JANUARY 14, 2019

By Dr G Gokul Kishore

SHIFTING the compliance burden from supplier to recipient is not new. The urge to adopt this route is also not new. The recent exercise to bring more recipients under the ambit of reverse charge and the beginning of sunset on the concept of one-nation-one-tax by approving calamity or disaster cess are discussed in this 20 th part.

Securing revenue through reverse charge

Reverse charge mechanism has been dutifully carried forward from the pre-GST regime to GST regime. It has, in fact, enlarged the ambit of such mechanism by including an omnibus provision in the form of Section 9(4) of CGST Act requiring suppliers to discharge tax and comply with law when supplies are received from unregistered persons, though the same has been kept in abeyance for now. From the days of GTO and Laghu Udyog Bharati - 2002-TIOL-162-SC-ST in service tax regime, the RCM regime went through phases like partial RCM, RCM based on status of service provider, etc. When the RCM notification under GST was issued, industry felt relieved to see that services like manpower agency and security agency are no more under RCM.

As per Notification No. 29/2018-Central Tax (Rate) [dated 31-12-2018 effective 1-1-2019] amending parent RCM Notification No. 13/2017-Central Tax (Rate) on services, security services i.e. providing security personnel by individuals, partnership firms, etc., (non body corporates), will be under reverse charge mechanism. The obvious reason could be the probable conclusion as to revenue leakage when such services are provided by persons other than body corporate. If this is the reason, then the likelihood of other services being brought under RCM in future whenever the tax administration perceives shortfall in revenue, is more. As a concept, RCM manifests certain weakness of the State insofar as its ability to ensure compliance by actual suppliers is concerned. But the same has parallel in income tax law also in the form of TDS and TCS and, therefore, it can be taken as tacit acceptance of this fact. Generally, governments and tax administrations also prefer easier options to enforce compliance and taking a subjective view may not take us forward.

We are more concerned about the dilemmas of such proprietorship and partnership firms which are registered under GST law now for security services. They do not have an option to continue under forward charge. It is very likely that the recipients will be reluctant to retain business with such persons. Section 18(4) of CGST Act requires paying back the amount availed as ITC in respect of inputs and inputs contained in semi-finished goods and finished goods when goods or services become wholly exempt. Whether such provision will get attracted when a service is brought under RCM may get clarified in favour of the department. These service providers may have to surrender registration (if they are not engaged in any other taxable supply), file final return, etc. To alleviate such pains, it will be worth considering whether RCM can be made optional in such cases. When partial RCM was possible in service tax regime which meant both provider and recipient were simultaneously liable, then optional RCM might well be doable. Let second year of GST be used to weigh such options and implement the same, wherever feasible.

One-nation-one tax - To be consigned to history

In the meeting held on 10-01-2019, GST Council has approved levy of cess upto 1% on intra-State supplies by Kerala for maximum period of two years. This cess comes after a few rounds of discussions on whether additional resources to be mobilized to fund reconstruction activities after major calamities or disasters can be through national level cess or at State-level and whether the same can be on select goods and services or on all goods and services. The question of period for which such additional levy would remain in force was also considered. There can be no second opinion on the severity of such disasters or the substantial quantum of funds required for reconstruction and rehabilitation.

Sourcing such funds by way of a top-up on GST by a State will lead to similar demands by other States which are or may be affected by similar natural calamities. It will be a major challenge for the GST Council to hold on to its consensus approach to all the decisions as these demands may be sometimes more of political in nature. Certain amendments could have been made to broaden the scope of compensation cess by including more items and such fund could have been used. One may argue that the same may not be sufficient for such purposes and compensation cess itself is to remain only for a specified period. Including petroleum products in the GST ambit by compelling States to agree to forego VAT, adding a compensation cess on petroleum products and increasing the total GST revenues could have been less controversial in the longer run. The present move of State-specific cess certainly dilutes the slogan or principle of one-nation-one-tax and that too within two years of implementation of GST.

The recent decision of the GST Council to double threshold limit for registration from Rs. 20 lakhs to Rs. 40 lakhs along with the discretion provided to States to either increase or retain such limit will now mean we will have different threshold limits in various States. Multiple levies like cesses in different States, multiple threshold limits, etc., will erode the basic principles of GST. As per amendments to CGST Act and SGST Acts, the option of obtaining separate registration for business vertical is being replaced by separate registration for every place of business. This means, within a State, a taxpayer can have multiple GST registrations for the same business. Deviating from the Act as originally enacted to this extent in such a short time may not be a cause of concern but certainly will be a point to pause and ponder. We hope second year is used for such exercise.

(…To be continued)

[The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are personal.]

See Part XIX