Tax Laws Should Ensure Payment Of GST Under Reverse Charge

India has witnessed the historic indirect tax reform by implementation of GST on July 1, 2017. The GST Act is a reprised and improved version of its predecessor service tax which also incorporates several new provisions to address shortcomings of erstwhile provisions of VAT and excise laws. The GST Act requires the supplier to make payment of GST while supplying goods or services to recipients. However, in special situations, GST is payable by the recipient of the goods or services instead of the supplier. This mechanism is called "reverse charge".

The basic reason behind introduction of the mechanism of reverse charge is to control and check tax evasion in cases where the supplier operates in an unorganized sector or where collection of taxes through routine channels would be a challenging task, i.e. goods transport services.

Although provisions of reverse charge in case of supply from an unregistered suppler to a registered person have been deferred till March 2018, the government might bring about some amendment to the Income Tax Act to ensure that business entities pay the GST accurately and in time.

In Income Tax Act, there are provisions for disallowance of an expense on failure to comply with TDS provisions. These provisions require that tax has to be deducted at source at a given percentage while making certain payments, i.e. interest, royalty, fees for technical services, commission etc. If the payer either fails to deduct the tax or after deduction fails to deposit the tax, some portion of the expense is disallowed and the remaining portion of expense can be claimed as deduction. However, the disallowed portion of the expenses can be claimed as deduction by the payer after complying with the TDS provisions. These disciplinary provisions have been introduced under the Income Tax Act to control tax evasions, keep a check on tax evaders and to recover the taxes from the sources itself.

Under the GST Act, two types of supplies are subject to payment of tax under reverse charge. The first type of supply includes the services which are specifically notified by the government, inter-alia, goods transport services, IPR services, legal services, arbitration services etc. In the second category, which has been deferred till March 31, 2018, the registered GST suppliers are required to pay tax under reverse charge on the supplies received by them from persons who are not registered under GST.

The input tax credit (ITC) of GST so paid under reverse charge is allowed to the recipient of service when recipient pays the tax to the credit of the government from his or her electronic cash ledger. The taxable person can claim the deduction for the underlying expenditure under the Income Tax Act even if GST has not been paid under reverse charge. There are no provisions in the Income Tax Act regarding disallowance of such expenses due to non-payment of GST under reverse charge.

Since revenue from GST saw a sudden fall in month of October 2017 and November 2017 despite the festival season, the government might consider putting an additional check to ensure that business entities pay the GST accurately and in time. It is, therefore, expected that provisions similar to Section 40(a)(ia) might be introduced in the Income Tax Act to disallow a portion of the expense till GST is paid on that expense under reverse charge.

(Rakesh Bhargava is Director at Taxmann)

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