APPLICABILITY OF REVERSE CHARGE MECHANISM TO UNREGISTERED PERSON

[Mr. M. GOVINDARAJAN]

Levy of tax

Section 9 of the Central Good and Services Tax Act, 2017 (‘Act’ for short) provides for the levy of goods and services tax (‘tax’ for short).    Section 9(1) provides that there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

Reverse charge mechanism

Section 2(98) of the Act  defines the expression ‘reverse charge’ as the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act.

Section 9(3) provides that 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.

Section 9(4) provides that 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.

Section 5(4) of Integrated Goods and Services Tax Act, 2017 provides that the integrated 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.

Section 9(4) of CGST Act and section 5(4) of IGST Act clearly provides that the central tax, as the case may be, the integrated 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 the recipient who is a registered person shall be paid such person on reverse charge basis as the recipient.  From the above said provisions it can be inferred that if any supply of goods or services provide d by a unregistered person to a unregistered person then such recipient who is also unregistered is not liable to pay tax on reverse charge basis.

Registration

Section 22 of the Act provides for registration of a supplier under the Act provided his turnover has not exceeded the threshold of ₹ 20 lakhs or 10 lakhs from any special category of States.

Section 24 of the Act provides that notwithstanding anything contained in section 22, for compulsory registration under this Act by certain categories persons.  Section 24(iii) provides that the persons who are required to pay tax under reverse charge is required to be registered compulsory despite they are not liable for levy of any tax or they have not crossed the threshold limit.  The threshold limit is not applicable to the person who is to pay tax under reverse charge mechanism.  He is compulsorily to register with the Department.

According to section 9(4) of CGST Act and 5(4) of IGST Act the recipient of supply of goods or services or both who is an unregistered person and received the supply of goods or services or both from an unregistered person is not required to collect tax.   Once an unregistered person, as a recipient, is not required to pay service tax under reverse charge mechanism he is also not required to register under the Act.

Advance Ruling

 In re ‘Joint Plant Committee’ – 2018 (4) TMI 809 - AUTHORITY FOR ADVANCE RULING , WEST BENGAL the applicant is a nonprofit organization set up by the Central Government.  The applicant declares that it has not been registered under any of the repealed acts and wants a ruling on whether it is required to be registered under CGST/WBGST Act.    The functions of the applicant include management and operation of the Steel Development Fund and other funds accumulated under the Iron & Steel (Control) Order, 1956, study and analysis of and maintenance of comprehensive data base on market situation in the Iron & Steel Sector including fluctuation in market price, production, availability and the movement of material etc.,

The Authority found from the statement of the accounts for the year ending 31.03.2017 the main source of the applicant’s income is interest accrued on the deposits and on the loans provided from the Steel Development Fund.  A secondary source of income is consideration received from sale of journals and periodicals and from renting accommodation it its guest houses.  The aggregate turnover of the applicant exceeds the threshold limit of ₹ 20 lakhs by which the applicant is liable to be registered under the GST Act, provided it does not make exclusive supply of goods or services that are not liable to tax or wholly exempt from tax under the Act.

The Authority found that the following services rendered by the applicant are exempted from the liability of tax under the Act-

• Supply of journals and periodicals;
• Renting of guest house below of ₹ 1000/- per unit for accommodation;
• Interest income on deposits, loans and advances.

However, the applicant arised a question as to whether the applicable will be liable for registration under any clause of section 24 of the Act even if it not making any taxable supply.  It will be apparent from plain reading of section 24 that the question is relevant in the context of applicant only with respect to section 24(iii) of the Act when the person is required to pay tax under reverse charge.

Based on the information furnished and the material presented at the time of personal hearing, the Authority held that the applicant is engaged exclusively in supplying goods and services that are wholly exempt from tax and therefore not liable to be registered in according the provisions of section 24(1) of the Act.

The Authority gave the ruling as that the applicant is not required to be registered under the GST Act if he is not otherwise liable to pay tax under reverse charge under section 9(3) of the Act.