Reverse charge on Residential Dwelling, Goods and Services Tax - GST

[Madhavan iyengar]

Dear Sirs

Companies / Persons have GST Regn in the State where factory and Corporate Regd Office is situated and they effect their supplies.

In addition to above they have Sales offices in Different states where there is effectively no supplies taking place. Hence they have not obtained GST Regn in those States

as a result of this new RCM Notification (05/22 dtd 13/07/2022) if they have sales office in Residential Premises in other states will they be liable to pay RCM, will the Section 24 compulsory Regn have any impact

Section 24. Compulsory registration in certain cases.-

Notwithstanding anything contained in sub-section (1) of section 22 , the following categories of persons shall be required to be registered under this Act,-

(iii) persons who are required to pay tax under reverse charge;

Experts kindly give your views

Posts / Replies

[KASTURI SETHI]

Dear Madhavan Iyengar Ji,

In terms of Section 2(85) (b) of CGST Act, sales office is a place of business. It is an integral part of commercial activity. Hence registration is required for the purpose mentioned in your query.

[Amit Agrawal]

Section 25 (5) states as follows: 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.

Section 2 (50) states as follows: “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

Section 2 (70) (b) states as follows: “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;

Whats follows from above is that even if there is no supply from Co's sales office in different states as said in your query (& this proposition itself is disputable under current GST law and one needs to re-evaluate its entire gst compliance strategy), you need to get registration in those states due to mandatory requirements of registration u/s 24 (iii) read with Section 25.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Madhavan iyengar]

thanks kasturiji and Amit Agarwal for your valuable views to take discussion further can following points also be brought to surface to carry the discussion further

Section 22. Persons liable for registration.-

(1) Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees:

From above can we not infer that for purpose of GST regn in state it is necessary to make a taxable supply of goods or services or both if this is not satisfied then will registration not be required as there is no taxable supply being made

Now coming to the point for discharge of RCM by a Company ( in respect of a sales office in a residential dwelling in a state where no registration has been taken)

Let us analyse the RCM notification which states that a residential dwelling when rented out to a Registered Person then Registered Person is required to discharge RCM

Now if a person is not Registered in a State why should RCM apply as the notification needs to be interpreted in strict manner what it states that is supply is to be made to a Registered Person hence how can we impute a meaning that he has to take a registration in the state and then pay the RCM as we need to see the position at the time of transaction when the recipient was a unregd person so it is not supply to a Regd person consequently RCM should not apply.

[Amit Agrawal]

Dear Shri Madhavan Iyengar Ji,

W.r.t. your last post, my views are as under:

This is with the factual background that these 'Sales Offices' (located in different state/s) are not yet registered under GST.

And & for this post, I am ignoring the question whether such 'Sales Offices' were required to be registered u/s 22 or not (though this is one of most controversial issues under GST i.e. whether such 'Sales Offices' are supplying services in nature of 'sales / marketing services or support' to the factory and, thereby, registration u/s 22 becomes compulsory?)

A. 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.

B. From the original query, it is clear that said Co. is registered in the in the State where factory is situated. So, said Co. is 'registered person'.

C. 'Place of Supply' for subject transaction under discussion is always 'place where immovable property is located'.

D. Now, the basis question is who is "recipient" of services by way of renting of residential dwelling and whether said recipient is 'registered person' or not?

E. These 'Sales Offices' are 'Place of business' and 'Fixed Establishment' as per respective definitions given in Section 2.

F. Only justification for not taking registration u/s 22 for these 'Sales Office' (i.e. for justifying non-supply of services in nature of sales / marketing services or support' to the factory of the Co.) could be that employees working there are as employees of factory / Co., there is no supply of any services from these locations to the factory and thereby, whatever services received at the location of these 'Sales Office' are NOT received by the 'Sales Office' per se but by the factory of the Co. In other words, these 'Sales offices' are just an extension of factory and have no separate identity per se.

G. As Co. is paying the subject rent, it is the recipient of service. And in terms of Section 2 (70) (b), said Co. has received a supply at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere).

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

I. Hence, 'factory' is indeed liable to pay GST under RCM basis against services by way of renting of residential dwelling. However, it is also a fact that location of these sales-office are currently unregistered.

