Registered recipient is liable to pay RCM under Section 9(3) even if the turnover of supplier is less than threshold limit for registration

[Shripada Hegde]

Under Section 9(3) many supplies have been specifically notified, on which tax is payable under RCM by the recipient. In this article, an attempt is made to analyze RCM applicability on procurement of supplies from vendors whose turnover is less than the threshold for registration.

Lets assume I have a business registered under GST. I receive a service covered by Notification No. 13/2017-CTR from a vendor whose turnover is less than 20 Lakhs – say for example legal service from an advocate. Question is whether I am required to pay RCM on such service received. Tax experts are advancing an argument that RCM is not applicable as the turnover of service provider is below the threshold limit and hence there is no levy of tax at all on such service. When tax itself is not levied, question of payment under RCM doesn’t arise.

However, these arguments do not seem to fit in the legal framework of GST. Tax is levied by Section 9. Section 9(1) reads as follows

“(1) 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.”

Section 9 has two limbs (broadly. Other limbs about exception, valuation, rate of tax and manner of collection are not relevant for the present discussion). The first limb prescribes a levy of tax and the second limb prescribes who should pay the tax levied. So if a tax is to be demanded first it will have to be shown that there is levy under first limb and second it will have to be shown that the person from whom demand is made is qualifies as taxable person.

From the first limb it may please be noted that the levy is on all supplies. The law doesn’t link any turnover while levying tax. However, when it comes to prescription of ‘who should pay the tax levied?’ such turnover prescription has been made. Taxable person has been defined as person registered or liable to be registered. Liability to register arises if the turnover of supplier crosses threshold limit (be it 10 Lakhs, 20 lakhs or 40 lakhs) or the assessee is covered by Section 24.

As far as supplies subjected to RCM are concerned, second limb of the charging provision about ‘who should pay the tax levied?’ gets overridden by Section 9(3) or Section 9(4). Section 9(3) reads as under

“(3) The Government may, on the recommendations 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 as if he is the person liable for paying the tax in relation to the supply of such goods or services or both”

From the above provision two things become clear. First – Section 9(3) doesn’t levy tax but only shifts the liability to pay tax from the supplier to the recipient. Second – there is a specific prescription that the provisions of the Act shall be tested as if the recipient is the person liable to pay tax.

Given the above, it is easy to arrive at an answer to our question. Whether there is a levy on supply if the supplier’s turnover is less than threshold limit? – Yes there is a levy. Since the levy (the first limb) is not connected with any threshold, there is a levy on all the supplies irrespective of the turnover. Whether the tax levied will have to be paid? – Yes. The liability to pay is on the recipient. As long as the recipient qualifies as ‘taxable person’ – being a registered person or being a person liable for registration – requirement to pay arises. When Section 9(3) specifically prescribes that the provision of Act shall be applied as if the recipient is the person liable to pay tax, the terms “shall be paid by the taxable person” appearing in Section 9(1) will have to be tested from the perspective of the recipient and not the supplier.

Comparing the framework of GST levy and collection with the framework of levy and collection under central excise law will place us in a better position to understand the above argument. Under Central Excise Law the levy was on ‘manufacture’ but the collection was made at the time of ‘removal’ from the factory. So there was a levy on all manufacture, but the same was not collected until the removal happens. Same is the case with GST. There is a levy on all supplies. If you do not qualify as taxable person you need not pay it and on the other hand you should pay it if you are a taxable person. In case of Forward Charge, if your turnover is below threshold you need not pay it – not because there is no levy but because you are not a taxable person. In case of RCM, recipient will have to pay it as long as they qualify as taxable persons.

Even the legal position under erstwhile service tax was the same. Exemption till 10 Lakhs of turnover was granted for service providers vide Notification No. 33/2012 - Service Tax. However, services subjected to RCM were specifically kept out of such exemption. Since GST is brought in to replace the service tax provisions, unless the plain simple provision provide for a different treatment, there is no reason why a different treatment should be adopted.

Based on the above, it is my humble view that a registered recipient will be liable to pay RCM on supplies covered by Section 9(3) irrespective of the turnover of supplier.

Any critical views or additional points are welcome.