IMPACT ON CASH FLOWS DUE TO INPUT TAX CREDIT BLOCKED UNDER SEC 17 (2) & 17(3) OF CGST ACT,2017
This query is : Resolved
26 June 2021
Dear Sir/Madam
We are Gst registered Sole proprietorship concern providing security services to our clients through third party security agency. Security agency being non body corporate raise Rcm invoice on us and we raise Rcm invoice on our client being Gst registered person located in taxable territory.
As per Sec 17(2) read with Sec17(3) ,among other things, input tax credit is not allowed if the outward supply is chargeable under reverse charge. Due to this we are loosing input tax credit paid under rcm even in case of trading of service which should not be the motive of the Gst law.
IMPACT OF CASH FLOWS DUE TO INPUT TAX CREDIT BLOCKED UNDER SEC 17 (2) & 17(3) OF THE CGST ACT,2017 IN RCM CASES
DOCUMENT TYPE PARTICULARS RCM CASE (Rs) FWD CASE (Rs)
SECURITY SERVICE BILL TAXABLE VALUE PAID (100,000.00) (100,000.00)
GST ON RCM BASIS PAID BY
ME TO GOVT (18,000.00)
GST AS PER BILL PAID TO VENDOR (18,000.00)
SECURITY INVOICE
WITH MARGIN 50,000 TAXABLE VALUE 150,000.00 150,000.00
GST PAYABLE BY CLIENT -
GST AS PER INVOICE 27,000.00
NET GST PAYMENT TO GOVT
UNDER FWD CHARGE (27000-18000) (9,000.00)
NET CASH FLOW 32,000.00 50,000.00
DIFFERENCE IN CASH FLOWS (50,000-32,000) 18,000.00
COMMENT: THIS IS DUE TO NON AVAILABILITY OF INPUT TAXCREDIT PAID UNDER RCM WHEN THE OUTWARD SUPPLY IS NOT TAXABLE AS PE SEC 17(2) &17(3) OF THE CGST ACT,2017.THIS IS SERIOUS CONCERN AS INPUT TAX CREDIT IS GETTING BLOCKED EVEN IN CASE OF TRADING OF SERVICE.
We are Gst registered Sole proprietorship concern providing security services to our clients through third party security agency. Security agency being non body corporate raise Rcm invoice on us and we raise Rcm invoice on our client being Gst registered person located in taxable territory.
As per Sec 17(2) read with Sec17(3) ,among other things, input tax credit is not allowed if the outward supply is chargeable under reverse charge. Due to this we are loosing input tax credit paid under rcm even in case of trading of service which should not be the motive of the Gst law.
IMPACT OF CASH FLOWS DUE TO INPUT TAX CREDIT BLOCKED UNDER SEC 17 (2) & 17(3) OF THE CGST ACT,2017 IN RCM CASES
DOCUMENT TYPE PARTICULARS RCM CASE (Rs) FWD CASE (Rs)
SECURITY SERVICE BILL TAXABLE VALUE PAID (100,000.00) (100,000.00)
GST ON RCM BASIS PAID BY
ME TO GOVT (18,000.00)
GST AS PER BILL PAID TO VENDOR (18,000.00)
SECURITY INVOICE
WITH MARGIN 50,000 TAXABLE VALUE 150,000.00 150,000.00
GST PAYABLE BY CLIENT -
GST AS PER INVOICE 27,000.00
NET GST PAYMENT TO GOVT
UNDER FWD CHARGE (27000-18000) (9,000.00)
NET CASH FLOW 32,000.00 50,000.00
DIFFERENCE IN CASH FLOWS (50,000-32,000) 18,000.00
COMMENT: THIS IS DUE TO NON AVAILABILITY OF INPUT TAXCREDIT PAID UNDER RCM WHEN THE OUTWARD SUPPLY IS NOT TAXABLE AS PE SEC 17(2) &17(3) OF THE CGST ACT,2017.THIS IS SERIOUS CONCERN AS INPUT TAX CREDIT IS GETTING BLOCKED EVEN IN CASE OF TRADING OF SERVICE.
26 June 2021
Get a detailed opinion having calculation from a professional.
12 July 2024
It appears you have concerns regarding the Input Tax Credit (ITC) being blocked under Reverse Charge Mechanism (RCM) scenarios for security services provided by a third-party security agency. Let's address the key points and implications:
### Understanding Input Tax Credit (ITC) Blockage under RCM:
Under GST law, specifically under Section 17(2) and 17(3) of the CGST Act, 2017, certain categories of expenses are excluded from the eligibility to claim ITC. This includes situations where the outward supply is subject to tax under RCM. Here’s a breakdown of your situation:
1. **RCM Scenario**:
- You, as a GST registered sole proprietorship, procure security services from a non-body corporate security agency.
