GOODS & SERVICES TAX

RESEARCH PAPER

REVERSE CHARGE MECHANISM IN

GOVERNMENT SERVICES UNDER GST

B SRIVALLI SAILAJA

2023-1LLM-14

SEM-I LLM

NALSAR UNIVERSITY OF LAW, HYDERABAD

SUBMITTED TO:

PROF. NEHA PATHAKJI

1
 Table of Contents
INTRODUCTION..................................................................................................................3
1 AN OVERVIEW OF THE REVERSE CHARGE MECHANISM UNDER THE GST ACTS.............5
1.1 PROVISIONS FOR RCM UNDER THE GST ACTS.................................................................5
2 RCM IN GOVERNMENT SERVICES................................................................................6
2.1 MEANING OF GOVERNMENT..........................................................................................6
2.2 MEANING OF LOCAL AUTHORITY....................................................................................7
2.3 MEANING OF BUSINESS ENTITY......................................................................................9
2.4 APPLICABILITY OF RCM ON VARIOUS GOVERNMENT SERVICES.....................................10
3 CONCLUSION............................................................................................................13

2
INTRODUCTION
The Reverse Charge Mechanism (RCM) is a tax collection mechanism used in various
countries, including India, to shift the responsibility of paying taxes from the supplier of
goods or services to the recipient (buyer) of those goods or services. It is a concept
commonly employed in Value Added Tax (VAT) and Goods and Services Tax (GST) systems.
In a typical tax system, the supplier of goods or services collects the applicable tax from the
buyer and remits it to the government. However, under RCM, this responsibility is reversed,
and the liability to pay the tax is placed on the recipient. RCM is generally used in specific
situations or for particular categories of transactions.
Common scenarios where RCM is applicable include:
 When a registered business or individual receives supplies from unregistered
suppliers.
 In the case of certain specified services, such as services provided by a goods
transport agency (GTA), legal services, or certain government services.
 Import of services from foreign providers

In some tax systems, there may be threshold limits below which RCM does not apply. This
means that small transactions may not be subject to the reverse charge mechanism. Under
RCM, the recipient of goods or services is responsible for calculating the tax liability,
reporting it to the tax authorities, and making the payment to the government. This often
involves issuing a self-invoice, accounting for the tax, and filing an appropriate return. In
most cases, recipients who pay tax under RCM are allowed to claim input tax credits. This
means that the tax they pay under RCM can often be offset against their overall tax liability,
reducing the net tax payable.

RCM is designed to collect tax revenues even when suppliers are unregistered or in situations
where the normal tax collection process might be impractical. It also helps prevent tax
evasion and ensures that the compliance burden is distributed between suppliers and
recipients. The specific rules and regulations regarding the Reverse Charge Mechanism can
vary from one country to another and may change over time, so it's important for businesses
and individuals to stay informed about the relevant tax laws and guidelines in their
jurisdiction.

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The role of the reverse charge mechanism in government services under the Goods and
Services Tax (GST) system is to shift the responsibility for tax payment from the government
entity providing the service to the recipient or buyer of the service. This mechanism is
applied to specific government services to ensure effective tax collection and compliance.
Under the reverse charge mechanism, the recipient (typically a business or individual) of
government services becomes liable to pay the GST instead of the government entity itself.
This helps in broadening the tax base and ensures that the tax is collected even on services
provided by government agencies.

The reverse charge mechanism helps prevent tax evasion or avoidance by government
entities. It ensures that the GST is collected and remitted, reducing the possibility of tax
leakage. Government agencies, which are otherwise exempt from paying GST, do not have to
deal with tax compliance procedures. Instead, the onus is on the recipient to calculate, report,
and pay the GST on government services, increasing compliance within the business
community. The reverse charge mechanism is typically applicable to specific government
services, such as services provided by local authorities, government-related bodies, or
services related to certain infrastructure projects. From an administrative perspective, it
simplifies the process for the government entity. They do not have to register for GST,
maintain detailed records, or deal with the complexities of GST compliance.

