02. Reverse Charge Mechanism
This article is part of the book named " Comprehensive Guide to GST" authored by CA. Brijesh Thakar. You can access the full book on following link.
Commentary on RCM
Service of GTA
Services provided by Goods Transport Agency needs to be discussed in detail. Let us first understand the meaning of GTA. As per clause (ze) of notification no.12/2017- CTR “goods transport agency” means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called.
Readers can observe in the definition the words “ in relation to “ are used. This means it is not only the service of transportation of goods but also ancillary service like packaging, loading-unloading etc shall also be covered. Here readers can also observe that the test of being GTA is through issuance of consignment note. Hence, if a person provides service of transportation of goods by road but is not issuing consignment note then he cannot be called GTA as per this definition. Suppose a person is providing service of transportation of goods by road but does not issue consignment note and consequently cannot be called GTA then what will be the taxability of such service? Answer to this question can be given through an exemption entry under notification no 12/2017-CTR which is as under
Service by transportation of goods by road is exempt except the service of
GTA
Courier agency
Hence, by implication such service shall be exempt and no GST shall be paid.
There also remains a question about what do we understand by the term “ consignment note” ? The term consignment note has not been defined under the Act. However, as per service tax rules ( Rule 4B), consignment note means a document, issued by a goods transport agency against the receipt of goods for the purpose of transport of goods by road in a goods carriage, which is serially numbered, and contains the name of the consignor and consignee, registration number of the goods carriage in which the goods are transported, details of the goods transported, details of the place of origin and destination, person liable for paying service tax whether consignor, consignee or the goods transport agency.
There is also another Exemption entry under exemption notification no 12/2017-CTR which provides for exemption to services provided by GTA. Exemption is given to transportation of goods by GTA for following
a) Agricultural produce;
(b) goods, where consideration charged for the transportation of goods on a consignment transported in a single carriage does not exceed one thousand five hundred rupees;
(c) goods, where consideration charged for transportation of all such goods for a single consignee does not exceed rupees seven hundred and fifty;
(d) milk, salt and food grain including flour, pulses and rice;
(e) organic manure;
(f) newspaper or magazines registered with the Registrar of Newspapers;
(g) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap; or
(h) defence or military equipments.
As there are exemptions for certain services provided by GTA, there is also an exemption in relation to services provided to GTA. As per entry 22 of exemption notification 12/2017-CTR, services by way of giving on hire a means of transportation to GTA is exempt. Hence, suppose GTA takes some trucks on hire from owner of trucks on payment of some hire charges then such service is exempt and no GST needs to be paid on such service.
As we have fairly understood the taxability aspect of services provided by/to GTA, now we can try understanding whether GST is required to be paid on forward charge or reverse charge on such service. Readers are expected to draw that there is no question of forward charge or reverse charge if the service itself is non taxable or exempt. In the absence of chargeability, question of forward/reverse charge shall not arise. So now let us assume that specific service provided by GTA is not covered under exemption list and hence it is chargeable. So now question will arise that who is liable to pay GST ? GTA ( forward charge) or service recipient ( reverse charge).
As mentioned in the RCM entry if GTA provides service in respect of transportation of goods by road to specified persons ( list of specified person we have already verified in above list) then such service shall be covered under RCM and the specified persons are required to pay GST as recipient. Here, we need to consider very important aspect of RCM mechanism under section 9 (3). If a person is covered under RCM notification as recipient who is required to pay GST then he is required to take compulsory registration under GST irrespective of his turnover. Let us take an example here. Suppose there is a new partnership firm whose aggregate turnover till date is only Rs. 10,000/-. It has not taken GST registration as aggregate turnover has not exceeded Rs. 20,00,000/- ( Section 22 discussed in relevant chapter). Now this partnership firm takes service of transportation of goods from a GTA who charges freight of Rs. 2000/- from the firm. As the partnership firm is a specified person covered under RCM notification entry no 1, it is required to take registration under GST to pay GST on this freight amount and once the registration is taken it shall become taxable person as per section 2 (107) and shall be liable to collect and pay GST on all its outward supplies. Suppose in this example freight is only Rs. 670/- . In this situation as the freight from the consignee does not exceed Rs. 750/- this service shall become exempt service as we have seen earlier and hence there is no question of payment of GST on this service and consequently the recipient partnership firm is not required to take registration also.
