RCM – Applicability to persons not liable to get registered us 23(1)

[Senguttuvan Kuppusamy]

Scope of Reverse Charge Mechanism (RCM) provisions under GST is widely different from RCM provisions under Service Tax (ST) Laws. Under ST provisions, RCM was applicable only for Services; and most of the services notified for RCM were common for manufacturing industry.

Under GST, the general understanding is that even if one doesn’t have to pay GST on the rendered services by him, he has to register himself, if he avails services which have the obligation/duty of paying under RCM.

Now the disputed question is, whether registration itself is necessary for the persons covered u/s 23(1) of CGST Act 2017?

Section 9(3) and 9(4) of CGST Act, 2017 elucidates the situations where in tax is payable by the registered person under Reverse charge.

The provision is reproduced below for further reference

“(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”

(4) The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient 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”

In simple terms, as per the above mentioned provisions tax on reverse charge is payable in two situations namely;

1. Services notified by Government of India covered under RCM;
2. When there is a purchase of Goods/ Services availed from an unregistered dealer by a registered dealer

Provisions for Registration under CGST

The provisions for registration under CGST Act, 2017, are contained in Chapter VI, (Registration).

The provisions are reproduced below for further reference –

“22. (1) Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees:

Provided that where such person makes taxable supplies of goods or services or both from any of the special category States, he shall be liable to be registered if his aggregate turnover in a financial year exceeds ten lakh rupees.”

As per the provisions mentioned hereunder, if any of the following conditions exists, it becomes mandatory for a person to register under GST.

• A state from where the person is making outward supply of goods/services.
• If aggregate turnover of a person from state from where the outward supplies are effected exceeds ₹ 20 Lakhs

As per section 2(6) of CGST Act, 2017, definition of aggregate turnover is,

“6) “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess”

Therefore, it is clear from the above mentioned provision that, if the value of all the taxable supplies, including exempt supplies, exports, interstate supplies etc and excluding supplies on which tax paid on Reverse charge for a person having same PAN, exceeds ₹ 20 lacs in a financial year,it is mandatory for a person to get registered under CGST Act in the state from where such outward supplies are made

Therefore, on such persons the provisions regarding RCM as per Section 9(3) & (4) of CGST Act, 2017 shall apply, if there is a receipt of supply as contemplated u/s 9(3) & (4).

Person not liable to pay Goods and Services Tax

As far as a registered person is concerned with respect to RCM provisions the position is clear.

This creates a conjecture with respect to applicability of RCM provisions on the persons who are not liable to pay under GST.

There are 2 situations under which, Registration provisions will not be applicable-

1. A person who does not qualify for registration i.e. whose aggregate turnover for a financial year is less than 20 lakhs as per the provisions contained in Section 22(1) of CGST Act, 2017.
2. A person indulged in supply exempted goods/services as per the provisions contained in section 23(1) of CGST Act, 2017.

RCM applicability on person not liable to register

Whether RCM provisions shall be applicable on persons not liable to register as per Section 22(1)?

YES. RCM shall be applicable on person not liable to register as per Section 22(1), but will have to register for the sole reason to fulfill obligations to remit tax under RCM.

As per Chapter VI, Section 22(1) of CGST Act, 2017, person having an aggregate turnover of more than ₹ 20 lakhs in financial year has to register compulsorily under GST.

Compulsory Registration Under Certain Circumstances

Section 24 of CGST Act, 2017, covers a non obstante clause which elucidates situations under which it is compulsory to take registration.

The provision is reproduced below for further reference

“24. Notwithstanding anything contained in sub-section (1) of section 22, the following categories of persons shall be required to be registered under this Act,––

 (iii) persons who are required to pay tax under reverse charge;

Sub-section (iii) of section 24 clearly explains that people who need to pay under reverse charge need to have a compulsory registration under GST.

It is compulsory for a person to get registered under GST if he is making supplies attracting payment under Reverse charge i.e. whether a person’s supplies are more than or less than 20 lakhs has no importance whatsoever under this clause. If a person is effecting supplies under reverse charge he has to get registered.

Whether RCM provisions shall be applicable on person who renders exempt supplies as per Section 23(1)?

No. RCM provisions shall not be applicable on person rendering exempt supplies

Section 23 of CGST Act, 2017 elucidates two conditions –

1. Person effecting exempt supplies
2. Agriculturist.

The relevant part is reproduced hereunder for further reference

“23. (1) The following persons shall not be liable to registration, namely:––

(a) any person engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under this Act or under the Integrated Goods and Services Tax Act;

(b) an agriculturist, to the extent of supply of produce out of cultivation of land.

(2) The Government may, on the recommendations of the Council, by notification, specify the category of persons who may be exempted from obtaining registration under this Act”

Both the persons are not liable to register and hence not liable to pay GST.

Applicability of Section 24

Whereas, Non obstante clause u/s 24 is concerned, it is only with respect to qualification provided u/s 22(1) for registration.

One can safely conclude that provisions under section 23 are intact and no RCM provisions shall be applicable on people who effect exempted supplies of goods/ services and Agriculturists are not liable to pay under RCM provisions under GST.

Exempted Services as per Notifications

Notification 12/2017 of CGST Act, 2017 and a corresponding notification 9/2017 under IGST Act, 2017 specifies list of services that shall be exempted under GST. For such services the tax payment under RCM is not applicable.

RCM services as per notification

Notifications 13/2017 of CGST Act, 2017 and corresponding Notification in 10/2017 of IGST Act 2017 provide category of services on which the tax shall be paid under Reverse Charge Mechanism under CGST Act.

Since, sec 23 is intact and provision regarding compulsory registration (sec 24) is not applicable on such persons. It can be safely concluded that, the persons providing only exempted services such as Legal services, GTA services etc, shall not come under RCM provisions being recipient of supplies covered u/s 9(3) & (4)