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1 AN OVERVIEW OF THE REVERSE CHARGE MECHANISM
UNDER THE GST ACTS

Section 2(98) defines Reverse Charge as:

“Reverse charge” means the liability to pay tax by the recipient of the 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 sub-section (4) of section 5 of
the Integrated Goods and Services Tax Act.1

Constitutional validity of this reverse charge tax was upheld in the case of Gujarat Ambuja
Cements Ltd. Vs. UOI2 2006 (3) S.T.R. 608 (SC)

1.1 PROVISIONS FOR RCM UNDER THE GST ACTS

Section 9(3): 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.3

Here, it is pertinent to note that those services , as mentioned under the provision above have
been notified in CGST (Rate) Notification No. 13/2017

Section 9(4): “The Government may, on the recommendations of the Council, by notification,
specify a class of registered persons who shall, in respect of supply of specified
categories of goods or services or both received from an unregistered supplier, pay the
tax on reverse charge basis as the recipient of such supply of goods or services or both, and

1
Section 2(98) Of The Central Goods & Services Act, 2017

2
2006 (3) S.T.R. 608 (SC)
3
Section 9(3) of the CGST Act

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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 such supply of goods or services or both.”4

The aforementioned section came into effect on February 1, 2019. It is noteworthy that
Notification 07/2019-CT(R), issued on March 29, 2019, provides specific details regarding
this matter.

2 RCM IN GOVERNMENT SERVICES

While many services offered by Central Government (CG), State Government (SG), or local
authorities are exempt, services provided by the government or local authorities to business
entities are taxable under the reverse charge mechanism as per the Notification of 13/2017,
except for the following categories: Postal and parcel services; Life insurance services;
Services related to aircraft and vessels; Transportation of goods services; Security services.

It's important to note that renting of immovable property was included in the scope of reverse
charge, as per Notification 3/2018 CT(R) issued on January 25, 2018.

Before analysing various issues pertaining to the taxability of government services, it is

necessary first to understand clearly the key terms involved in the provision.

2.1 MEANING OF GOVERNMENT

FAQ on Government Services under GST provided by the CBIC clarified the meaning and
definition of Government for the purposes of the GST Acts. In accordance with section 2(53)
of the CGST Act, 2017, the term 'Government' specifically refers to the Central Government.
However, as stipulated in clause (23) of section 3 of the General Clauses Act, 1897,
'Government' encompasses both the Central Government and any State Government.

Furthermore, according to clause (8) of section 3 of the same Act, the 'Central Government,'
concerning actions taken after the commencement of the Constitution, denotes the President.
Per Article 53 of the Constitution, the executive authority of the Union is vested in the
President, to be exercised directly or indirectly through officers subordinate to the President,
in accordance with the Constitution. In line with Article 77 of the Constitution, all executive
actions of the Government of India must be officially attributed to the President. Therefore,

4
Section 9(4) of the CGST Act

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the Central Government signifies the President and the officials acting under the President's
executive powers on behalf of the Union.

Similarly, as defined in clause (60) of section 3 of the General Clauses Act, 1897, the 'State
Government' is represented by the Governor in a State and the Central Government in a
Union Territory, for actions executed following the Constitution's commencement. According
to Article 154 of the Constitution, the executive power of a State is vested in the Governor,
exercised either directly or indirectly through officers who are subordinate to the Governor,
in adherence to the Constitution. Furthermore, Article 166 of the Constitution dictates that all
executive actions of a State government must be expressed to be taken in the name of the
Governor. Thus, 'State Government' signifies the Governor or the officials acting under the
Governor's executive authority on behalf of the State.

2.2 MEANING OF LOCAL AUTHORITY

The term "local authority" is defined in clause (69) of section 2 of the CGST Act, 2017, and
encompasses the following entities:

 A "Panchayat" as articulated in clause (d) of Article 243 of the Constitution.