There is also another important point of discussion for RCM entry relating to GTA. As per this entry, registered persons are specified persons who are required to pay GST under RCM. There is a specific provision under section 51 for TDS under GST (Discussed in respective chapter). As per this section some government departments, local authorities etc are required to take registration merely for deduction of TDS under section 51. These authorities are not doing any Business and hence not required to pay GST on any of their activities. However, taking registration under section 51 shall make them specified person for receipt of GTA service and they will have to face unnecessary burden of paying GST on freight charges payable to GTA under RCM. To avoid this difficulty, the entry has been amended by notification 29/2018 which provides that nothing contained in this entry shall apply to those covered under section 51 merely for TDS deduction.
As we have understood the RCM mechanism in this entry, it is also important to understand the rate at which GST shall be paid in case of GTA services as here also there are different options. To simplify this, I have prepared following chart.
Readers can derive from above chart that there are two GST rates for GTA service. i.e. 12 % and 5 %. These rate are optional rates for service provider i.e. GTA. The selection of the option depends on whether GTA wants to avail ITC of the input tax paid by it on inputs and input services. If it wants to avail ITC then it shall charge 12 % GST. If it does not wish to avail ITC then it shall charge 5 % GST. For example, let us say, a GTA has purchased a truck to be used for transportation of goods on for Rs 23,60,000/- ( 20,00,000 plus 360,000 GST). Now if GTA is charging GST on outward supplies at 12 % then it can avail ITC of this Rs. 360,000/-. However, if it is charging GST at 5 % then this ITC cannot be availed.
Another important observation can be that the option to discharge GST through recipient in case the service is provided to specified person is with GTA. For example, if GTA issues tax invoice separately showing tax charged in it then there is no question of RCM. GTA shall collect and pay GST to government at 5 % or 12 % whatever the case may be. However, in case of service supplied to specified persons GTA can issue a Bill of supply which shall have an inscription that “ GST shall be paid by the recipient under Reverse Charge “. When specified person receives such invoice they shall pay GST under RCM at 5 %.
Advocate services
Legal services provided by an individual advocate including a senior advocate or firm of advocates are covered under RCM in certain situations. Further there is an exemption available to such services in certain cases. As there are many legs of taxability of this service, it becomes important to discuss this service at length for proper clarity.
Let us first understand the meaning of Advocate and senior advocate. Question also arise as to whether advocate and lawyer are same or not.
As per Para 2(b) of Notification No. 12/2017 -Central Tax (Rate) , “Advocate” has the same meaning as is assigned to it in clause (a) of sub-section (1) of section 2 of the Advocates Act, 1961 (25 of 1961); “
As per this section, Advocate” means an advocate entered in any roll under the provisions of this Act (Section 2 (a) of Advocates Act,1961) and “Roll” means a roll of advocates prepared and maintained under this Act. ( Basically a person whose name is entered in register of advocates prepared and maintained by Bar Council.)
‘Senior Advocate’ means an advocate who may be designated as senior advocate if Supreme Court is of the opinion that by virtue of his ability or standing at Bar or special knowledge or experience in law and he is deserving of such distinction.
Hence we can understand distinction between lawyer and advocate as this- Advocate is a lawyer whose name is entered in register of advocates maintained by Bar Council. Lawyer is a law graduate who may or may not be an advocate. So we can say that all advocates are lawyers but all lawyers may not be advocates.
As per entry number 45 of notification 12/2017-CTR, following services are exempt in case of advocates
(a) A advocate by way of legal services to any person other than business entity or a business entity with an aggregate turnover up to Rs. 20 Lakhs in the preceding FY.
(b) A firm of advocates or an individual advocate other than a senior advocate, by way of legal services to an advocate or firm of advocates, other than business entity or a business entity with an aggregate turnover up to Rs. 20 Lakhs in the preceding FY.
From the above entry, it seems that a legal service provided by a senior advocate to individual advocates or firm of advocates are not exempt. Further such service is also not covered under RCM as we can see from RCM entry. Hence, we can say that in such case, senior advocate shall charge GST in his invoice from individual advocates or firm of advocates on forward charge.
