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Budget Expectations: No deduction for exp. If GST not paid in Reverse Charge

January 24, 2018 2327 Views
TAXMANN
Editorial Team

The Finance Minister, Mr. Arun Jaitley, in his Budget Speech for the Union Budget, 2017 quoted some statistics in support of his conclusion that we are largely a tax non-compliant society. In Income-tax Act there are various penal provisions to keep a check on that all required compliances are made by the business entities in time. One of such punitive provisions is disallowance of an expense on failure to comply with TDS provisions.

This provision requires the payer to deduct tax at given percentage while making certain payments, i.e., interest, royalty, fees for technical services, commission, etc. If payer either fails to deduct the tax or after deduction fails to deposit the tax, a portion of the expense is not allowed as deduction, at least till the year in which he deducts and deposits the tax with the Govt. Such disallowance of an expense would, in turn, increase the taxable income of the payer. These disciplinary provisions were introduced so that Govt. got its share of taxes from the source itself.

GST, which came into force w.e.f. 01/07/2017, requires the supplier to make payment of GST while selling goods or services. However, in some cases GST is payable by the recipient of the goods or services and this mechanism is called "Reverse Charge".

Taxes under reverse charge are payable mostly in those cases where supplier operates in an unorganized sector or where collection of taxes through routine channels would be challenging, i.e., goods transport services.

There are two type of supplies which are subject to payment of tax under reverse charge. The first type of supply includes the services which are specifically notified by the Govt., inter-alia, goods transport services, IPR services, legal services, arbitration services, etc. The second category, though deferred till March 31, 2018, requires the registered GST suppliers to pay tax under reverse charge on those transactions which have been done with those persons who are not registered under GST.

The input tax credit (ITC) of the GST so paid under reverse charge is allowed to the recipient of service only when the recipient pays the tax to the credit of the Government from his electronic cash ledger. If GST is not paid on these expenses, the recipient can claim the deduction for the underlying expenditure under Income-tax Act. There are no provisions in the Income Tax Act regarding disallowance of such expense due to non-payment of GST under reverse charge.

Since the GST revenue has been declining sharply, Govt. might consider to put an additional check to ensure that business entities pay the GST accurately and in time.

A provision 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.

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