Reverses of Reverse Charge – Strategic thinking during GST transition

The reverse charge provisions have been there in the current service tax law for over a decade. Still these provisions are always difficult for entrepreneurs to comprehend, appreciate or follow. Sensing this attitude, the focus of the tax department officials nowadays is also is to identify transactions on which service tax was payable under reverse charge mechanism and not paid. And GST has taken these reverse charge provisions to an altogether new level.

Similar to the current service tax & VAT laws, the GST law also provides for tax to be paid under reverse charge on imports and other purchase of goods / services. The list of these other purchase of goods / services is yet to be notified, but is expected to be similar to the current list. However, the highlight of reverse charge provisions is taxability of purchases from unregistered persons. The GST law provides that receipt of any goods or services from any unregistered person will attract GST liability under reverse charge in the hands of the registered recipient.

Now the purpose of this article is about strategic thinking during the GST transition. We all know that generally, service tax paid under reverse charge is available as a credit for use in adjusting against output tax liability. Further, the credit can be taken only on the basis of and after we have a duty paying document – which in the given case is always a challan. Now let’s discuss a few case studies how this reverse charge can affect any corporate during the GST transition exercise.

Service tax reverse charge liability of June 2017, paid on July 6, 2017

The service tax provisions allow for payment of monthly service tax liability by 6th of the next month. Now assuming that GST is implemented on 1st of July 2017, it will be important to know that whether one can get credit of reverse charge service tax paid on July 6, 2017. Since the tax has been paid on July 6, 2017, its credit can also be availed only on or after July 6, 2017. Thus the credit cannot be availed in the service tax return for the period upto June 2017. Unfortunately, the transition provisions do not cover a scenario where service tax is paid post GST implementation; thereby mandating everyone to pay their June 2017 service tax reverse charge liability by June 30, 2017.

Reverse charge liability detected suo-moto / during service tax audit and paid later along with applicable interest / penalty

Interest and penalty is always a cost. But the grave concern of any company would be not getting credit of reverse charge tax. In absence of any provisions under GST, any tax paid under reverse charge post GST implementation will become a cost. So it will be advisable for every company to review the books of unaudited period to identify reverse charge liabilities and pay them before GST implementation. This will ensure them getting credit at-least of the tax amount.

Litigation on liability to pay service tax under reverse charge, decided against the company post GST 

The provisions of Section 142 of the CGST law are very much clear on this aspect. These provisions provide that if the litigation is decided against the assesse, the tax (reverse charge) will be recoverable and also not be eligible as credit. This makes imperative for every organization to reassess the status and chances of winning its current litigations. If the chances of winning such disputes are bleak or less than 50%, they may prefer to pay the tax along with interest / penalty before the GST appointed date. This safeguards the credit of the tax amount.

After reading between the lines of GST transitional provisions, it becomes vital for every organization to strategically plan for the impending GST transition. Not making prudent decisions on these matters can lead to significant financial setbacks in the initial days of GST.

By CA Mudit Goyal