Let us now discuss the RCM entry relating to this service. When this service is provided by individual advocate ( including a senior advocate) or firm of advocates to a business entity located in the taxable territory. Here we need to understand that to attract RCM two conditions must be fulfilled in relation to the recipient. 1. The business entity must have turnover more than 20 lakhs in the preceding FY. ( If turnover in not more than 20 lakhs in preceding FY then the service shall become exempt and there is no need to pay GST either on forward charge or reverse charge ). 2. The business entity must be located in taxable territory. In case the business entity is not located in taxable territory then the service of advocate provided to such business entity may be covered under export of services if other conditions of export of services are fulfilled ( e.g. recipient is outside india, consideration is received in convertible foreign exchange etc ). If all required conditions are fulfilled and service is considered as export of service then GST is not required to be paid. However, if the recipient business entity is not located in taxable territory and conditions of export of services are also not fulfilled then the service provider advocate( or firm of advocates) is liable to pay GST on forward charge as per normal provisions of GST.
Service by government/ union territory or local authority to a business entity ( entry 5 and 5A)
As we have an RCM entry related to service provided by Government or local authority, the discussion shall remain incomplete without discussing other ends of services provided by Government or local authority. I have bifurcated services provided by Central government, state government, union territory or local authority in to three categories a. services covered under RCM b. services which are exempt and c. Services which are covered under forward charge. Let us discuss all these categories one by one
Services covered under RCM
(entry 5 of RCM notification)
Services provided by government/ local authority to a business entity located in taxable territory except following shall be covered under RCM.
Renting of immovable property
Services specified below
Services by the department of post by way of speed post, express parcel post, life insurance and agency services provided to a person other than central government, state government or union territory or local authority
Services in relation to an air craft or a vessel, inside or outside the precincts of a port or air port
Transport of goods or passengers
It is also important to note that the above RCM shall be applicable only if the recipient business entity has aggregate turnover exceeding Rs 20 lakh in preceding FY. If the business entity has aggregate turnover not exceeding 20 lakhs then the service is exempt as per exemption notification and consequently there is no question of applicability of RCM.
Further, as per entry 5A of RCM notification, services supplied by central/state government or union territory or local authority by way of renting of immovable property to a registered person shall be covered under RCM.
Services covered under exemption
There is also a long list of services provided by government/ union territory/ local authority covered under exemption notification. This is discussed in relevant chapter
Services covered under forward charge
From analysing a and b above we can say that following services are covered under forward charge
Services by the department of post by way of speed post, express parcel post, life insurance and agency services provided to a person other than central government, state government or union territory or local authority
Services in relation to an air craft or a vessel, inside or outside the precincts of a port or air port
Transport of goods or passengers
Service of renting of immovable properties to an unregistered person.
Service provided by director of a company or body corporate to the said company or body corporate
There are lot of discussions and confusions on this specific RCM entry. An adverse Advance Ruling given by Karnataka Authority of Advance Ruling in the case of M/s Alcon Consulting Engineers (India) Pvt Ltd has created a new panic in the minds of taxpayer companies. I have restricted myself here in the interpretation of this entry to my opinion only.
Question posed to Karnataka authority of Advance Ruling was whether remuneration paid to Director of the company is covered under this RCM entry or not. As per the ruling given by Karnataka Authority of Advance Ruling, such remuneration is covered under RCM and company is required to pay GST on it. As per opinion of the author, blanket application of this ruling is erroneous. For drawing conclusion regarding remuneration payable to Director, we need to understand some provisions of Companies Act and Income Tax Act. Under Companies Act director can be executive director or non executive director. Generally an executive director is considered as employee of the company whereas non executive director is not considered as employee of the company. Executive director being employee of the company is eligible to draw salary from the company whereas salary cannot be paid to non executive director as he is not an employee of the company. Non executive directors receive sitting fees etc from company for their time and services, however executive directors are not taking sitting fees as they receive salary from the company. Let us also look into Income Tax provisions related to TDS on payments made to directors. As per Income Tax Act, TDS shall be deducted on salary paid to director shall be deducted under section 192 considering them as employees. Further, TDS on sitting fees etc is deducted under section 194J considering it as professional services. So there does not remain a doubt regarding executive director being employee of the company. Now, as per entry 1 of schedule III of the GST Act, services by en employee to employer in the course of or in relation to employment is neither supply of goods nor supply of services. Hence, salary payable to executive director ( being an employee of the company) cannot be taxed under GST. As the salary/remuneration cannot be taxed there is no question of application of RCM. Hence as per opinion of the author, GST can not be imposed on remuneration payable by company to its executive directors.
