
It is natural that the Banks, NBFCs or Financial Institutions would have to increase the price at which they render services to their clients or customers to absorb the higher input costs.
Hence here we can see another example of Tax on tax due to RCM.
REGISTRATION
As per Section 22 of CGST Act, 2017 Every supplier shall be liable to be registered under this Act in the State or Union territory from where he makes a TAXABLE supply of goods or services or both if his aggregate turnover in a financial year exceeds the threshold limit as specified below,
I) For supplier engaged exclusively "Supply of Goods" (Including exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount
(a) Normal State:
- Telangana & Puducherry: Rs.20 Lakhs.
- Other State: Rs.40 Lakhs.
(b) Special Category State:
- Manipur, Mizoram, Nagaland, Tripura: Rs.10 Lakhs.
- Arunachal Pradesh, Meghalaya, Sikkim, Uttarakhand: Rs.20 Lakhs.
- Assam, Himachal Pradesh, Jammu and Kashmir: Rs.40 Lakhs.
(c) Supplier engaged in making supplies of "Ice cream and other edible ice, whether or not containing cocoa (2105 00 00)", "Pan masala (2106 90 20)", "All goods, i.e. Tobacco and manufactured tobacco substitutes (24)"
Normal State: Rs.20 Lakhs.
Special Category State:
- Manipur, Mizoram, Tripura, Nagaland: Rs.10 Lakhs.
- Jammu & Kashmir, Arunachal Pradesh, Assam, Himachal Pradesh, Meghalaya, Sikkim, Uttarakhand: Rs.20 Lakhs.
II) For supplier engaged exclusively "Supply of Service" or "Goods & Service"
(a) Normal State: Rs.20 Lakhs.
(b) Special Category State:
- Manipur, Mizoram, Tripura, Nagaland: Rs.10 Lakhs.
- Jammu & Kashmir, Arunachal Pradesh, Assam, Himachal Pradesh, Meghalaya, Sikkim, Uttarakhand: Rs.20 Lakhs.
DISCLAIMER: This is strictly my personal opinion. The above discussion cannot be considered as our professional or legal advice. Users shall consider legal provisions or take advice from experts before taking action on it.
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