J. 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."

K. Thus, status of 'factory' & their sales-office changing from from "same persons" to 'distinct persons' ONLY AFTER said Co. is required to obtain separate registrations for these sales-offices and NOT PRIOR to the requirement of obtaining more than one registration arises.

L. And, in terms of Section 24 (iii) read with Section 25 (1), Said co. is liable to get itself compulsorily registered now where these sales-offices are located. This is also to do the fact that current GST return / GST portal does not allow paying these taxes under RCM (when it is intra-state supply) from existing gst registration of factory / regd. office.

Now, coming to your post as serial No. 3 above. If we take the argument that 'these sales-offices are "unregistered persons" and thereby, subject RCM provisions does not apply', this also means that we are claiming that factory and these sales-offices are 'distinct persons' under GST (i.e. they separate entities on deeming basis for GST purpose). But, this can happen only if these sales-offices are supplying services (in nature of sale / marketing & support etc.) to the factory which in-turn makes them liable to be registered u/s 22 (1) in those states where they are located. And if so, these sales-offices are also liable to pay GST under RCM on the subject transaction under discussion.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Madhavan iyengar]

Amitji thanks for your detailed implications and insights given

i would like to lay down that

Sales offices are extended arm of HO but they are only manned by sales team which procures orders etc for HO. and sales team are compensated by way of salaries and there is employer employee relation there is no taxable service which they render to HO suppose sales team was sitting in HO itself then is there any implication no so same mirror image is sales team sitting in another state there is no any service rendered as such as these issues will be very important when it travels to the court yes i agree if there is any taxable supply being made from the sales office then gst regn is a must because we cant impute meaning into the law as courts will go into the provisions and when we can argue that in section itself it is mentioned that only if we make a taxable supply regn is required. and again coming back to rcm notn at time of transaction if sales office is not a regd person then rcm should not apply

even for a moment if we take the argument that HO in another state is the receipient then we cant pay the RCM as it is CGST/SGST of other state when there is no mechanism for the payment of tax should not the levy fail

[Amit Agrawal]

Dear Shri Madhavan Iyengar Ji,

I most respectfully disagree with your views though I fully understand from where you are coming from.

As reasons of controversies and for our difference of opinions are fairly known, let me add the following to sum up my reasons:

As I said before, the question about whether sales-office is providing any taxable services to factory / HO is one of most controversial issues in GST. And I myself explained - in earlier post - some of the grounds to argue why it is not. But, unless clarified by board / Superior courts, this is going to be very difficult to decide with 100% conviction.

Furthermore, when there will be any such disputes, there is good possibility that Dept. will come up with far more additional facts (which will be dependant on case to case basis) on record to back up their demand. Hence, in my first post itself, I said that entire gst compliances needs a review for tax-papers having such physical presence in different state/s on fairly permanant basis and there is no registration taken in those states.

Second, even if it is agreed that sales-office is not providing any sales / marketing etc. services to factory / HO as employees stationed there are providing their services to the employer, next question is whether these sales-office location/s are providing services in nature of infrastructural support OR even say, services by way of renting of residential dwelling etc. to HO / factory .. & so on as per additional facts as & when they come on record?

And if so, section 22 will come into play one way or other for these sale-office locations. This gets more complex if employees stationed at these sales-office are using some goods like stationery / computers / furniture etc. while performing their duties as employees at those locations.

Lastly, w.r.t. argument about non-availability of mechanism to pay taxes under RCM by HO / factory, Section 24 (iii) with Section 25 comes into play and same indeed gives mechanism to pay such liability under RCM.

And, any decision not to pay on account of challenging to levy on account of non-availability of mechanism can be fraught with risks. This is because Court/s generally give wider aptitude in such matters while interpretation of various provisions of law before finally agreeing to struck down any levy on such grounds. And I feel that court got many provisions in current law to struck down any such challenge.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Amit Agrawal]

Just to clarify about my last post: While it is true that court goes with strict interpretation for charging provisions, it is also true that same strict rule of interpretation does not apply while interpreting other supporting provisions - which are available under same law - to make charging provisions work.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Amit Agrawal]

Dear Readers,

Kindly also have a look at my article published on TMI (Article ID = 10589) bearing subject-line: 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:

Link: https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=10589

I also tried to cover aspects related to 'distinct person/s as per Explanation – I & II under Section 8 of the IGST Act, 2017' in the context of the subject matter under discussion here, in my article.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Ashwarya Agarwal]

Entry 5AA notifies applicability of reverse charge on "service by way of renting of residential dwelling by ANY person to a REGISTERED person"

Clause (94) of section 2 defines “registered person” means a person who is registered under section 25 but does not include a person having a Unique Identity Number;

Now the question which arises is that whether a person registered in one state, can be considered as registered person in another state also where he is not registered ??