RCM on Services provided by director to company
There is also another question which arises related to this RCM entry. The question is whether all services provided by director to company ( like renting of immovable property etc ) are covered in this entry or only services provided by director in the capacity of director is covered in this entry ?
This question does not have a straight answer. On plain reading of the entry, we do not see any differentiation drawn by law drafters between services provided by director in his capacity as director and other services provided by him. Wherever the intention of the law was to include only specific services they have mentioned it clearly in the entry. For example entry no 2,3,4, 5 etc. in which it has been specifically mentioned which services shall be covered under RCM entry. Hence, by literal interpretation of the entry no 6 related to service provided by director to company, all services provided by director shall be covered under RCM. Hence services like renting of immovable property etc shall also be covered under RCM.
However, there is another angle of this question also. There are two more similar entries i.e entry no 7 which is related to service supplied by an insurance agent to an insurance company and entry no 8 related to services supplied by recovery agent to a bank. In these two entries also type of services covered under RCM are not specified only supplier and recipient are specified. So should we conclude that if an immovable property given on rent by insurance agent to insurance company shall also be covered under RCM ? That can not be the intention of the RCM that all services provided by insurance agent to insurance company shall be covered under RCM. It should be only insurance service which should be covered. If that is the case with insurance agents and recovery agents then how it can be different for a director of a company ? If for insurance agents only services supplied in the capacity of insurance agent is covered under RCM and if for recovery agent only services supplied in the capacity as recovery agent is covered under RCM the same should apply to services provided by director to the company. And only those services which are provided by director to company should be covered under RCM. So as per this argument, services like renting of immovable property supplied by director to a company shall not be covered under RCM. There is another support to this argument also. If all the services supplied by director to company is covered under RCM then it will result in breakage of ITC chain. For example let us say, an immovable property is supplied on rent by director to a company. Now if this service is covered under RCM then it shall become exempt supply for director as per section 17 (3). And due to this, director shall not be able to take ITC on the inputs and inputs services received by him to provide this service. ( This is discussed in detail in relevant chapter on ITC). Hence, this will result in breakage in supply chain.
So, readers can deduce from above discussion that two views are possible in this matter. It is left to the judgement of readers whether they wish to go conservatively and follow the literal interpretation. Author’s view is inclined towards second view.
RCM in case of music composers, photographers etc ( entry 9 )
Here both services and suppliers are specified. Services provided by following suppliers are covered
Music Composer
Photographer
Artist or the like
Here a generalised term of “ the like “ is used. So suppliers similar to music composers, photographers, artist or like persons are covered. It seems that law makers wants to cover those persons who supplies services by their natural talent etc. However, we also need to understand which service is covered here. It has been mentioned that the service by way of transfer or permitting the use or enjoyment of a copy right covered under section 13 (1) ( a) of the Copyrights Act, 1957 relating to original dramatic, musical or artistic work shall be covered. Readers can deduce that the generalised categories of suppliers given in this entry can not be clear without understanding what is covered under section 13 (1) (a) of the Copy Rights Act, 1957. Let us understand this section 13 (1) of the Copyrights Act.
Subject to the provisions of this section and the other provisions of this Act, copyright shall subsist throughout India in the following classes of works, that is to say,—
As readers can observe, section 13 (1) of the copyrights Act have three clauses. Out of these three clause only first clause is covered under RCM entry. i.e. original literary, dramatic, musical and artistic work. Out of works covered under this clause, work relating to dramatic, musical and artistic works are covered under this entry number 9. Work related to literary ( work of author ) is separately taken in entry 9A.
Another important point of observation here is suppliers like music composers, photographers, artists etc should be in relation to dramatic , musical and artist work. If it is related to cinematographic films then it shall not be covered under 13 (1) (a) and hence not be covered under entry 9 of RCM notification. There is a difference between dramatic and cinematographic. Dramatic scripts or “plays” are produced on a stage, by actors performing directly and personally in the company of the audience. In cinema, however, the actors perform for the director and the camera.