 A "Municipality" as defined in clause (e) of Article 243P of the Constitution.

 A Municipal Committee, Zilla Parishad, District Board, or any other body duly
authorized by the Central Government or any State Government to oversee or
administer a municipal or local fund.

 A Cantonment Board under Section 3 of the Cantonments Act, 2006.

 A Regional Council or a District Council formed under the Sixth Schedule to the
Constitution.

 A Development Board formed under Article 371 of the Constitution.

 A Regional Council created under Article 371A of the Constitution.

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But, often the questions before the courts arise as to what includes Government or Local
Authorities for the purposes of Goods and Services Tax. The following are some of the
instances:

1. Statutory bodies and corporations constituted by the Act of Parliament/State

Legislatures

Statutory bodies, corporations, or authorities established by either the Parliament or a

State Legislature do not fall within the categories of 'Government' or 'local authority.'
These entities are typically brought into existence through the exercise of powers
granted under Article 53(3)(b) and Article 154(2)(b) of the Constitution, respectively.

It has been firmly established in legal precedent, as exemplified in the case of

Agarwal Vs. Hindustan Steel5, that the personnel working within such statutory
bodies or authorities are not considered officers subordinate to the President under
Article 53(1) of the Constitution or to the Governor under Article 154(1).

These statutory bodies, corporations, or authorities are distinct juridical entities

separate from the State. They cannot be categorized as the Central or a State
Government, and they also do not meet the criteria for being classified as 'local
authorities.' Consequently, regulatory bodies and other autonomous entities do not
qualify as 'government' or 'local authorities' for the purposes of the GST Acts.

2. Local bodies constituted by the central or state governments

The definition of 'local authority' is explicitly narrow and pertains exclusively to those
entities listed as 'local authorities' in clause (69) of section 2 of the CGST Act, 2017.
It does not encompass other organizations that might be labelled as a 'local body'
solely by virtue of local law. In Re. Pushpa Rani Pabbi6, the question was whether
the services provided by the “Mandi Board” or the “Market Committee” are exempted
from GST as they are established by the State Government of Punjab. The Punjab
AAR held that Parking services rendered by the Contractor, who has been engaged by

5
AIR 1970 SC1150
6
Advance Ruling Order No. Aar/Gst/Pb/011 Dated 6th September, 2019 Punjab Authority For Advance Ruling

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 the Market Committee, do not fall under the exemption criteria outlined in
Notification No. 12/2017. This is because the Market Committee is not considered a
Government Authority and does not meet the qualifications detailed in clause 2(zf) of
the notes accompanying Notification No. 12/2017. Therefore, the parking services
provided by the applicant are categorized under heading 9967 and are subject to a
GST rate of 18% (comprising CGST at 9% and SGST at 9%).

State Governments have established local development authorities responsible for

various development projects, including infrastructure, housing, residential, and
commercial developments, as well as house construction, among other functions.
These authorities are instituted under the Town and Planning Act and include entities
such as the Delhi Development Authority, Ahmedabad Development Authority,
Bangalore Development Authority, Chennai Metropolitan Development Authority,
Bihar Industrial Area Development Authority, and more. It's important to note that
these development authorities established under the Town and Planning Act do not
meet the criteria to be categorized as local authorities under the GST Acts.

3. Government Companies registered under the Companies Act, 2013

Entities created through Central or State Acts, as well as companies registered under
the Companies Act, 1956/2013, and autonomous institutions established under State
Acts, do not fall within the purview of the 'Government' definition. Consequently, the
services offered by such entities will be subject to taxation unless specifically
exempted through a notification.

4. Regulatory Bodies constituted by the Central or State Governments

A regulatory body, often referred to as a regulatory agency, is a public or

governmental entity that performs duties in a regulatory or supervisory capacity as
mandated by its specific role. These bodies do not fall within the definition of a
government authority for the purposes of GST. Regulatory bodies include the
Competition Commission of India, the Press Council of India, the Directorate General
of Civil Aviation, the Forward Market Commission, the Inland Water Supply
Authority of India, the Central Pollution Control Board, and the Securities and
Exchange Board of India.

