GST – Reverse Charge Mechanism (RCM)
Exemptions
Composition Scheme
By- CA GAGAN KEDIA
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Introduction:
As we say it, GROWTH is a synonym for change and CHANGE is the only constant factor in life. In order to cope up with this factor of change, one must constantly change themselves to climb up the ladder of growth and development.
Based on the same principle our Government has decided to change the present system of Indirect Taxation in our country. In order to avoid the multiple compliance burden on the industry, eliminate the nuisance of cascading effect of tax on tax and to remove the restrictions on seamless flow of credit, GST was the need of the hour. GST which targets to subsume a large number of Central & State taxes will require a lot of cooperation between all the states and between the industry at large with the Government of India.
GST is a destination based tax and is levied at each stage of supply chain. But the final consumption of tax or collection of tax by the government happens at the time of consumption of goods or services by the ultimate consumer.
GST like any other indirect tax will be collected from the supplierof goods/services at the time of supply (i.e. either inter-state orintra-state supply) but the same can be realised by the supplier from its customer by charging it separately in the invoice.
Need of the Hour:
We are standing at the juncture where GST is just about to be rolled out and yet we do not have clarity on many aspects. Such as“What will happen to the exemptions that were provided earlier?”or “Will there be Reverse Charge Mechanism under GST as well?” or “Whether the GST Compliance is required to be done by each and every registered persons or are there any composition scheme for small tax payers?”
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Let us discuss the provisions of Reverse Charge Mechanism,
Exemptions under GST & Composition Scheme under GST in details below:-
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REVERSE CHARGE MECHANISM OR ‘RCM’
Let us first understand the concept of RCM.
In general, the liability to pay GST to the Government (or any indirect tax for that matter) is on the person who is supplying the goods and/or services. That is, the person, who is having a sales / income, is liable to pay GST to the government. However, the supplier charges the tax amount in the invoice issued to its customers and collects the same.
Looking at this transaction from the buyer’s perspective; in general, the buyer is required to pay tax to its vendor (against a valid tax invoice issued by the vendor) and the vendor in turn has to deposit the tax to the government.
Now, in some cases, the Government feels that in a particular class of transaction, it would be better to collect or easier to collect the tax from the buyer directly, instead of asking the buyer to give tax to the vendor and then collect from the vendor.
For example: In case of services by an insurance agent to the insurance company; the total number of insurance agents in India will be far exceeding than the total number of Insurance Companies in India. Furthermore, it will be very difficult for the Government to regulate and control all the individual insurance agents (which happen to be comparatively less organised sector) as compared to regulating and controlling the insurance companies (which happen to be a comparatively more organised sector).
Thus, the need for RCM arises on a specific set of transactions involving a specific class of persons.
The concept of Reverse Charge already exists under the current Service Tax provisions. Presently, reverse charge on Goods was effective in limited cases involving ‘purchase tax’. However, under the GST regime,Reverse charge mechanism has been introduced for both Goods and Services. Therefore scope & collection of GST under reverse charge may increase tremendously.
Legal Provisions:
The legal provisions relating to reverse charge under GST are contained in section 9(3) & 9(4) of the CGST Act and section 5(3) & 5(4) of the IGST Act. Provisions under both the Acts are similar to each other.
Some important points regarding Reverse Charge:
i)Persons who are required to pay tax under reverse charge are compulsorily required to be registered under the Act, irrespective of the threshold limit exemption being available.
ii)Every registered taxable person shall have to electronically file all the GST Returns.
iii)Person liable to pay tax under RCM for GOODS - shall have to pay tax on the occasion of receiving goods or making payment to the vendor or 31st day of purchase bill date,whichever is earlier.
iv)Person liable to pay tax under RCM for SERVICES - shall have to pay tax on the occasion of making payment to the vendor or 61st day of inward bill date, whichever is earlier.
Important Point regarding RCM – Sec 9(4)
It is pertinent to note section 9(4) of the CGST Act,(a major drift from the present taxationsystem), which says that liability under reverse charge would also be applicable on all purchases of goods or services made from unregistered parties.
This provision will be applicable only if the buyer of goods / services is registered under GST for any other reason.
This provision may have massive impact as one may need to pay tax under reverse charge on almost all debit side items of Trading A/c or Profit & Loss A/c. except items not chargeable to GST such as Salaries.
For Example:
a)A person whose taxable turnover is greater that the prescribed threshold of INR 20 Lakhs is required to be registered under GST and pay taxes on the value of all the taxable supplies made by him.As per section 9(4), such person shall also be required to pay tax under RCM on all the purchases made from unregistered parties.
b)A person is registered under GST for paying tax only under RCM as per section 9(3), shall also be required to pay all taxes under 9(4), because he will be considered as a registered person.