RCM for authors ( entry 9A )
Readers have observed during discussion on entry 9 that out of four works covered under section 13 (1) (a) of the Copy Rights Act, 1957, i.e. original literary, dramatic, musical and artist works three works which are other than work of literary are covered under entry 9, however, original literary work is not covered under entry 9. A separate entry 9 A has been inserted for this work. As per this entry, service provided by an author to a publisher by way of transfer or permitting the use of a copy right covered under section 13(1)(a) of Copyright Act, 1957relating to original literary work shall be covered under RCM.
A proviso has been added to this entry which gives option to the author who has taken GST registration to charge GST in his invoice issued to publisher under forward charge. This option may have been given to the authors due to removal of certain hardships to authors and publishers. Let us assume that a CA has taken registration under GST. He writes a book on GST and permits use of copy right to a publisher. If this service is taken under RCM then for the author ( who is a CA) there will be a problem due to operation of section 17 (3). As per this section supplies covered under RCM shall be considered as exempt supply and he need to proportionately reverse input tax credit. Instead if he has option to charge GST in his invoice then this problem can be resolved. Further, there are publishers who sells only books which is considered as exempt supply. As per section 23 (2), if a person is engaged in merely supply of exempt goods or services, he is not required to take GST registration. Now assume that the author is writing a book for this publisher. He charges royalty for use of copy right from publisher. If this is compulsorily covered under RCM then the publisher is required to take GST registration for payment of GST under RCM. Instead if an option is given to the author to charge GST in his invoice under forward charge then the publisher is relieved from the burden of taking registration and other consequential procedures.
Hence, to remove these difficulties the option of forward charge is given in this entry.
RCM in case of services supplied to Banks or financial institution, NBFC etc . (Entry 8, 10, 11 and 12 )
Certain services supplied by specified suppliers to banks etc are covered under RCM. Following suppliers are covered under RCM if they are providing services to Banks etc
Recovery agents ( entry 8)
Individual Direct Selling Agents (DSA) other than a body corporate, partnership or LLP ( entry 10)
Business facilitator ( entry 11 )
Out of the three suppliers mentioned above, recovery agents concept is very much clear. So let us understand other two categories. i.e. DSA and business facilitator
Banks and NBFCs appoint DSAs for selling their products like loan etc to customers. Similar to entry 8 related to recovery agents, services supplied by DSAs to banks or NBFCs are covered under RCM. Here it is important to understand that if banks appoint body corporate or a partnership firm or LLP as DSA then RCM shall not be applicable. RCM is applicable only in case of individual DSA.
There remains a question as to what do we mean by business facilitator? Along with business facilitator we also need to understand the term “ Business correspondent” for which there is a separate entry no 12 for RCM. Both these entries 11 and 12 needs to be understood combined.
With the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, in Jan 2006 based on the recommendations of Khan Commission for the purpose of expanding their business. Reserve Bank of India issued a new set of guidelines allowing banks to employ two categories of intermediaries which are Business Correspondents (BCs) and Business Facilitators (BFs).
Business Correspondents: They are permitted to carry out transactions on behalf of the bank as agents.
Business Facilitators: They can refer clients, pursue the clients' proposal and facilitate the bank to carry out its transactions, but cannot transact on behalf of the bank.
As readers can understand from above explanation, Business Facilitator ( BF) has lesser powers in comparison to business correspondents (BC). Unlike BC, they cannot transact on behalf of customer with bank.
Let us understand this model of business employed by banks for their business with the help of following chart
As shown above, there are two service elements in this model
01. Services provided by agents to BF or BC
02. Service provided by BF/BC to banks
From combined reading of entry 11 and 12, we can deduce that Business facilitators are kept out of GST. In case of services provided by agents to BF, this service is not covered under RCM. Hence agents need to pay GST on forwards charge. Whereas in case of service provided by BF to banks, such service is covered under RCM. Hence, bank is required to pay GST on such services under RCM. Hence in none of the two cases, BF is required to charge GST. On the other hand, situation is exactly opposite in case of business correspondents. Services provided by agents to BC is covered under RCM as per entry 12. Hence, BC is required to pay GST on recipient of this service. In case of service provided by BC to banks, it is not covered under RCM. Hence, BC is required to collect and pay GST under forward charge. Let us summarise this as under
In case of Business Facilitator
Agent to BF ( forward charge- Agent will collect and pay GST)
BF to Bank ( Reverse charge- Bank will pay GST under RCM)
In case of Business correspondent
Agent to BC ( RCM- BC shall pay GST under RCM)
BC to Banks ( Forward charge- BC shall collect and pay GST).
