Reverse charge system in GST, a grey area

Brijesh Kothary/ Nikhil Agarwal | Updated on November 13, 2020

Where the tax is already paid by the supplier, when it was required to be paid by the recipient, the latter cannot be held liable

The reconciliation of the tax liability as per the books of account vis-à-vis the GST returns is a tedious exercise for filing of annual return and GST audit.

While undertaking the exercise of reconciliation, in some cases the taxpayers may identify instances where the supplier has discharged tax under forward charge, though the tax was required to be paid by the recipient under reverse charge. The nuances in this regard need to be understood.

The reverse charge mechanism (RCM) on supply of service was first introduced with effect from January 1, 2005, under Finance Act 1994. Initially, a few services were brought under the ambit of RCM. Later, vide Notification No. 30/2012-S.T. of June 20, 2012, a number of services were added.

The above was also continued under the GST laws and services where tax is payable under RCM, which was notified vide Notification No. 13/2017-Central Tax (Rate) of June 28, 2017, as amended from time to time (for brevity “RCM Notification”). Will the tax paid by service provider under forward charge absolve the recipient from payment of tax? Let us take the example of Entry No. 4 to the RCM Notification. In the said entry, if services are provided by way of sponsorship to any body corporate or partnership firm, then the corporate or partnership firm located in the taxable territory is liable to pay tax under RCM on the said services.

Reverse charge mechanism

A perusal of the above entry will lead to the conclusion that the recipient of service will be liable to pay tax under RCM where the services are supplied by way of sponsorship to a company. The recipient company may not be absolved from payment of GST even in case the sponsor has discharged GST by virtue of Entry No. 4 to the RCM Notification.

It may however be noted that in the case of Lilason Breweries v. CCE [(2010) 24 STT 279 (CESTAT SMB)], service tax was paid by transporters themselves though the tax was required to be paid under RCM by the recipient. It was held that demand of tax again on the same service is not sustainable. A similar view was taken in CCE v. Om Tea Company (2012) 36 STT 91 (CESTAT) and Umasons Auto Compo Pvt. Ltd. v. CCE 2017 (47) S.T.R. 377 (Tri. - Mumbai).

Similarly, in Sanjivani SSK Ltd. v. CCE [(2009) 241 ELT 431 (CESTAT)], excise duty on molasses was paid by the manufacturer (though it was payable by procurer). It was held that the duty cannot be demanded from the procurer as it would lead to double taxation on the same goods.

Applying the ratio of the above decisions, a view may be taken that where the tax is already paid by the supplier, though the same was required to be paid by the recipient, there cannot be a demand of tax on the recipient.

Continuing with the example discussed, in case the sponsor supplies services to a body corporate and discharges tax on forward charge basis, then a question may arise whether the recipient will be entitled to take ITC (input tax credit) of taxes paid by the said supplier.

In terms of Section 16(1) of the CGST Act, every registered person shall, subject to such conditions and restrictions as prescribed, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.

The condition prescribed under Section 16(1) is that the recipient is entitled to take ITC of tax charged on any supply. The provision does not contemplate any scenario where ITC can be availed of only if tax was liable to paid on such supplies by the supplier or recipient. Therefore, a view can be taken that the recipient would be entitled to take credit of tax charged on the supplies. In this regard, reference can be to the decision of CESTAT, Mumbai, in the Sanjivani SSK Ltd case wherein it was held that the procurer can get Cenvat credit of duty paid by manufacturer on molasses, as what matters is whether duty was paid on the inputs and not whether duty was payable thereon.

Thus, the requirement of payment of tax by the recipient when the tax was paid by the supplier (though it was required to be paid by the recipient) for bona fide reasons, should not arise. This must not cast additional liability on the recipient of services and the recipient should also be entitled to take credit of such tax so that a wrong can be done right.

However, in all probability, the departmental authorities may demand tax and disallow the credit to the taxpayers. It would be interesting to see if the contention of the departmental authorities can stand the test of time.

The writers are Joint Partner and Senior Associate, respectively, Lakshmikumaran & Sridharan Attorneys. The views are personal

Published on November 13, 2020

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