AUGUST 14, 2017

By Bharat Bhushan & R K Hasija, Advocates

IT has been the endeavour of Government to collect tax revenue from all services but not from service providers in some categories. Goods Transport Agency Services and Legal Services are examples where tax is collected from the service receivers and service providers are not required to take out registration and follow the rigmarole of tax law. In the erstwhile service tax regime, when the Government wanted to levy service tax on Goods Transport Agency, it was advised by the Bhardwaj Committee to collect tax from service receivers (persons making payment of freight who are generally in organised sector) inasmuch as persons in the goods transport sector being unorganised are not generally literate enough to follow tax law. The idea to collect tax from service receivers in the case of GTA is well understood. But the principle applied to legal services is beyond comprehension inasmuch as it cannot be said that legal services sector is also an unorganised sector. The reason for keeping legal services under reverse charge mechanism is different albeit obvious as the Government does not want to meddle with Advocates.

The concept of reverse charge mechanism has been carried over into GST law. However, the provisions relating to reverse charge mechanism under GST are giving sleepless nights to small level business men and Tax Consultants. Statutory provisions relating to it as also towards registration are contained in Section 9(3), 9(4), 22(1), 23 and Section 24 of CGST Act. The relevant portion of said Statutory Provisions is reproduced below for ready reference.

"9.Levy and collection. -

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(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.

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22.Persons liable for registration. -(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.

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23.Persons not liable for registration.-(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.

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

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

As per Section 9(4), a registered person is liable to pay tax on taxable supply of goods and/or services received from unregistered persons. As per Section 9(3), a recipient is liable to pay GST in respect of supply of notified goods and services. Section 22(1) says that person whose turnover in a financial year exceeds rupees twenty lakhs is liable for registration. However, Section 24 has an overriding effect on provisions contained in Section 22(1). As per Section 24(iii), persons liable to pay tax under reverse charge are required to be registered. Notification No. 13/2017-Central Tax (Rate) has been issued under Section 9(3) of the CGST Act, wherein various services are specified on which tax is payable under reverse charge. One such specified services is GTA Service provided by a Goods Transport Agency to the persons specified in the said notification. Partnership firm is one such category which is made liable to pay tax under reverse charge in respect of GTA service. If turnover of a partnership firm is below rupees twenty lakhs then, as per provisions contained in Section 22(1), such firm is not required to be registered. However, if such partnership firm receives services of GTA, then it is required to be compulsorily registered under Section 24. Since provisions contained in Section 24 have overriding effect on Section 22(1), such firms are required to be registered and even their initial threshold exemption of rupees twenty lakhs is lost. Needless to say once registered, tax has to be paid and threshold limit becomes meaningless.

But the real problem is in respect to such persons who are specifically exempted from registration under Section 23, but are liable to registration under Section 24. For example, a person dealing exclusively in exempted goods is specifically exempted from registration under Section 23 but is liable to pay GST on supply of services from GTA or legal services from Advocate. Similarly, agriculturist is specifically exempted from registration under Section 23, but liable for registration in respect of legal services received from an Advocate in respect of his agricultural land. One more example is of an Advocate firm receiving GTA service for shifting of its office.

Thus, there is an apparent conflict between the provisions contained in Section 23 and Section 24 of the CGST Act . Now, the question is which legal provision will prevail over the other. To answer this question we have to go through various rules and maxims of legal interpretation. One such maxim is ''generalibus special derogant", i.e., if a special provision is made on a certain subject, that subject is excluded from the general provision. The Hon'ble Supreme Court in K. M. Nanavati Vs . State of Bombay, AIR 1961 (SC) 112 held as under:-

"(e) If two sections are repugnant, the known rule is that the last must prevail : Wood v. Riley (1867-8) 3 C.P. 26 per Keating, J.

(7) The power given to the Governor in regard to pardons is a specific power specially conferred as was vested in the colonial and British Governors in Indian provinces during British days. The power given to the court under Art. 142(1) is a general power exercisable for doing complete justice in any cause or matter. If they, i.e., arts. 161 and 142(1) deal with the same subject matter as is contended then art. 161 must prevail over art. 142(1) which is in accord with the constitutional position as above discussed."

In the aforesaid judgment, the Hon'ble Supreme Court held that the provisions contained in Article 142 are general and provisions contained in Article 161 are specific. Therefore, Article 161 will prevail. However, the Hon'ble Supreme Court further held if both the provisions are repugnant, the known rule is that the last must prevail. In the instant discussion, Section 24 makes a general provision as per which the persons liable to pay tax on reverse charge basis are required to be registered. Whereas, Section 23 exempts specified categories from registration. Therefore, in view of the authors, provisions contained in Section 23 being specific will prevail. But then a question will arise as to who will pay taxes in such cases in the absence of any exemption. Therefore, in all likelihood, the revenue may entertain a different interpretation and result in litigation. Therefore, it is expected that the executive will take proactive steps to avoid unnecessary litigation.

While it is a boon for GTA/Advocates, it may be a bane for others.