Further, there is also exemption available to services provided by BF/BC in certain cases. Following entry related to this exemption is relevant.
Services by the following persons in respective capacities –
(a) Business facilitator or a business correspondent to a banking company with respect to accounts in its rural area branch;
(b) Any person as an intermediary to a business facilitator or a business correspondent with respect to services mentioned in entry (a); or
(c) Business facilitator or a business correspondent to an insurance company in a rural area.
RCM in case of security services ( entry 13 )
Security services provided by way of supply of security personnel to a registered person is covered under RCM. Here, it is important to note that if the service provider is a body corporate then RCM shall not apply.
There is also a proviso added to this entry according to which following two recipients who are even if registered shall not be covered under GST
Government departments, local authority or governmental agencies who have merely taken registration under section 51 for TDS deduction and not making any taxable supplies.
A registered person paying tax under section 10 of GST Act ( Composition tax payers).
Let us understand the first exception. There is a specific provision under section 51 for TDS under GST (Discussed in respective chapter). As per this section some government departments, local authorities etc are required to take registration merely for deduction of TDS under section 51. These authorities are not doing any Business and hence not required to pay GST on any of their activities. However, taking registration under section 51 shall make them specified person for receipt of Security service and they will have to face unnecessary burden of paying GST on amount charged by supplier under RCM. To avoid this difficulty, the entry has been amended by notification 29/2018 which provides that nothing contained in this entry shall apply to those registered under section 51 merely for TDS deductions. This is similar to the exception provided in case of RCM for GTA services that we have discussed earlier.
About the second exception, a registered person paying tax under section 10 is also not required to pay GST under RCM for security services. This exception may create a difficulty for supplier of security services. Because every time he need to check whether the registered person is a composition tax payer (covered under section 10) or not. If the recipient is a composition tax payer then the security service supplier needs to pay GST under forward charge.
RCM in case of import of services
Apparently, this RCM entry seems simple that whenever any person located in a non taxable territory supplies a service to a person located in taxable territory ( other than non taxable online recipient ) then the recipient is require to pay GST under RCM. As per GST Act taxable territory means the territory to which provisions of GST Act applies. As per section 1 of the GST Acts, provisions of the GST Act applies to whole of India. Hence we can say that whole of India is a taxable territory. This analysis suggests that the RCM entry basically covers importation of service by a person located in India from a person located outside India. Now, importation of service is possible in two ways. Either the supplier comes to India physically and provides service or the service is provided through online mode, which is mainly online information and database access or retrieval service ( OIDAR). In the former case the provision is clear that the recipient shall pay GST under RCM. However in case of OIDAR service, we need to check whether the recipient is Non taxable online recipient or not. Based on that liability to pay GST shall be determined.
There are two important questions that we need to answer to completely understand this entry. And these questions lead to discussion of some provisions of GST Act also. The two questions are as under
What is the meaning of non taxable online recipient ?
If service is received by non taxable online recipient then who will pay GST?
Non Taxable Online Recipient is defined under section 2 (16) of IGST Act as under
“non-taxable online recipient” means any Government, local authority, governmental authority, an individual or any other person not registered and receiving online information and database access or retrieval services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory.
Explanation.––
For the purposes of this clause, the expression “governmental authority” means an authority or a board or any other body,––(i) set up by an Act of Parliament or a State Legislature; or(ii) established by any Government,
with ninety per cent. or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution;
Now let us understand the definition of Online Information and Database Access or Retrieval Service. It is defined under section 2 (17) of IGST Act as under
“online information and database access or retrieval services” means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as,––
(i) advertising on the internet;(ii) providing cloud services;(iii) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet;(iv) providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;(v) online supplies of digital content (movies, television shows, music and the like);(vi) digital data storage; and(vii) online gaming;
As readers can see from the above definition, OIDARS are mainly those services which are information technology driven. They are provided with minimum human intervention and supply is automated. For example a service of cloud hosting. Scope of such services are increasing day by day and there is a huge amount of money spent by businesses and others for receiving such services. Hence, it becomes very important to ensure that such services do not escape taxation.