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2.3 MEANING OF BUSINESS ENTITY

The term "Business entity," as defined in Section 65B(17) of the CGST Act of 2017,
refers to any individual or entity that regularly engages in activities associated with
industry, trade, commerce, or any other form of business or profession. Reverse
Charge Mechanism (RCM) under GST encompasses services offered by the
Government to business entities, necessitating the payment of GST through reverse
charge. Business entities avail themselves of various services provided by the
Government.

2.4 APPLICABILITY OF RCM ON VARIOUS GOVERNMENT SERVICES

Reverse charge is applicable when the Government or local authorities provide services
to individuals or entities with a turnover exceeding Rs. 20 lakhs (or Rs. 10 lakhs for
Special Category States). However, this does not apply to certain services, namely:

(i) Renting of immovable property.

(ii) Services by the Department of Posts such as speed post, express parcel post, life
insurance, and agency services to non-government entities.

(iii) Services related to aircraft or vessels, whether within or outside the confines of an
airport or port.

(iv) Transportation of goods or passengers.

Consequently, the recipient of the goods or services is responsible for paying the entire
tax amount associated with the supply of such services or goods. For determining the
liability to pay tax under the Reverse Charge Mechanism on Government services, the
recipient must consider- If the amount paid to the Government is below INR 5000/-;
nature of the amount paid i.e. if it is against any services or is merely a deposit of taxes,
duties or cess; whether the service provided is under any exception mentioned under
the notifications issued by the government.

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 1. The Authority for Advance Rulings (AAR) in Gujarat In re, Ahmedraza
Abdulwahid Munshi7 deliberated on the tax implications for a Composition Dealer
under the Central Goods and Services Tax Act, 2017 when purchasing scrap or used
vehicles from governmental entities. The core issue addressed was the tax liability of
a Composition Dealer who acquires such vehicles from the Central Government,
State Government, Union Territory, or a Local Authority, specifically if they are
required to pay tax using the Reverse Charge Mechanism (RCM). Based on their
evaluation, the AAR reached the conclusion that a Composition Dealer, upon
purchasing scrap or used vehicles from these governmental entities, would indeed be
obligated to pay tax on an RCM basis. Conversely, if such vehicles were procured
from unregistered dealers, the RCM tax liability would not apply.

This ruling is grounded in the interpretations of sections 9(3) and 9(4) of the CGST
Act and is further bolstered by various associated notifications. Specifically, the
notifications that played a pivotal role in the formulation of this decision include
Notification No. 4/2017-Central Tax (Rate) from 28-6-2017, Notification No.
36/2017-Central Tax (Rate) from 13-10-2017, Notification No. 08/2017-Central Tax
(Rate) from 28-6-2017, and Notification No. 07/2019-Central Tax (Rate) from 29-3-
2019. It's essential to note that the conclusions derived by the AAR are rooted in the
existing provisions and notifications at the time of the ruling.

2. In a recent ruling by the Authority for Advance Rulings (AAR) in Uttarakhand In

re M D Power Transmission Corporation of Uttaranchal Ltd 8, the nature and
classification of services provided by Uttarakhand CAMPA (Compensatory
Afforestation Fund Management and Planning Authority) were under scrutiny. The
AAR determined that the services offered by Uttarakhand CAMPA, which encompass
regenerating natural forests and building institutions for similar endeavors, constitute
a supply of service. Notably, the funds received by CAMPA are not solely for
reparations due to forest land damages. They also account for various activities geared
towards the conservation and management of forest and wildlife. This funding is
deemed a "consideration", signifying that the services CAMPA provides are not
charity-driven but are conducted in a business capacity.

