Challenges of RCM in GST: Seigniorage and Royalty Insights

Introduction

The Goods and Services Tax (GST) introduced in India is designed to simplify the tax structure and ensure efficient tax collection. One of the critical mechanisms under GST is the Reverse Charge Mechanism (RCM). Under RCM, the responsibility for payment of tax shifts from the supplier of goods or services to the recipient. While RCM is applicable in specific circumstances under the GST framework, there has been an increasing concern regarding its application to certain charges, such as Seigniorage Charges and Royalty Payments.

This article aims to delve deeply into the practical implications of RCM on these charges, review the relevant rules and regulations, and explore the most recent updates on the subject. As professionals in the field of finance, we must understand not only the legal framework surrounding RCM but also how it affects business operations on a practical level.

What is Reverse Charge Mechanism (RCM)?

Before diving into the specific charges such as Seigniorage and Royalty, it is essential to understand the concept of RCM in GST. Under Section 9(3) and Section 9(4) of the Central Goods and Services Tax (CGST) Act, 2017, the liability to pay tax is shifted from the supplier to the recipient for certain specified categories of goods and services.

Under Section 9(3), RCM is applicable to certain goods and services notified by the government. The recipient, in this case, is required to pay the tax directly to the government instead of the supplier. On the other hand, Section 9(4) mandates RCM for any supplies made by an unregistered supplier to a registered taxpayer.

RCM has its roots in simplifying tax collection, especially in sectors where it is challenging to trace the suppliers or ensure proper tax compliance.

Seigniorage Charges and RCM

Seigniorage refers to the charges that are levied by the government on the creation of currency. In the context of the Reserve Bank of India (RBI), Seigniorage refers to the profit made by the central bank from issuing currency. The RBI earns Seigniorage from printing currency notes, the cost of which is much lower than its face value.

In the context of business transactions, Seigniorage charges might refer to charges levied in relation to the issue of coins or notes for transaction purposes. These charges are often found in contracts between the RBI and other entities like banks, government departments, and currency printing press suppliers.

Now, let’s examine the GST implications on Seigniorage charges. If we assume that Seigniorage charges are part of a larger contract value, the GST is initially paid on the total value under the forward charge mechanism. However, when it comes to applying RCM, the charge could become an issue if the same amount is subjected to tax again under RCM.

RCM and Seigniorage Charges – Practical Issue

As per Section 9(3) of the CGST Act, the RCM is applicable to a specific list of services. Seigniorage, being part of the gross contract value, already attracts GST when it is included in the invoice. The Petitioner’s argument in the case of Seigniorage Charges is that since the GST is already paid under the forward charge on the gross contract value, the same amount should not be taxed again under RCM, as it would amount to double taxation.

In this scenario, the practical approach would be:

• The gross contract value is arrived at, including all charges such as Seigniorage, IT TDS, GST TDS, Labour Cess, etc.
• GST is calculated and paid on this gross value.
• When the Seigniorage charge is subjected to RCM, it effectively leads to the tax being paid twice – first under the forward charge mechanism and again under the reverse charge mechanism.

Legal Precedents and RCM on Seigniorage Charges

The issue of double taxation in cases where the charge has already been taxed under the forward charge mechanism and is subjected to RCM has been contested in various legal forums. There is a general agreement that double taxation should be avoided, particularly where no revenue loss to the government is involved.

Case law such as Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner highlights that double taxation must be avoided under tax statutes, and the government must provide clarity on the application of RCM.

Given the evolving nature of GST, businesses should consider these issues and ensure that they do not pay taxes twice on the same value unless there is a clear legal provision supporting the same.

RCM and Royalty Payments

Another issue that businesses frequently face under GST is the application of RCM on Royalty Payments. Royalty, in a typical business setting, refers to the payment made by a business for the use of intellectual property such as patents, trademarks, or copyrights.

Under the GST law, royalty payments are considered a service. Royalty is specifically listed under Notification No. 13/2017- Central Tax (Rate), and the tax liability for such payments is required to be discharged by the recipient under RCM.

How RCM Affects Royalty Payments:

The application of RCM on royalty payments can sometimes lead to confusion. A royalty payment is typically made by a recipient (licensee) to the owner of intellectual property (licensor). The government has specifically outlined that in the case of intellectual property rights (IPRs), the recipient of the service is liable to pay the GST under RCM.

However, practical scenarios arise where the licensor is unregistered under GST, leading to a situation where the recipient has to account for the GST on the royalty payment, even though the licensor might not be involved in the day-to-day operations of the business.

Practical Scenarios Where RCM is Challenging on Royalty Payments:

1. Unregistered Supplier: If the licensor is unregistered under GST, the recipient of the royalty payment (licensee) will have to pay the GST under RCM.
2. Global Licenses: In cases where the intellectual property is licensed from foreign entities, businesses often struggle with the applicability of RCM. The licensing agreement, along with the nature of the supply, plays a critical role in determining whether RCM applies or not.
3. Cross-border Transactions: In the case of cross-border royalties, businesses need to account for the import of services provisions under the GST law. These provisions ensure that the recipient pays the tax for the royalty received from a foreign entity.

Other Charges and the Application of RCM

Apart from Seigniorage and Royalty, there are several other charges that may fall under RCM, such as:

1. Legal Services: Services provided by an individual advocate or law firm to a business or a legal entity are subject to RCM.
2. Transportation Services: If transportation services are provided by an unregistered person to a registered entity, the recipient will need to pay the tax under RCM.
3. Purchase from Unregistered Suppliers: RCM is applicable in cases where a registered taxpayer procures goods or services from unregistered suppliers.

Latest Updates and Notifications

Several key updates and notifications from the government have attempted to address the issues of RCM on specific charges, such as:

1. Notification No. 13/2017-Central Tax (Rate): This notification clarifies the applicability of RCM on various services, including royalty.
2. GST Council Decisions: Recent discussions in the GST Council have focused on refining the scope of RCM, particularly regarding the taxability of specific charges like royalty, and have introduced transitional provisions to prevent double taxation in certain circumstances.
3. Clarification on Seigniorage: The GST Council has yet to issue a detailed clarification on Seigniorage charges and RCM, but it is expected that in cases where tax has already been paid on a charge under the forward charge mechanism, businesses will not be required to pay the same tax again.

Conclusion

The Reverse Charge Mechanism (RCM) is an essential tool for ensuring tax compliance and addressing specific sectors in GST. However, its application to charges such as Seigniorage, Royalty, and similar services has raised several practical challenges.

From a professional standpoint, businesses need to ensure that they are not subject to double taxation. Double taxation, especially on charges like Seigniorage, must be avoided, as it places an unnecessary burden on businesses. The government must continue to issue clarifications and notifications to remove ambiguities surrounding RCM’s application, and businesses must stay updated on the latest regulations to remain compliant.

In practical terms, it is crucial for taxpayers to review the GST implications of their transactions, particularly in relation to RCM, and seek legal guidance where necessary to avoid disputes and ensure smooth operations under the GST