As per section 13 of IGST Act, place of supply for such service is location of the recipient. Hence we can say that the service is deemed to have been consumed in India and it should be taxed in India.
If the recipient is a registered person who consumes such service for their business then he will pay GST under RCM. However, when such service is consumed by a non-taxable online recipient then RCM is not applicable and hence it become important to derive a mechanism to tax it. This mechanism is provided under section 14 of IGST Act.
As per this section if following three conditions are satisfied then the supplier located in a non-taxable territory shall be liable to pay GST
Supply is of OIDAR servicesThe supplier is located in a non-taxable territoryRecipient is a non-taxable online recipient.
Provisions of section 14 is discussed in detail in relevant chapter
RCM in case of renting of motor vehicle ( entry no 15 of RCM notification)
Another widely debated and frequently amended entry is about taxation of renting of motor vehicle used for passengers. Before we discuss RCM on this service we need to discuss two important things- a. Rate of GST applicable on this service and b. Input tax credit admissibility of this service.
Rate of GST
There are two categories of the business model to determine rate of GST
Cost of fuel is not included in the charges collected from the recipient.
Here the arrangement with the service recipient is only for providing service of renting of motor vehicle and the cost of fuel shall be separately paid by the recipient. In this situation rate of GST shall be 18 %.
Cost of fuel in included in the charges collected from the recipient
Here the consideration fixed for the services to be provided shall be inclusive of fuel cost. Here the service provider shall have two options. – either to charge GST at 12 % and take full ITC of all inputs and input service or to charge GST at 5 % and taking limited ITC only of the same line of service i.e. ITC of only service of renting of motor vehicle.
ITC admissibility
For service provider, admissibility of ITC depends on whether GST is charged at 12 % or 5 %. In case GST at 5 % is charged there is only limited ITC that can be taken. He can take ITC only for same line of business. For example Mr. A provides service of renting of motor vehicle. For this purpose, he receives motor vehicle from Mr. B on rent. Here Mr. A and B are in same line of business and hence GST charged by Mr. B from Mr. A is available as ITC to Mr. A. Suppose Mr. A charges GST at 12 % then he can take ITC of all inputs and input services.
For service recipient, ITC is blocked under section 17 (5) if approved seating capacity of the motor vehicle is not more than 13 persons ( including the driver) except for providing same category of service . For example, X ltd receives service of renting of motor vehicle for their employees which has seating capacity of 9 persons. In this situation, X ltd is not eligible for ITC of this service irrespective of whether the GST is charged at 12 % or 5 %.
Let us take some example to understand these two aspects
Example
Mr. A provides service of renting of motor vehicle to Mr. B which has seating capacity of 5 persons. answer following questions
What will be the rate of GST if price quoted by Mr A does not include charges for fuel.
What will be the rate of GST if price quoted by Mr.A is inclusive of fuel and Mr A wants to take full ITC of all inputs and input service
What will be the rate of GST if price quoted by Mr A is inclusive of fuel and Mr A does not want to take full ITC but only limited ITC of same line of business
How much ITC can be taken by Mr B from the invoice issued by Mr A, if he is a businessman having a business of production of plastic items.
Will there be any change in the answer of d above if seating capacity of the vehicle is 15?
How much ITC can be taken by Mr. B from the invoice issued by Mr B if he is having business of renting of motor vehicle and he has taken service from Mr A for further supply of service of renting of motor vehicle.
Answer
If price quoted is exclusive of fuel cost then GST rate shall be 18 %
If price quoted by Mr A is inclusive of fuel and Mr A wants to avail full ITC of all inputs and input services then GST rate shall be 12 %.
If price quoted by Mr A is inclusive of fuel and Mr A does not want to avail full ITC of all inputs and input services but only limited ITC of same category of service then GST rate shall be 5 %.
As per section 17 (5), Mr. B cannot take ITC of the service received from Mr A as he is not in the same category of service
If seating capacity of the motor vehicle is more than 13 persons then restrictions of section 17 (5) shall not apply and Mr B is eligible for ITC of the tax charged by Mr A
Here Mr B is taking service of renting of motor vehicle for further supply of service of renting of motor vehicle, hence restriction under section 17 (5) shall not be applicable and Mr. B is eligible to ITC.