7
(2021) 131 taxmann.com 268 (AAR-GUJARAT)
8
[2022] 145 taxmann.com 566 (AAR- UTTARAKHAND)

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 Concerning the classification of services, those offered through Uttarakhand's Forest
Department fall under 'Other services nowhere else classified,' represented by sub-
heading 999799. In a similar vein, the service concerning the renting or leasing of
forest land by the DFO is categorized under sub-heading 997212, denoting 'Rental or
leasing services involving own land or leased non-residential property.' Moreover, the
application of the reverse charge mechanism in GST for services provided by
CAMPA implies that the service recipient is liable for payment. This comprehensive
ruling was rendered against the assessee, based on the case presented by M D Power
Transmission Corporation of Uttaranchal Ltd.

3. The Authority for Advance Rulings (AAR) of Chhattisgarh In re, Chattisgarh

State Power Generation Co. Ltd9recently addressed the issue of the "Abhivahan
Shulk" or transit fee. This fee is levied by the Government of Chhattisgarh for the
transportation of coal mined from forest regions. The case was brought forth by the
Chhattisgarh State Power Generation Co. Ltd., which sought clarity on the tax
implications of this fee. The primary concerns debated upon were whether the
"Abhivahan Shulk" should be exempt from GST and how this fee should be classified
for GST purposes. After careful examination, the AAR provided several key
conclusions. Firstly, it was clarified that the local municipality does not possess the
authority to impose a fee for activities related to 'urban forestry' under article 243W of
the Indian Constitution.

The AAR debunked the argument that the "Abhivahan Shulk" should be exempt from
GST simply because each transaction is always valued below Rs. 5000. Instead, the
AAR affirmed that the fee falls under the ambit of Sections 2(23) and 11 of the CGST
Act, 2017. As such, it is categorized under 'other services' and attracts a GST rate of
18%. Given that the service provider is the Forest Department, the AAR directed the
applicant to pay the GST using the reverse charge mechanism. Coal is recognized as a
'forest produce' under the Indian Forest Act, 1927. This classification arises from the
understanding that coal formation is a result of the natural burial of extensive forest
areas. The Supreme Court of India has also upheld the legitimacy of state
governments charging transit fees on such forest produce. Furthermore, according to
the provisions in the GST Act notifications, when services are rendered by state

9
[2023] 147 taxmann.com 183 (AAR- CHATTISGARH)

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 governments, the responsibility of tax payment under the reverse charge mechanism
falls on the business entities receiving those services.

4. The AAAR of Madhya Pradesh In re Directorate of Skill Development 10

addressed the issue of GST liability on consultancy services availed by the Directorate
of Skill Development (DoSD), Government of Madhya Pradesh, from ITE Education
Services Pte. Ltd., a Singapore-based consultancy. This collaboration was for the
Global Skills Park (GSP) project, which aimed to revamp the technical and vocational
education system in Madhya Pradesh.

The crux of the discussion revolved around the tax liability of the government body
for services sourced from a non-taxable territory. Could they be liable under the
reverse charge mechanism, or were they exempt? The AAAR's resolution was
twofold. Firstly, services from a provider outside India are treated as an import, thus
necessitating IGST under the reverse charge mechanism. However, given the
consultancy's alignment with functions bestowed upon the panchayat under article
243G of the Constitution, such services merited an exemption from GST.

3 CONCLUSION
Nevertheless, the applicability of the reverse charge mechanism in government services
varies across jurisdictions, and its effectiveness relies on the specific context and nature
of the services provided. Future research in this area should continue to explore its
impact on various sectors and its adaptability to evolving fiscal policies.
In summary, the reverse charge mechanism represents a valuable strategy for taxation in
government-provided services, offering potential benefits in terms of revenue collection
and compliance. Its successful implementation calls for a nuanced approach, addressing
the unique characteristics of government operations, and continually refining the
regulatory framework to optimize its utility.

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[2022] 142 taxmann.com 119 (AAR- MADHYA PRADESH)

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