Availment of Input tax credit on the tax paid under RCM

[SESHU KUMAR]

Supplies (Goods or Services or both) which attracts the tax liability under reverse charge mechanism (RCM) and the availability of the same as input tax credit as per the GST Provisions are discussed in detail below.

Levy of GST under RCM: -

sub section (3) and (4) Section 9 of the CGST Act,2017 is reproduced below.

“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.”

sub section (3) and (4) Section 5 of IGST Act is reproduced below.

"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 integrated 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.”

Eligibility and conditions for taking input tax credit

Section 16 of CGST Act 2017 has been reproduced below

“(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless, ––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both.

Explanation. -For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

  Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon”

Claim of input tax credit and provisional acceptance thereof.

Section 41 Sub section,

 (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.

(2) The credit referred to in sub-section (1) shall be utilized only for payment of self-assessed output tax as per the return referred to in the said sub-section.

The words that are highlighted above have to be emphasized with a combined reading of Sec.16 and Sec.17.

Section 17 has the restrictions which enables us to conclude whether a transaction is eligible for taking credit or not.

And

Section 16 has the conditions after fulfilling which only we will be able to avail the credit.

Cenvat Credit Rules,2004

Rule 4 Conditions for Allowing Cenvat credit,

“(7) The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received:

Provided that in respect of input service where whole or part of the service tax is liable to be paid by the recipient of service, credit of service tax payable by the service recipient shall be allowed after such service tax is paid.

Provided further that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9 is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service, except an amount equal to the CENVAT credit of the tax that is paid by the manufacturer or the service provider as recipient of service, and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules28”

Discussion: -

 As per the earlier Cenvat credit rules the service tax that is paid under reverser charge mechanism are available to take credit only after the payment of the same to the exchequer. Given below example for understanding.

S. No	Month	Output tax liability	Liability under RCM	Total Liability	CENVAT Credit				Net Cash Payment to Exchequer
					Opening balance	Availed during the month	Utilized during the month for Output liability	Closing balance
1	Apr-18	100	30	130	0	0	0	0	130
2	May-18	200	40	240	0	30	30	0	210
3	Jun-18	300	50	350	0	40	40	0	310
4	Jul-18	400	70	470	0	50	50	0	420

However, In GST regime, it is understood from Section 41 that the credit on account of tax paid under reverse charge is available in the same month. Given below example for understanding.

S. No	Month	Output tax liability	Liability under RCM	Total Liability	Input Tax Credit				Net Cash Payment to Exchequer
					Opening balance	Availed during the month	Utilized during the month for Output liability	Closing balance
1	Apr-18	100	30	130	0	30	30	0	100
2	May-18	200	40	240	0	40	40	0	200
3	Jun-18	300	50	350	0	50	50	0	300
4	Jul-18	400	70	470	0	70	70	0	400

The intent of the law may not be the same as it gives following other implications.

1. For a tax payer who has always output liability than his input tax credit will now pay only the cash towards his output liability and for him the reverse charge liability will not make any difference since the credit is available in the same month and utilized for the output liability.
2. Since net tax payable is actually equal to output tax liability only, tax payer does not need to disclose any reverse charge related transactions. This will be acceptable in the higher court of law as it is a revenue neutral situation and there is no loss of revenue.

The intent of the law may not be the same.

Grounds for arguments in favor of revenue: -

As per CENVAT Credit Rule 4 (7), 2^nd proviso it is emphasized that if the invoice is not paid to the service provider within 3 months then the CENVAT has to be reversed along with interest and the same is available once the remittance is done. However, the proviso exclusively eliminates the scenario where the payment to service provider is not made for the services for which the tax is paid by recipient.  This rule is due to the tax on output services are payable based on point of taxation basis and hence the service provider would have already remitted the tax to exchequer on the due date as per the law. To ensure the service provider getting the tax which he has remitted on due date, a time limit of 3 months has been imposed by which the service receiver will pay tax to service provider.

In case of reverse charge mechanism, the tax is paid by recipient to the exchequer on the respective due dates. And credit of the same has been taken only after making the payment to exchequer. Service provider is not liable to pay any tax to Indian exchequer. And hence paying the value of service to service provider who is not liable under the Finance act will not have any impact on the credit that has been availed by recipient. And hence the same is eliminated based on the fact that the tax has already been paid by recipient.

Now, if we go through the same scenario in GST also, 2^nd Proviso to section 16 (1) clause (d) emphasizes the same, except the time period being mentioned as 180 days instead of 3 months. Hence the intention to eliminate the credit on account of RCM is that the credit is given based on the payment of the same.

Conclusion: -

Based on the above discussion and grounds it’s imperative that the credit, which is on account of RCM will be available only after payment. Precisely, the reverse charge liability admitted for a month April and filed the return by 20th of following month say May. the credit on account of RCM will be available only in the month of May while filing the return for the month of May on 20^th of June as part of 3B.