As readers are now well aware of the GST rate and ITC provisions for Renting of motor vehicle service, we can examine entry relating to RCM.
This entry is added with effect from 1/10/2019. Further the entry has been amended by another notification dated 31/12/2019. A circular has also been issued on same date to clarify the entry. Let us understand implication of all these notifications and circular.
RCM in case of renting of motor vehicle shall be applicable only if all of the following conditions are fulfilled.
Service is of renting of any motor vehicle designed to carry passengers.
Cost of fuel is included in the consideration charged from the recipient.
Supplier is a person other than a body corporate.
Supplier does not issue invoice charging GST at 12 %.
Recipient is a body corporate.
If all of the above conditions are fulfilled then the recipient body corporate shall pay GST under RCM. He will pay GST at 5 %. Further he cannot take ITC of the tax paid under RCM as the same is restricted under section 17 (5) if seating capacity of the motor vehicle is not more than 13 persons and he is not in the same line of business. If any of the above 5 conditions are not fulfilled then RCM shall not be applicable and tax will be paid by the supplier under forward charge.
Applicability of GST on Healthcare Services and applicability of Reverse Charge
Let us try to answer some of the questions arising for medical profession under GST.
1. Whether GST is levied on the professional charges paid to directors in the capacity of medical practitioners by a company?
Entry no. 74 of notification no. 12/2017 – Central Tax (Rate) dated 28/06/2017 and Entry no. 77 of 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) “authorised 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:
a. Services provided by the supplier or its directors are healthcare services.b. Supplier is a clinical establishment.c. 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 are also medical practitioners are exempt under GST. The fact that the medical practitioner is director 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 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 the 25th GST Council Meeting held on 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 are 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 the 25th GST Council meeting, a circular was issued by CBIC (Circular No. 32/06/2018 dated 12th February 2018).
Entry No. 5 of the said circular is as under.
Is GST leviable in the 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.
2. Whether the RCM (Reverse Charge Mechanism) is applicable to the company for payments made to directors, who are authorised medical practitioners?
The reason for 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 the context and background of 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 services 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 recommendations 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.a. On which transactions tax needs to be levied?b. What will be the value on which tax shall be levied?c. What will be the rate at which tax shall be paid?d. Who is a person liable to pay this tax?
On analysing section 9(1), answers to these four questions are as under–
a. 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 inter-state).b. Value shall be determined under section 15 of the CGST Act.c. Rate shall be notified by Government on the recommendation of GST Council.d. 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 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 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 services or both under sub-section (3) or sub-section (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—
5. 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.
5.1 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.
Amendments for Restaurant Service and Auto Rickshaw Service provided through electronic commerce operator (ECO) effective from 01.01.2022
Liability to collect GST on restaurant services provided through ECO shifted on ECO
Notification No. 17/2021-CTR dated 18th November, 2021 has amended earlier Notification No. 17/2017-CTR which provided for liability to collect GST on ECO under section 9(5). This section is reproduced below—
(5) The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services:
Provided that where an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax:
Provided further that where an electronic commerce operator does not have a physical presence in the taxable territory and also he does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax.
By Notification 17/2021-CTR a new entry is inserted which is as under—
(iv) supply of restaurant service other than the services supplied by restaurant, eating joints etc. located at specified premises.
Specified premises has been defined under the notification as under—
“(c) specified premises means premises providing hotel accommodation service having declared tariff of any unit of accommodation above seven thousand five hundred rupees per unit per day or equivalent.”
By this notification, now restaurants need not collect GST on sales made by them through ECO like Swiggy, Zomato etc. In such cases now the liability to collect and pay GST has been shifted to ECO under section 9(5).
This amendment is effective from 1st January, 2022.
Liability to collect GST on Auto Rickshaw services provided through ECO shifted on ECO
Further amendment has been made widening the scope of Notification 17/2017-CTR dated 28th June 2017 by issuance of Notification 17/2021-CTR dated 17th November, stating that motor cycle, omnibus or any other motor vehicle shall also be covered under section 9(5) provisions.
This amendment shall cover transport of passengers by auto rickshaws etc. into GST net. The exemption given to auto rickshaw under section 11 has also been omitted for booking of transport by auto rickshaw through Electronic Commerce Operator consequently.
This amendment shall be effective from 1st January, 2022.
Next Chapter