- The security agency charges GST under Reverse Charge Mechanism (RCM), and you pay this GST to the government.
2. **Impact on ITC**:
- According to your example:
- You pay Rs 18,000 as GST under RCM to the government.
- You cannot claim this Rs 18,000 as Input Tax Credit because the outward supply (security services) is under RCM.
- When you invoice your client for these security services, you charge GST on the total invoice amount, including the margin.
- The GST charged on your invoice to the client (Rs 27,000) is less than the GST paid under RCM (Rs 18,000).
- Therefore, there is a net cash outflow of Rs 32,000 in the RCM scenario compared to Rs 50,000 in a scenario where Forward Charge Mechanism (FCM) applies and ITC is available.
3. **Concerns Raised**:
- You highlight that this results in a significant cash flow impact and creates a disadvantageous situation where ITC is blocked, even though the service provided is taxable.
### Addressing the Issue:
- **Legal Framework**: The restriction on claiming ITC under RCM is a provision of the law designed to prevent double taxation and ensure tax compliance. However, it does create cash flow challenges, especially for businesses incurring substantial RCM expenses.
- **Advocacy and Representation**: If this issue significantly affects your business operations and cash flow, consider representing your case to industry bodies, chambers of commerce, or through tax advocacy forums. These platforms can advocate for policy changes or clarifications that could mitigate such cash flow impacts.
- **Consultation with Tax Experts**: Seek advice from GST experts or consultants who can provide tailored strategies to manage cash flows effectively under RCM scenarios. They may suggest operational adjustments or financial planning measures to alleviate the impact.
### Conclusion:
The issue of blocked ITC under RCM for services where GST is paid to the government but cannot be claimed back creates cash flow challenges, particularly in sectors heavily reliant on RCM transactions. Exploring advocacy avenues and seeking expert guidance can help navigate these challenges effectively while ensuring compliance with GST regulations.
### Understanding Input Tax Credit (ITC) Blockage under RCM:
Under GST law, specifically under Section 17(2) and 17(3) of the CGST Act, 2017, certain categories of expenses are excluded from the eligibility to claim ITC. This includes situations where the outward supply is subject to tax under RCM. Here’s a breakdown of your situation:
1. **RCM Scenario**:
- You, as a GST registered sole proprietorship, procure security services from a non-body corporate security agency.
- The security agency charges GST under Reverse Charge Mechanism (RCM), and you pay this GST to the government.
2. **Impact on ITC**:
- According to your example:
- You pay Rs 18,000 as GST under RCM to the government.
- You cannot claim this Rs 18,000 as Input Tax Credit because the outward supply (security services) is under RCM.
- When you invoice your client for these security services, you charge GST on the total invoice amount, including the margin.
- The GST charged on your invoice to the client (Rs 27,000) is less than the GST paid under RCM (Rs 18,000).
- Therefore, there is a net cash outflow of Rs 32,000 in the RCM scenario compared to Rs 50,000 in a scenario where Forward Charge Mechanism (FCM) applies and ITC is available.
3. **Concerns Raised**:
- You highlight that this results in a significant cash flow impact and creates a disadvantageous situation where ITC is blocked, even though the service provided is taxable.
### Addressing the Issue:
- **Legal Framework**: The restriction on claiming ITC under RCM is a provision of the law designed to prevent double taxation and ensure tax compliance. However, it does create cash flow challenges, especially for businesses incurring substantial RCM expenses.
- **Advocacy and Representation**: If this issue significantly affects your business operations and cash flow, consider representing your case to industry bodies, chambers of commerce, or through tax advocacy forums. These platforms can advocate for policy changes or clarifications that could mitigate such cash flow impacts.
- **Consultation with Tax Experts**: Seek advice from GST experts or consultants who can provide tailored strategies to manage cash flows effectively under RCM scenarios. They may suggest operational adjustments or financial planning measures to alleviate the impact.
### Conclusion:
The issue of blocked ITC under RCM for services where GST is paid to the government but cannot be claimed back creates cash flow challenges, particularly in sectors heavily reliant on RCM transactions. Exploring advocacy avenues and seeking expert guidance can help navigate these challenges effectively while ensuring compliance with GST regulations.
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