Budget Expectations 2018 – No deduction for exp. if GST not paid in Reverse Charge

  • Blog|GST & Customs|
  • 3 Min Read
  • By Taxmann
  • |
  • Last Updated on 28 November, 2023

Budget 2018 Expectations:

In his Budget Speech for the Union Budget, 2017, the Finance Minister, Mr. Arun Jaitley quoted certain statistics in support of his conclusions that we are largely a tax non-compliant society. The Income-tax Act provides for various penal provisions in order to ensure that the required compliances are being timely met by the business entities. One of such punitive provisions is the disallowance of an expense on failure to comply with the TDS provisions.
Under these provisions, the payers are required to deduct tax at a given percentage while making certain payments like interest, fees for technical services, commission, royalty, etc. However, if any payer fails to deduct the tax or after such deduction fails to deposit the tax with Department, a portion of the expenses is not allowed as a deduction for the year until he deducts and deposits the tax with the Government. As a result, such disallowance of expense increases the taxable income of the payer. Disciplinary provisions like these were introduced so that the Department got its share of taxes from the source itself on a timely manner.
GST, that came into force w.e.f. 01/07/2017, requires every supplier to make the payment of GST while selling goods or services. In some cases, GST is payable by the recipient party of the goods or services, and this mechanism is called Reverse Charge.
Taxes under reverse charges are payable mostly in the cases in which supplier operates in an unorganized sector or where the collection of taxes through routine channels would be challenging. For instance, goods transport services.
There are two types of supplies which are subjected to the payment of tax under reverse charge. The first type of supply includes the services which are specifically notified by the Government, inter-alia, IPR services, goods transport services, arbitration services, legal services, etc. The second category, although it has been deferred till March 31st, 2018, it requires registered GST suppliers to pay tax under reverse charge on those transactions done with those who are not registered under the GST.
The ITC or Input Tax Credit of the GST as paid under reverse charge is allowed to the recipient of service only when he/she pays the tax to the credit of the Department from his/her electronic cash ledger. 
Under the circumstances where GST is not paid on these expenses, the recipient can claim the deduction for the underlying expenditure under Income-tax Act. As, there are no such provisions in the Income Tax Act regarding disallowance of such expense due to non-payment of GST under reverse charge.
Currently, as the GST revenue has been declining sharply, Government may consider putting an additional check to ensure that the business entities pay their GST dues timely and in an accurate manner.
In relation to this, a provision similar to Section 40(a)(ia) might be introduced in the Income-tax Act that would disallow a portion of the expense until GST is paid on that expense under reverse charge provisions.
Keep yourself updated with Budget 2018-19 latest updates here.

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