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The list of services that will be under reverse charge as approved by the GST Council in its meeting held on 19th May 2017, is given below. The information is subject to further vetting by the government, during which the list may undergo some changes. The final list and the decisions of the GST Council will be given effect to through gazette notifications which shall have force of law.
Sl.No / Service / Provider
of service / % of GST payable by supplier / Recipient of Service / % of GST payable by any person other than supplier
1. / Taxable services provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non-assessee online recipient (OIDAR) / Any person who is located in a non-taxable territory / Nil / Any person located in the taxable territory other than non-assessee online recipient (Business Recipient) / 100%
2. / Services provided by a goods transport agency (GTA) in respect of transportation of goods by road / Goods Transport Agency (GTA) / Nil / (a) any factoryregistered under or governed by Factories Act, 1948 ;
(b) any societyregistered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India ;
(c) any co-operative societyestablished by or under any law ;
(d) any person registered under CGST / SGST/UTGST Act;
(e) any body corporateestablished by or under any Law ;
(f) any partnership firmwhether registered or not under any law, including association of persons &
(g) Casual taxable person. / 100%
3. / Services provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly / An individual advocate or firm of advocates / Nil / Any business entity. / 100%
4. / Services provided or agreed to be provided by an arbitral tribunal / An arbitral tribunal / Nil / Any business entity. / 100%
5. / Sponsorship services / Any person / Nil / Anybody corporate or partnership firm. / 100%
6. / Services provided or agreed to be provided by Government or local authorityexcluding,-
1)renting of immovable property, and
2)services specified below-
- services by the Department of Posts
- services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
- transport of goods or passengers.
8. / Services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate; / A director of a company or a body corporate / Nil / A company or a body corporate. / 100%
9. / Services provided or agreed to be provided by an insurance agent to any person carrying on insurance business / An insurance agent / Nil / Any person carrying on insurance business. / 100%
10. / Services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company / A recovery agent / Nil / A banking company or a financial institution or a non-banking financial company. / 100%
11. / Services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India / A person located in non-taxable territory to a person located in non-taxable territory / Nil / Importer as defined under clause (26) of section 2 of the Customs Act, 1962. / 100%
17. / Transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works / Author or music composer, photographer, artist, etc / NIL / Publisher, Music company, Producer / 100%
18 / Radio taxi or Passenger Transport Services provided through electronic commerce operator / Taxi driver or Rent a cab operator / Nil / Any person / 100% by Electronic Commerce Operator
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EXEMPTIONS UNDER GST
Introduction:
Tax Exemptions are the privileges or freebie provided by the Government from the taxes levied by it, in the common interest of the public at large. Keeping in mind the level of importance or the meritorious nature, the government may exempt a particular class of goods or services from the levy of GST. For Example: the government has exempted certain food grains and other basic necessity items from levy of GST by placing them in the NIL rate category in the rate basket. Similarly the government has also exempted certain service like basic education and health care services.
Another interesting aspect regarding ‘exemption’ is that with the intention of developing a certain backward area, the government comes up with area-based exemptions. However, sometimes, such exemptions lead to an economic distortion. It is anticipated that under GST, such exemptions could be converted to refund schemes wherein units would be first required to deposit the tax.....
....and subsequently claim a refund. Commercially, such changes can have a significant impact on the overall business decisions.
Legal Provision:
Exemption under GST is governed by section 11 of the CGST Act and section 6 of the IGST Act.
As per the above section, when the Government feels that in view of public interest exemption from taxes are required, it may (on recommendation of the council) grant either whole exemption or partial exemption, either absolutely or with some conditions, from current date or from a future date. The same is explained below:
Contd...
Under GST, the list of items enjoying exemption is likely to be pruned. Exemptions under GST are expected to be extended predominantly to the ‘merit’ goods.
Suggestive List ofBroad CategoryGOODStaxable under NIL RATE:
Live animals other than horses; Meat, fish & Edible meat offal in unfrozen state; Food grains, certain dairy produce like fresh milk, pasteurised milk etc. not containing added sugar or sweetener, eggs, curd, lassi, chena or unpacked paneer, unbranded natural honey; fresh vegetables, fruits, trees & plants; unroasted coffee beans, unprocessed green leaves of tea, fresh ginger & turmeric; looses unbranded cereals,atta, besan, maida, vegetable oil, betel leaves, puffed rice, papad, bread except pizza bread; prasad;water except treated water; certain aquatic, poultry & cattle feed; common salt;human blood & contraceptive;unbranded organic manure; kumkum, bindi, sindur, alta; platic bangles, lac; firewood or fuel charcoal; stamp papers; printed books except children’s drawing books; handlooms; hearing aids; spacecraft and satellite; indigenous handmade musical instruments etc.
