Trouble for businesses to pay GST under Reverse charge Mechanism

The Global pandemic has affected several businesses severely due to continuous series of lockdowns and has made it further difficult for businesses especially those under the reverse charge mechanisms, where they are unable to pay their taxes and their ITCs have been piled up.

It’s a known fact that the GST is an indirect tax where the tax burden is ultimately shifted to the customer’s pocket. However, with the intent of ensuring compliances the Government has made certain service providers and manufacturers under an obligation to pay taxes in cash, who in turn receiver input tax credits, and later when they go to pay taxes, the final settlements are made after setting taxes with the ITCs. Under the GST framework, the liability payments of taxes on specific services and raw materials used in the input or making of the product are initially paid by these manufacturers or service providers, and ultimately on the buyer. Later, the final tax is then set off and passed on to consumers when they buy these services. 

Now, under the reverse charge mechanism(RCM) like aviation, hospitality and telecom businesses are coming across the twofold-liability of paying GST dues due to the situation that they are not able to shift their burden to customers finally due to stress in business. Still, such businesses need to pay taxes to be in cash, and the as input tax credits keep piling up,  further extending the cycle of working capital and further posing problems in the flow of liquidity.

Under the GST structure, the cost of certain services and raw materials used in the input or making of the product is primarily on the purchaser for the payment of GST. Later, this cost is then settled and passed on to the consumers when they buy these services. 

But, in a situation like Covid-19 pandemic, where the businesses are already dealing with major revenue knockouts and are unable to shift the cost of GST to consumers, facing troubles in the utilization of input tax credit for payment of reverse charge liabilities perpetually for the business; specifically for businesses with fixed committed costs involving a further reverse charge levy like i.e. Aviation, Hospitality & Telecom Business. Still, they need to make GST payments on raw materials and input services in cash for which they are constantly seeking relaxations to the Government.

Particularly, businesses like Airlines& Telecom business companies need some immediate relief as their ITC keeps amassing in related fixed charges such as airport usage, lease rentals for aircraft, etc. to the GST payments. They have ITC in their accounts still to need to pay GST in cash on reverse charge mechanism (RCM) basis on the lease hire charges they need to pay to the foreign aircraft lessors. 

Conclusion- What are the possible remedies to the problem?

Hence, the government should come forward with a way out to the specific business sectors like the aviation and hospitality industry holding a large pool of ITC credits in their GST accounts but then need to pay cash on the RCM basis. 

The government might choose this alternative for certain specified output services so that such businesses could release their tax liabilities under the reverse charge with the help of the gathered credit maintained in the books for a specific period or.

Where the RCM applies, by changing the specified persons required to pay GST under the RCM as the recipient of GST supply is liable to pay the tax instead of the supplier in normal cases. For eg. Telecom companies are under an obligation to pay GST through the RCM on the government spectrum charges, airlines have to pay reverse charge liabilities on payment to foreign parties for the lease of aircraft and multinationals need to pay taxes on the royalty costs for their brand, for gaining the technical know-how, IT management, etc.

Author:

eStartIndia Team