Multiple registrations all over India on account of singular RCM provision (i.e. renting of residential dwelling Services) and Time to revisit tax compliance strategy:

[Amit Agrawal]

Vide Notification No. 05/2022-Central Tax (Rate) dated 13.07.2022, Notification No. 13/2017- Central Tax (Rate) was amended where entry at serial number 5AA was added. Resultantly, with effect from 18.07.2022, any registered person is made liable to pay GST under Reverse charge mechanism (i.e. RCM) basis against receipt of ‘Service by way of renting of residential dwelling to a registered person’.

Now, it is very regular feature for many businesses to have factory, warehouse, registered office etc. in one state but supplies its goods / services all over India. Under GST, many of these businesses have taken only one GST registration in the state / UT where factory, warehouse, registered office etc. is physically located (hereinafter called as ‘Main Location’).

However, in order to reach its targeted customers spread all over India and / or to support various business activities of main-location, these businesses also have mini-offices (hereinafter call as ‘Sales-Office/s’) spread all over India. And, many of these sales-offices (especially for medium-scale business/es) are located in ‘residential premises’ and operated by minimum manpower stationed in these locations in close co-coordination, support and supervision of Main location.

As these sales-offices do not supply any goods / services to third parties / end-customers (as same are always done by main-location), majority of businesses have not taken any GST registration for these sales-office/s location all over India.

Now, question is whether main-location is liable to pay GST under RCM basis in view of the fact that these sales-offices are located in residential-dwellings taken on rent. And if yes, whether main-location needs to take multiple registrations in those states / UT where sales-office are physically located.

Basic argument against a liability to pay GST under RCM basis against subject transaction under discussion is that main-location is not registered under GST in the state where these sales-offices are located. Hence, it is argued that subject services are received by “unregistered person”. And consequently, it is felt that subject amendment via Notification No. 05/2022-Central Tax (Rate) dated 13.07.2022 does not come into play at all for these unregistered persons. And thereby, once there is no liability to pay GST under RCM, Section 24 (iii) read with Section 25 of the CGST Act, 2017 will not come into consideration at all for the main-location.

We believe that above arguments are conceptually faulty as well as self-defeating. And our reasoning/s for the same are as follows:

1.  First, argument/s to support non-taking registration of these sales-offices in states where they are located u/s 22 (1) of the CGST Act, 2017 are as follows: 

1.  Said Section 22 (1) compels a tax-payer (who is registered or liable to be registered in one state) to take registration in the other State or Union territory only if he makes a taxable supply of goods or services or both from those other states or UT.
2. Employees stationed at these sales-office locations are providing their services to their employer and same is not taxable under GST. 
3. These Sales-offices are not making any taxable supply to anyone as these sales-offices are mere extension of main-location.
4. Explanation 1 & 2 given under Section 8 of the IGST Act, 2017 makes it very clear that that sales-office/s & main-location are distinct persons. But, without any supply between these places, deemed supply as per Serial No. 2 of Schedule – I under CGST Act, 2017 does not come into picture.
5. Hence, main-location need not take separate registration in those states where these sales-offices are located.

 

   1.1  Let’s presume – for the time being – that based on above arguments, these sales-offices were not required to take registration u/s 22 (1) in those states where they are located.

2.       Now, taking above arguments are taken as face-value, the question arises is what is status of these sales-offices in scheme of things under GST. In this context, following provisions of law are worth noting:

i)       In terms of Section 2 (85) of the CGST Act, “place of business” includes a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both. Place of business also includes a place where a taxable person is engaged in business through an agent, by whatever name called;

ii)      Section 2 (50) states that “fixed establishment” means a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs

iii)     Section 2 (70) (b) states that “location of the recipient of services” means,– where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

iv)      As per Section 2 (94), “registered person” means a person who is registered under section 25 but does not include a person having a Unique Identity Number.

v)       Needless to say that 'Place of Supply' for subject transaction under discussion is always 'place where immovable property is located' in terms of Section 12 & 13 of the IGST Act, 2017.

3.       From facts shared earlier, it is clear that said person is registered in the State / UT where main-location is situated. So, it is a fact that said person is 'registered person'.

3.1     Now, the next question is who is actual "recipient" of subject services by way of renting of residential dwelling and whether said recipient is 'registered person' or not?

3.2     These 'Sales Offices' are 'Place of business' and 'Fixed Establishment' as per respective definitions given in Section 2 for the main-location.

3.3     Only justification for not taking registration u/s 22 for these 'Sales Office' located in different states could be that employees working there are as “employees of main-location”, there is no supply of any goods / services from these locations to the main-location and thereby, whatever services received at the location of these 'Sales Office' are not received by the 'Sales Office' per se but by the main-location. In other words, these 'Sales offices' are just an extension of main-location and have no separate identity per se.

3.4     Consequent to above justification, this becomes clear that main-location is paying the subject rent as the recipient of services by way of renting of residential dwelling/s. And in terms of Section 2 (70) (b) of the CGST Act, 2017 read with Section 12 & 13 of the IGST Act, 2017, it has received subject supply at a place (and thereby, state / UT) other than the place of business for which registration has been obtained (a fixed establishment elsewhere).

3.5     Thus, "recipient" of services by way of renting of residential dwelling is the main location and such recipient is indeed registered under GST. Status of said main-location as 'unregistered' in those states (where Sales offices are located) does NOT alter status of said recipient from 'registered' to 'unregistered'.

3.6     Hence, main-location is indeed liable to pay GST under RCM basis against services by way of renting of residential dwelling in view of recent amendments. However, it is also a fact that locations of these sales-offices are currently unregistered.

