HC upholds validity of provisions restricting ITC where supplies are taxed under RCM

This Tax Alert summarizes a recent judgement of the Delhi High Court (HC)^[1] dealing with the issue of denial of input tax credit (ITC) where supplies are taxed on reverse charge basis under both Service tax and Goods and Services Tax (GST).

Assessee is providing services of recovery agent to non-banking financial company (NBFC) and the said service is covered under RCM. Hence, ITC in the hands of the assessee is denied. 

HC observed that:

• Section 9(3) of the CGST Act and Section 5(3) of the IGST Act empowers the Central Government to specify categories of supply of goods or services on which tax shall be paid on reverse charge basis. Similar provisions were there under Finance Act, 1994. Hence, RCM notifications were issued with authority of law.
  
• The right to avail ITC is a statutory right. The same is available only if the statute provides for it and same will be available to the extent the statute permits. 
• All persons rendering services of a particular nature have been treated uniformly. It is not the case of petitioner that persons rendering services of a recovery agent to NBFC have been treated differently.
• It is well settled that Article 14 of the Constitution of India does not prohibit reasonable classification, which has the rational nexus to its object.
• Denying ITC to service providers, who are not liable to pay tax on output services, is founded on a rational basis which has a clear nexus with the classification. 

Accordingly, HC held that there is no merit in the challenge laid by the petitioner to the impugned RCM Notifications or the provisions of Section 17(3) of the CGST Act.  

Comments

• Reverse charge mechanism was brought to tackle the issue of non-payment of tax by small taxpayers and unorganized sector.
  
• While RCM notifications are held legally valid, the businesses whose services are covered under RCM may represent before the GST Council to move the levy to forward charge in case where the supplier is registered or a corporate entity,
• Alternatively, the Government may incorporate provisions to grant refund of ITC to the suppliers as was available in certain cases under Service tax.
• In 52nd GST Council meeting held on 7 October 2023, it had been suggested to move the supplies by Indian Railways from reverse charge to forward charge since ITC was becoming cost to Indian Railways. 

[1] TS-180-HCDEL-2024