38. Reverse charge is a new charge or merely a mechanism of payment of tax
Though this question has a very straight and simple answer, there have been lot of cases wherein unnecessary litigation has been created due to misunderstanding of the Reverse charge mechanism. Reversed charge merely shifts liability to pay tax from supplier to recipient, it does not create a new charge. Hence, if a supply is otherwise exempt, it shall not become taxable because of an RCM entry. One such case that came to us for legal opinion is quoted here for understanding this concept.
Whether GST is levied on the professional charges paid to directors in the capacity of medical practitioners by a company?
Entry no 74 of the notification no 12/2017-Central tax (rate) dated 28/06/2017 and Entry no 77 of the notification no 9/2017-
integrated tax (Rate) dated 28/06/2017 (which are exemption notifications) exempts following services from charge of GST
Heading 9993- Services by way of- (a) health care services by a clinical establishment, an authorised medical practitioner or para-medics; (b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above
Health care service has been defined under the said notification as under
/(zg) "health care services" means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma.
Clinical establishment has been defined under the said notification as under
(s) "clinical establishment" means a hospital, nursing home, clinic, sanatorium or any other institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India, or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases;
Authorised medical practitioner has been defined under the said notification as under
(k) "authorized medical practitioner" means a medical practitioner registered with any of the councils of the recognized system of medicines established or recognized by law in India and includes a medical professional having the requisite qualification to practice in any recognized system of medicines in India as per any law for the time being in force;
For getting benefit of the exemption, only three conditions need to be fulfilled.
Services provided by the supplier or its directors are healthcare services
Supplier is a clinical establishment
Directors are authorised medical practitioners.
All these three conditions are fulfilled in case of the given question and hence professional charges paid to directors who also medical practitioners are are exempt under GST. The fact that the medical practitioner is directors of the company is not relevant for determining applicability of exemption. It is also important to note that who is service receiver is also not relevant for determining the applicability of the exemption entry. The said entry gives no condition regarding recipient of the service. Hence, healthcare services provided by clinical establishment and healthcare service provided by director to clinical establishment both are exempt services.
Further, this matter has been clarified by 25th GST council meeting held 18th January, 2018. It has been clarified that
Services provided by senior doctors/consultants/technicians hired by the hospitals, whether employees or not, are healthcare services which is exempt.
Hospitals also provide healthcare services. The entire amount charged by them from the patients including the retention money and the fee/payments made to the doctors etc., is towards the healthcare services provided by the hospitals to the patients and is exempt.
Consequent to the clarification made in 25th GST council meeting as cited above, a circular was issued by CBIC (circular no 32/06/2018) on 12th February, 2018. Entry no 5 of the said circular is as under-
Is GST leviable in following cases ?
Hospitals hire senior doctors/consultants/technicians independently, without any contract of such persons with the patient; and pay them consultancy charges, without there being any employer- employee relationship. Will such consultancy charges be exempt from GST? Will revenue take a stand that they are providing services to hospitals and not to patients and hence must pay GST?
Clarification :- Services provided by senior doctors/ consultants/ technicians hired by the hospitals, whether employees or not, are healthcare services which are exempt.
Further, as held by Karnataka Authority of Advance Ruling in case of M/s Matrix Imaging Solutions India Private Limited, "it is pertinent to note that there is no condition relating to the recipient of these services in the said entry" (Para 4.6 of the ruling)
Hence,
The professional charges paid to directors in the capacity of medical practitioners are exempt and no GST is payable thereon.
Whether the RCM (Reverse Charge Mechanism) is applicable to the company for payments made to directors, who are authorised medical practitioners?
The reason of emergence of this question is circular no 140/10/ 2020 dated 10th June, 2020. Para 4.3 of this circular is reproduced below-
Accordingly, it is hereby clarified that the remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis
A huge misinterpretation has been made on the basis of this circular and the issue needs to be understood in broader details. To clarify this issue, we need to understand the charging section of GST, Provisions of reverse charge and context and background of the circular no 140/10/2020.
Section 9(1) is the charging section under CGST Act, 2017 which is reproduced below-
Subject to the provisions of sub section (2), there shall be levied a tax called the central goods and services tax on all intra-state supplies of goods or service or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent, as may be notified by the Government on the recommendation of the council and collected in such manner as may be prescribed and shall be paid by the taxable person.
Sub section (2) of the CGST Act, 2017 is as under
The central tax on the supply of petroleum crude, high speed diesel, motor spirit ( commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendation of the council.
Before we discuss section 9(3) which provides for reverse charge under GST, analysis of the charging section 9(1) needs to be done. Under any indirect tax for a charge to sustain four elements must be specified in the charging section.
On which transactions tax needs to be levied?
What will the value on which tax shall be levied?
What will be the rate at which tax shall be paid?