3.7     As per Section 25 (4), "A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.  Similarly, As per Section 25 (5), "Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act."

3.7.1  Thus, status of main-location & their sales-office changing from "same persons" to 'distinct persons' - on deeming basis - happens only after said tax-payer is required to obtain separate registrations for these sales-offices and not till to the requirement of obtaining more than one registration arose.

3.8     In terms of Section 9 (3) of the CGST Act, all the provisions of this Act shall apply to such main-location as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

3.9     And hence, in terms of Section 24 (iii), Section 25 (1) read with Section 9(3), the main-location is liable to get itself compulsorily registered now where these sales-offices are located.

4.0     Now, let’s evaluate the basic argument to support non-liability to pay GST under RCM where its is argued that 'these sales-offices’ are "unregistered persons" who are distinct from main-location as per Explanation – I & II under Section 8 of the IGST Act, 2017 and thereby, subject RCM provision does not apply'.

4.1     In other words, these arguments claim that these unregistered sales-offices are recipient of subject services GST and not the registered main location .

4.2     Subject expenses are incurred in course or furtherance of business by “the business-entity as a whole”. These are not personal consumption / welfare expenses incurred by these sales-offices with no intention of any outward supply. Hence, it is not possible to claim that these sales-offices – being distinct person - are not providing some or other taxable service to the main location. And, deemed supply provisions of Serial No. 2 of Schedule – I under CGST Act, 2017 will come into play even if it is argued that there is no consideration. Consequently, such argument will also mean that these sales-offices are supplying taxable services (in nature of sale / marketing & support OR infrastructural support OR just say, services by way of renting of residential dwelling etc.) to the main-location.

4.3     Consequently, this itself will make sales-office liable to be registered u/s 22 (1) in those states where they are located and this will be applicable since the day when these offices were started.

4.4     Moreover, all this will also mean that these sales-offices were already liable to be registered u/s 22 (1) since their existence and they are also liable to pay GST under RCM w.e.f. 18.07.2022 on the subject transaction under discussion.

4.5     In other words, arguments listed in Para 4 above are self-defeating one for the tax-payer in our view.

5.0     Now, let us deal with at-together new argument that even if it is held that main-location is recipient of subject services under discussion and thereby, liable to pay GST under RCM basis, it is a fact that main-location cannot discharge liability under RCM from its existing registration and thereby, there is no mechanism to discharge liability and hence, levy fails.

5.1     While it is true that interpretation of charging provisions needs to be strict, but also true that court gives wider amplitude while interpreting supporting provisions under same law to make charging provisions work. Supporting legal provisions – existing in same law - are read and interpreted by Courts constructively in a harmonized manner to make charging provisions (i.e. levy) “work” (instead of “fail”).

5.2     Once it is admitted that main-location is recipient of subject services under discussion and thereby, liable to pay GST under RCM basis on the subject transactions, one cannot dispute charging provisions themselves (i.e. liability to pay taxes under RCM on the subject transaction). And Section 9 (3) read with 24 (iii) & Section 25 of the CGST Act, 2017 (plus other provisions, some of which are listed at various places above) gives enough room for Courts, in our view, to deny the challenge to subject levy on the ground that there is no mechanism to pay subject liability under RCM.

6.0     Lastly, we wish to draw attention is various presumption made in Para 1.1 above. From above discussion, it is clear that these sales-offices are required to take registration in states of their location one way or other. Hence, it is important to re-visit such presumption & GST compliance strategy going forward.

6.1     This is more so because at-least w.e.f. 18.07.2022 onwards, these sales-offices are anyway become distinct person as explained in above Para 3.7 & 3.7.1.

6.2     And this will further mean that these sales-offices are supplying taxable services (in nature of sale / marketing & support OR infrastructural support OR just say, services by way of renting of residential dwelling etc.) to the main-location at-least since 18.07.2022. Furthermore, these questions may become more complicated once we add more facts to the mix such as ‘employees stationed at these sales-offices are using some goods like stationery / computers / furniture etc. while performing their duties as employees at those locations’. And thereby, one need to re-evaluate his GST compliance strategy about potential liable to pay GST against taxable supplies by these sales-locations to main-location and take holistic call going forward.

Note for caution and the way forward:

Lastly, we are very sure that there will be different interpretations on various aspects of law touched by this article or otherwise and some will not agree with our views. Moreover, GST law is in its nascent stage where we do not have even tribunal despite five years passing and evolution of various provisions of gst laws - through higher court’s interpretation - is just started. These are complex matters involving too many legal variables and probably, they will take much longer time – than anyone likes - when same can be seen as settled one way or other.

Hence, after passing of five years of GST, we believe that everyone needs to re-evaluate its entire tax compliance strategy and see where risks can be minimized, more specially when choice is merely some increase in cost of compliance as opposed to potentially some substantial losses and / or multiple cases of litigations.

And these issues cannot have “universal best solution/s” which can be applied equally for everyone. But, best / optimum legal strategy going forward will be dependent on considering multiple factors on case-to-case basis including nature of business involved, whether any exempt supplies are involved & potential loss of ITC there-against, other surrounding factual aspects relevant for decision-making, risk appetite of management, analysis of “risks, costs and benefits” in each of multiple possible legal solutions, level of conviction in legal arguments to defend existing compliance strategy via planned new strategy going forward and so on.

So, we need to keep refining the legal & tax-compliance strategy as and when better clarity emerges on various legal issues involved as we move forward.

Thank you very much for your time!

Regards,

Amit Agrawal

Handphone: 9850551033

Email: [email protected]