IS IT FAIR TO TREAT RCM SUPPLIES AS EXEMPT?

HISTORY OF RCM IN INDIA

Reverse
Charge Mechanism or RCM is not a new concept in the Indirect Tax arena. It was
first introduced in India in 1997 on services provided by Goods Transport
Agency and Clearing and Forwarding Agent. Even the erstwhile Sales Tax and VAT
Laws in some states had a tax similar to RCM, the purchase tax wherein the
buyer or recipient of goods had to pay tax on purchase of specified goods; for
example, Maharashtra levied a purchase tax on cotton. The current GST regime
has only taken this forward, bringing in some more categories of goods and
services under the net of RCM.

India
is not the only country with RCM provisions; most of the developing and developed
nations have RCM provisions including EU VAT, Australia, Singapore, etc. The
underlying reason for introducing RCM in India was to map the unorganised
sector and shift the compliance liability regarding the same to the organised
recipients. It was believed that this would lead to increase in tax revenue
and make administration of the small unorganised sector easy.

From
an economy’s perspective, RCM is a robust check mechanism to ensure that all
supplies are taxed and there is minimal evasion. However, the concept has
certain flaws and repercussions that need to be dealt with.

RCM UNDER GST

RCM
under GST is governed by sections 9(3) and 9(4) of the CGST Act, 2017 which
essentially lay down the following:

(a)  9(3): Supply of specified categories of notified
goods and / or services attract GST under RCM where the recipient is liable to
pay tax on such goods and / or services;

(b)
9(4): Supply made by an unregistered person to a registered person, wherein the
registered recipient shall be liable to pay tax.

Further,
Notification No. 13/2017-CT (Rate) dated 28^th June, 2017 notifies
the categories of supplies which shall attract GST under RCM u/s 9(3) of the
CGST Act, 2017. Considering that under the RCM provisions the recipient pays
tax instead of the supplier, the recipient is eligible to avail Input Tax
Credit (ITC) of the tax so paid. However, as per section 17(3) of the CGST Act,
2017 the value of exempt supply shall include reverse charge supplies and
therefore ITC on the inputs and / or input services used for making such
reverse charge supplies is not available. Accordingly, the ITC pertaining to
such supplies stands unutilised and blocked.

While
the recipient certainly bears the brunt of the compliance burden on RCM
supplies, he remains financially unaffected as the tax paid can be availed as
credit (subject to his taxable and exempted supplies). However, this provision
proves to be prejudicial against the supplier who is unable to avail ITC
pertaining to inputs or input services used for supplying RCM supplies and also
leads to double taxation.

Moreover, if such supplier is engaged only in a
single business (i.e., RCM supplies), the entire ITC paid becomes a cost to
him. Let us understand this with the help of a numeric example as given below:

In the above example, it is evident
that although the recipient in both cases is eligible to avail the same ITC, it
is the supplier who faces iniquitous treatment.

Under GST, there are exempt,
zero-rated, taxable and non-GST supplies. For supplies that are either taxable
or zero-rated, ITC is available to the supplier. However, for exempt and
non-GST supplies such as essential items, reverse charge supplies, petroleum,
alcohol, etc., the suppliers suffer as they pay GST on the inward side but fail
to avail the set-off of the same as their outward supplies are not taxed. When
GST was being rolled out, the GST Council had received several representations
from sectors such as pharma, poultry, education, etc. to examine the problem of
accumulated ITC on account of exempt supplies. However, the problem remains
unaddressed till now as far as RCM is concerned.

During the Covid-19 outbreak, the
Supreme Court dismissed various pleas which had sought exemption from GST for masks, ventilators, PPE kits and other Covid-19-related equipment
on the premise that granting exemption to these would result in blocked ITC,
thereby increasing the manufacturing cost and occasioning a higher price for
consumers.

The
Council has in the past taken steps to address the issue of inverted duty
structure. However, the businesses which deal in exempted supplies are still
reeling from the impact of accumulated credits. The Council needs to deliberate
on the probable solutions to the above-mentioned concerns. The immediate
actions could include:

(i) Taking stock of items which are
exempt supplies, including the RCM supplies;

(ii) Evaluating the inward supplies used by such suppliers;

(iii) Exempting the inward supplies for the entire
chain of suppliers if feasible, or providing a mechanism of refunds to such
suppliers;

(iv) If not feasible, then
classifying the outward supplies as zero-rated supplies so that ITC is
available to the suppliers;

(v) An
option can be provided to the RCM sellers: whether to be classified as an RCM
supplier or not. This will give an alternative to sellers to evaluate the
trade-off between the cost of compliance and credit lost. Suppliers with
substantial credit can avail the ITC and carry out the compliances themselves
as against the small suppliers who would not like to get into the compliance
hassle. Similarly, this can be indicated in the tax invoice so as to inform the
buyer about whether or not to levy GST under RCM on the basis of the option
chosen by the supplier.

CONCLUSION

Is it fair for the RCM
suppliers to endure the unwarranted loss of credit for the simple reason that
their products or services, viz. sponsorship services, legal services, security
services, GTA services, cashew nuts, silk yarn, raw cotton, etc. are covered by
the said mechanism?

As discussed above, RCM is a tax
concept meant for the small and unorganised sector. Therefore, shouldn’t the
government be extra vigilant about any financial hardships being caused to
these small traders and businesses by the tax mechanism? Every business incurs
certain non-avoidable expenses including rent, audit fees, housekeeping,
business promotion, etc. All these input services are exigible to GST and constitute a large chunk of the
expenditure in the supplier’s profit and loss account. The GST pertaining to these expenses not being allowed as ITC
gives rise to superfluous adversities.

One of the most prominent objectives of GST was to eliminate
cascading effect and double taxation. While the government has, to a large
extent, been able to meet this objective, it remains to be seen whether the RCM
suppliers will also experience the benevolence of the Good and Simple Tax soon
enough!