Who is a person liable to pay this tax?
On analysing section 9(1), answers to these four questions are as under-
Tax shall be levied on intra state supply of goods or services or both ( in case of IGST Act, section 5, intra state shall be substituted by interstate).
Value shall be determined under section 15 of the CGST Act.
Rate shall be notified by Government on the recommendation of GST council.
Tax shall be paid by a taxable person as defined under section 2(107) as a person
who is registered or liable to be registered under section 22 or section 24.
Having analysed the charging section, let us understand section 9(3), which provides for reverse charge. Section 9(3) is reproduced below-
The Government may, on the recommendation 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 (emphasis supplied) as if he is the person liable for paying the tax in relation to the supply of goods or services or both.
By exercising powers given under section 9(3), government issued a notification no 13/2017-CTR dated 28/6/2017. As per entry no 6 of the notification, services supplied by a director of a company or a body corporate to the said company or the body corporate shall be covered under reverse charge and recipient company is required to pay tax on such services.
On the basis of answer to question 1 and above discussion, we have two entries which are relevant to answer our question.
Entry no 74 of the notification no 12/2017- CTR which exempts health care services from levy of GST
Entry no 6 of notification no 13/2017-CTR which provides that GST shall be paid on reverse charge basis by the recipient company on services received from its directors.
Does it mean that the RCM notification shall override the exemption notification and can we say that if any service is mentioned in RCM notification, exemption shall not apply to it? To put it differently, can we say that reverse charge creates a separate charge and overrides all exemptions and other provisions of law? This is the main question of law involved here, answer to which will clear all the issues raised.
To answer this question we need to understand the definition of reverse charge. The term reverse charge has been defined under section 2(98) as under-
"reverse charge" means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier (emphasis added) of such goods or service or both under sub-section (3) or subsection (4) of section 9 or under sub-section (3) or subsection (4) of the Integrated Goods and Services Tax Act.
From the definition of reverse charge, it is clear that reverse charge merely shifts liability to pay tax from supplier to recipient, it does not override other provisions of law. Section 9(3) itself provides that all the provisions of the Act shall apply to the recipient covered under section
9(3). "All the provisions" shall include section 11 also, which is a section giving power to grant exemption under which notification 12/2017-CTR has been issued. As mentioned earlier, out of four elements of charge of tax, section 9(3) only changes the fourth element, i.e. a person liable to pay tax. Instead of supplier, recipient shall pay tax. No other element of charge is changed by the reverse charge mechanism. Reverse charge mechanism is merely a procedure for collection of tax and it does not change the taxability of any supply.
The first question that we need to ask is whether the supply itself is taxable or not. If due to any entry of exemption notification or due to schedule III, the supply itself is not taxable, then the question of who will pay the tax shall not arise. The question that who will pay tax shall arise only when it is confirmed that the supply is not covered under any of the entries of the exemption notification. In the given question, supply of healthcare service is covered under entry 74 of the exemption notification 12/2017-CTR, hence question of paying tax under RCM shall not arise.
As far as circular no 140/10/2020 issued in June, 2020, I clarify the doubt raised through this circular as under-
This circular was issued to clarify the issue of applicability of RCM on director's remuneration. Reason of issuance of the circular was some of the debatable rulings given by Authority for Advance Ruling. One of such ruling was by Karnataka authority of advance ruling in case of m/s Alcon Consulting Engineers (India) Pvt. Ltd. (GST AAR Karnataka), para 5 of the ruling is reproduced below-
Regarding the remuneration to the Directors paid by the applicant, the services provided by the Directors to the Company are not covered under clause (1) of the Schedule III to the Central Goods and Services Tax Act, 2017 as the Director is not the employee of the Company. The consideration paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company as per clause (93) of section 2 of the CGST Act and the supplier of such service is the Director.
The question before us is not whether this service is taxable or not, but whether this supply of services is liable to tax under reverse charge mechanism.
This ruling created a huge confusion about the GST liability in case of director's remuneration. There was an impression due to this ruling that the company needs to pay GST on salary of directors, which is clearly against the provisions of law. To rest the debate, circular 140/10/2020 was issued which only discusses the GST liability from the point of view of presence or absence of employer-employee relation. The purpose of the circular was to clarify that if director is employee of the company there is no need to pay GST under RCM. However, in the given case, this circular has no relevance, because it does not discuss applicability of exemption notification in case of supplies covered under RCM.
Above view is supported by Karnataka Authority for Advance Ruling in case of M/s DKMS BMST FOUNDATION INDIA held that HLA testing is covered under "Health care service" and as per para 15 of the ruling, " Since the service itself is exempt, the applicant is not liable to pay tax on reverse charge basis"
Hence, answer to second question is as under
As the health care service is exempt from GST, question of payment of tax on the same whether on forward charge or reverse charge does not arise.