Section 22 which provides for a person liable for registration is state specific. It cannot be generalized that a person registered in one state is to be considered as a registered dealer in all state. If that would have been the case than RCM would be applicable in all other expenses also like security, transportation, etc incurred in that state where he is un-registered.

In my humble opinion, if a person registered in one state has rented a residential dwelling in another state where he is not registered, the above mentioned entry will be not applicable for him in that state.

Further, clause (ii) of sec 24 requires compulsory registration for a person liable to pay tax under reverse charge. This clause is applicable in case where RCM is applicable and person is un-registered.

However entry 5AA will be applicable only if the person is already registered. It does not require a person to take registration for that.

[Amit Agrawal]

As per Section 1 (2), CGST Act, 2017 extends to the whole of India.

And 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.

So, a person has taken registration anywhere in India u/s 25 of the CGST Act, 2017, he remains 'registered person' as defined u/s 2 (94) - in my humble view - even in those other states / UT where he is not taken "separate" registration while receiving subject services under discussion here in in those other states / UT.

Of course, this is subject to presumption that said person was not "otherwise" required to take separate registration in those other states / UT u/s 22. This aspect as well as my understanding of Section 22 & 24 is covered briefly in my earlier posts here and more elaborately, in above-referred article of mine.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Amit Agrawal]

W.r.t. Ld. Shri Ashwarya Agarwal Ji's comment about '.... If that would have been the case than RCM would be applicable in all other expenses also like security, transportation, etc incurred in that state where he is un-registered.', my humble view is as follows:

If 'place of supply' of any others services (where-against taxes needs to be paid under RCM) is "state / UT where recipient is currently located" and "same are received at a place of business which is already registered" as per Section 2 (70) (a), then, he does not require to take "separate" registration in other states / UT for paying subject taxes under RCM.

Again, basic question about liability to get registered in those other state / UT u/s 22 is ignored for above views.

And the counter argument/s - on core issue under discussion here - will make concerned person anyway liable to get registered u/s 22 in those other states / UT and I tried to explain this conundrum in my article.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Rakesh Garg]

Residential Dwelling - RCM and Registration:

1. Sec 24(iii) is applicable if the person is liable to pay tax on RCM basis. The same provisions exist in the State GST Act. Thus, unless the person is not liable for RCM, Sec 24 will not be triggered.

2. By virtue of Sec 25(5) of the CGST Act (also sec 8 of the IGST Act) - Where a person who has obtained or is required to obtain registration in a State or UT 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. Thus, registration is state specific.

3. Unlike the Sl. No. 2 (Advocate) where every business entity (registered or unregistered) is liable to pay RCM and sec 24 triggered if the business entity is liable to pay RCM; entry no. 5AA casts responsibility only upon the "registered" person.

4. In the case of 5AA, since the person is already registered, sec 24 is not applicable

5. If a landlord enters into a rent agreement with Mumbai Registered Tenant for a property located in Delhi, 5AA is applicable and Mumbai Tenant will pay tax on RCM basis. [Suppose Delhi Office has no authority to enter into an agreement; or otherwise)

5. However, if the landlord enters into a rent agreement with Delhi Unregistered Tenant for a property located in Delhi, 5AA is not applicable as Delhi Tenant is not registered. Entry will be exempt under Sl. No. 12 of N. No. 12/2017-CTR.

6. Since 5AA is not applicable for Delhi establishment, Sec 24 would also be not applicable for the Delhi office.

7. Thus, in my view, parties to the agreement would be a decisive factor: if the rent agreement (or the rent receipt) is with a registered person, then 5AA is applicable; otherwise not.