Exemptions in SERVICES:
In relation to services, the GST Council has published a list (along with the GST rates on services) containing 83 items of exemption on services. This list is predominantly a list similar to the items of existing negative list & existing Mega exemption list of Service Tax with some minor changes like exemption related to construction services in connect with road, bridge or tunnel has been removed.
The abovementioned list of exempted services is annexed to this article as Annexure – 1.
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Exemption from Registration:
As specified in Section 22 of the CGST Act, the exemption limit for a supplier to be registered under the act is as under:-
For Special Category States :
Rs.10 Lakhs of aggregate turnover in a F.Y.
For the Rest of India:
Rs.20 Lakhs of aggregate turnover in a F.Y.
The exemption limit is applicable only when supply (sale) is made within the state. Any supply outside the state will attract registration provisions.
The term ‘aggregate turnover’is defined in section 2(6) of CGST Act as – the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable 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.
Other cases where the exemption limits are not applicable and registration under GST is mandatoryare:
- Person making any inter-state taxable supply (i.e. selling outside the state)
- Casual Taxable person
- Person who required to pay underReverse Charge
- Non-resident taxable person
- A person required to deduct tax (e.g. e-commerce business – marketplace).
- The person supplying goods or services or both as an agent of any other person.
- Input Service Distributor
- A person who supplies goods or services through e-commerce.
- Every e-commerce operator
- An aggregator who supplies services under his brand name.
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COMPOSITION SCHEME
Introduction:
There would always be a section of taxpayers who would find it difficult to completely fulfill the compliance requirement of all the Indirect tax laws, may be due to their small size or nature of their operations. From the view point of all those small tax collectors, the cost of the process of collecting tax from their customers is far more in percentage terms than the tax collected from them.
Composition Scheme is a feature of Indirect Tax Laws in the present laws as wellas in GST. The scheme is in order to provide certain comfort to the small traders and small scale industries who find it difficult to maintain detailed records for their sales, purchases, stock-in –hand etc.
As per this scheme the assessee is made free from the requirement of maintaining complete details of its inputs & outputs and permits the assessee to make payment of a single put together amount known as ‘composite fees’.
Legal Provisions
Section 10 of the CGST Act, 2017provides an option of availing the benefit of Composition levy.The said section provides for an option to the ‘ Registered person’ whose ‘aggregate turnover’during preceding financial year does not exceed fifty lakhs rupees to discharge its GST liability on a composite or nominal rate. The definition of Aggregate Turnover as per section 2(6) of CGST Act, has been defined above.
Rates of Composition
The exact rates of composition are yet to be prescribed, however the maximum rates are classified under three categories:
Manufacturer / Trader / Restaurants1% CGST / 0.5% CGST / 2.5% CGST
1% SGST / 0.5% SGST / 2.5% SGST
Total 2% / Total 1% / Total 5%
Who cannot avail Composition Scheme
The Composition scheme cannot be availed by the following categories of persons:
a)A service provider, other than service by way of supply of food (as laid down in clause (b) of para 6 of Schedule II of CGST Act.
b)Person engaged in making any supply of goods which are not leviable to tax under GST Laws.
c)Person engaged in making any inter-State outward supplies of goods. The bar is only on making outward supplies while it is open for the supplier to procure inter-state supplies.
d)In case of sales made through e-commerce platform, composition scheme cannot be availed.
e)A manufacturer of such goods as may be notified by the Government on the recommendations of the Council.
Condition: The benefit of composition scheme will be available only when all the registered entities under a single Permanent Account Number opt for such scheme.
Compliance Requirements under Composition Scheme:
The persons paying tax under composition scheme are required to:-
- Pay tax on quarterly basis ;
- File quarterly returns in Form GSTR-4 by the 18th of the month following the end of the quarter, instead of any statement of outward or inward supplies.
- The proper officer may cancel the registration where the said person has not furnished returns for three consecutive tax periods.
Important points to note for Composite Dealer:
The person registered under composition scheme is neither permitted to collect any tax from the recipient of supplies made by him nor can he avail any credit of input tax paid.
The option availed by a registered person shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds fifty lakh rupees.
The option exercised by registered person to pay tax under composition scheme shall remain valid so long as he satisfies all the conditions. Registered person can withdraw from composition scheme at his option by filing an application.
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