Contracts Cannot Override Statues – GST RCM Case

Introduction:

A recent High Court judgment has reaffirmed a crucial principle under GST law — statutory liabilities, particularly under Reverse Charge Mechanism (RCM), cannot be bypassed through private contractual agreements. Even if a contract stipulates that the supplier will bear the GST burden, the recipient remains legally liable under RCM for specific categories of transactions.

This article examines the statutory backdrop of RCM, outlines the implications of this judicial development, and provides guidance for businesses and tax professionals in ensuring compliance.

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Understanding RCM under GST Law

Reverse Charge Mechanism (RCM) shifts the liability to pay tax from the supplier to the recipient of goods or services in certain notified cases under:

• Section 9(3) of the CGST Act, 2017 – for specific goods/services like legal services, GTA, security services, etc.
• Section 9(4) – for procurements from unregistered suppliers (limited applicability as per current notifications).

The key feature is that RCM is a statutory imposition, not based on mutual agreement or contract between the parties.

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The Case at a Glance:

In the matter before the High Court:

• A recipient entered into a service agreement where the supplier contractually agreed to bear the GST liability.
• The service in question was a notified service under RCM, making the recipient legally responsible for GST payment.
• The department issued a demand for non-payment under RCM.
• The recipient contended that based on the agreement, the liability was that of the supplier.

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Court’s Observations and Legal Principles:

1. Statutory Liability Prevails Over Contractual Clauses:
   • The Court held that contractual terms cannot override the statutory liability cast upon a recipient under Section 9(3) of the CGST Act.
   • The RCM liability arises from law, not from the will of the parties.
2. Recipient Treated as ‘Deemed Supplier’:
   • For the purpose of RCM, the law deems the recipient as the person liable to pay tax, irrespective of any internal arrangement.
3. Tax Department Not Bound by Private Agreements:
   • The enforcement agency is bound by statute, not by contractual obligations between private parties.
4. Non-compliance Invites Consequences:
   • Failure to discharge RCM liability will attract interest (Section 50) and penalty (Section 122), as the obligation is automatic upon fulfillment of statutory conditions.

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Practical Implications for Businesses:

1. Review and Redraft Contracts Cautiously:
   • While commercial agreements may allocate the financial burden of GST, they cannot alter the legal obligation to pay tax under RCM.
2. Strengthen Internal GST Controls:
   • Enterprises must maintain an updated list of services and goods covered under RCM, and ensure timely self-payment and compliance.
3. Accounting and ITC Considerations:
   • GST paid under RCM must be paid in cash but is available as Input Tax Credit, provided other conditions under Section 16 are met.
4. Avoid Reliance on Supplier Representations:
   • Do not rely solely on vendors or suppliers to handle GST, particularly where RCM is applicable. The responsibility lies with the recipient.

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Conclusion:

This judgment reiterates that tax liability under GST is governed by law, not by private arrangements. For professionals and businesses, it is vital to adhere to statutory obligations independently of what is agreed upon commercially.

In light of this development, every registered person should:

• Reassess their contractual terms with vendors;
• Ensure systems are in place to detect RCM-triggering transactions; and
• Establish SOPs for RCM compliance and timely payment.

Statutory compliance is not negotiable — contract clauses may serve commercial ends but cannot nullify legal duties.