FEBRUARY 13, 2023

By CA Anuj Kakkar

Introduction

UNION Budget 2023-24 has proposed to amend section 23 of the Central Goods and Services Tax Act, 2017 (CGST Act) retrospectively with effect from 01.07.2017. The proposed amendment will override section 22(1) and section 24 of the CGST Act.

Section 23 of CGST Act provides for cases where a person is not liable to obtain registration whereas section 24 provides for cases where a person is mandatorily required to obtain registration under GST.

Post the amendment, section 23 of CGST Act would provide that notwithstanding anything in section 24 of CGST Act, a person engaged (a) exclusively in the business of supplying exempt goods or services; or (b) an agriculturist, to the extent of supply of produce out of cultivation of land, shall not be liable to registration under GST. On the other hand, section 24(iii) of CGST Act provides that the person who is required to pay GST under reverse charge shall be required to be registered under GST.

The trade is seeking to know as to whether a person dealing in exclusively exempt supplies would still be liable to pay GST considering that he is required to take registration in terms of section 24(iii) of the CGST Act. The question arises as the amended section 23 of the CGST Act (which waives the registration requirement for a person making exempt supplies) overrides section 24 of CGST Act which requires a person to mandatorily obtain registration if he is required to pay GST under reverse charge.

Statutory provisions

Section 9(3) of the CGST Act provides that tax shall be paid on a reverse charge basis by the recipient of specified goods or services and all the provisions of the Act shall apply to such recipient. The expression 'recipient' is defined under section 2(93) of the CGST Act as (a) a person who is liable to pay consideration and (b) in cases no consideration is payable, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available or services are rendered. A person is defined under section 2(84) of the CGST Act to include individual, HUF, Company, LLP etc. and every other artificial juridical person.

Levy of reverse charge is not dependent on the registration status 

A reading of section 9(3) of the CGST Act shows that the levy that is triggered for reverse charge is supply of notified goods or services to a recipient. The charging section nowhere provides registration status of the recipient as criteria to pay tax under reverse charge (except section 9(4) of CGST Act). The notification issued under the said section 9(3) of the CGST Act provides for cases where tax is to be paid under reverse charge by various recipients such as body corporate, business entity, promoter, etc. (e.g., legal services, renting of motor vehicle, services provided by the director, etc.). This clearly shows that the levy is independent of the registration status of the recipient.  

Say, Company X is dealing exclusively in exempt goods and engages a law firm for legal services. As per the notification, any business entity located in the taxable territory is required to pay GST under reverse charge on services provided by a firm of advocates by way of legal services, directly or indirectly. In this case, the levy is triggered as Company X is a business entity and it will be required to pay GST under reverse charge. The registration status of Company X is not relevant for deciding the levy of tax under reverse charge.

Recipient steps into the shoes of the supplier

Another important aspect that needs consideration is that section 9(3) of CGST Act provides that "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 such supply of goods or services or both".  The recipient of supply steps into the shoes of the supplier. In the author's view, a person receiving taxable goods or services under reverse charge cannot be said to be engaged exclusively in the supply of exempt goods or services as he steps into the shoes of the supplier of making taxable supplies under reverse charge.

In the above example, Company X steps into the shoes of the law firm and qua the legal services is making taxable supplies. It cannot be said that Company X is exclusively making exempt supplies as legal services are taxable supplies and thus, the exception carved under section 23 of CGST Act would not apply.

Conclusion 

In light of the above, a person exclusively engaged in exempt supplies is required to obtain registration under GST if he is required to pay GST under reverse charge. The registration under GST is to be obtained to comply with the requirement to discharge GST under reverse charge and not the other way around. An exception created by the Statute to not obtain registration would not  ipso facto  create an exception to the levy  per se . Till such time that the Government prescribes a manner of payment of GST under reverse charge without obtaining registration, a recipient who is liable to pay GST under reverse charge will be required to obtain registration irrespective of the nature of supplies made by the person, whether taxable or exempt. 

[The views expressed are strictly personal.]