Services rendered by corporate recovery agents to Banks and NBFC – A case for levying GST under Forward charge
1) Recovery Agent –
The term ‘Recovery agent’ is not defined in either of the GST acts. Section 2(5) of the CGST act defines an ‘Agent’ as under –
“agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another;
Meaning of the term ‘Recovery Agent’ can be derived from the meaning of ‘Agent’ and covers a person carrying on the business of debt recovery on behalf of another person.
Services of a Recovery Agent are covered under SAC heading 9985 attracting a GST rate of 18% (9% CGST and 9% SGST or 18% IGST) under entry number 23 of Notification number 11/2017 dated June 28, 2017, as amended. (Annexure A)
2) Reverse charge –
In terms of sub-section 3 of Section 9 of CGST Act, 2017 and based on recommendation of the GST council the Government may specify categories of supply of Goods or Services on which GST shall be paid on reverse charge basis by the recipient of services. Accordingly, the Government has issued Notification number 13/2017 dated June 28, 2017 (Annexure B) which specifies such services.
The services of a Recovery Agent are covered under schedule entry 8 of the said notification. Accordingly, the GST on services rendered by a Recovery agent to Banking companies, Non-Banking Financial Companies or Financial Institutions is currently being paid by the said recipients on reverse charge basis. An extract of the same is reproduced hereunder for ready reference.
| Sl. No. | Category of Supply of Services | Supplier of service | Recipient of Service |
| (1) | (2) | (3) | (4) |
| *** *** *** | *** | *** *** *** | |
| 8 | Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company. | A recovery agent | A banking company or a financial institution or a non-banking financial company, located in the taxable territory. |
3) Input Tax Credit –
In case of a person making taxable supplies as well as exempt supplies, Sub-section 2 of Section 17 places a restriction on the Input Tax Credit available to such person. Accordingly, the only the Input Tax Credit attributable to taxable supplies is considered eligible. The Input Tax Credit attributable to exempt supplies is not available in such cases.
Further, Sub-section 3 of Section 17 mandates that exempt supply shall include supplies on which the recipient is liable to pay GST on reverse charge basis. An extract of the same is reproduced hereunder for ready reference.
“The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.” (emphasis supplied)
4) Input Tax Credit chain is broken because of reverse charge –
In the course of rendering services as Recovery Agents, the supplier relies on various input service providers or sub-contractors. These suppliers or sub-contractors render recovery agent’s services to the Recovery Agent, who in turn renders such services to the its clients who are Banks, NBFCs or Financial Institutions. In the course of rendering services to the Recovery agents, such sub-contractors levy GST under forward charge on their services because their services are supplied to the Recovery Agent and not to a Bank, NBFC or Financial Institution. Reverse charge provision applies only when such services are provided to a Bank, NBFC or Financial Institution.
When, the Recovery Agent, in turn, bills its clients, i.e., Banks, NBFCs or Financial Institutions, GST cannot be levied because the same is covered under Reverse Charge Provisions as discussed in paragraph 3 above. Consequently, in terms of Sub-section 3, of Section 17, the outward supply of services of Recovery Agent becomes exempt supply.
In terms of Sub-section 2 of Section 17, the Recovery Agent is not eligible to take the Input Tax Credit of the GST charged to it by its sub-contractors because the output services of the Recovery Agent are treated as exempt supplies. This results in a situation where such GST charged by the sub-contractors of the company becomes a cost for the company. In order to maintain its profitability, the Recovery Agent is constrained to increase the price of outward supplies of its Services rendered to the Banks, NBFCs or Financial Institutions, to the extent of GST charged to it by the sub-contractors.
5) Cascading effect of GST –
First impact: The clients of the Recovery Agent i.e., the Banks, NBFCs or Financial Institutions are required to pay the GST on the Recovery Agent’s services under Reverse Charge provisions. Consequently, they would pay GST @ 18% on a service value which includes the GST charged by the sub-contractors of the company. Here we see the first cascading effect of GST on reverse charge.
Second impact: The GST paid by a recipient under Reverse Charge provisions is available to such person as Input Tax Credit, subject to rules in this regard. However, in terms of Sub-section 4 of Section 17, in case of Banks, NBFCs or Financial Institutions, the Input Tax Credit is restricted to;
- either the proportionate eligible credit as per actuals, or,
- 50% of the eligible credit, at the option of such recipient.
The balance credit, in excess of 50%, lapses. Thus, the Input Tax Credit eligibility of Banks, NBFCs and Financial Institutions is severely restricted under Section 17 of the CGST Act, 2017.
Thus, Banks, NBFCs or Financial Institutions suffer a double impact of higher input costs as a result of –
- the increased cost of the company due to unabsorbed GST levied by the sub-contractors on their services to the company, and,
- the higher GST paid on the increased cost which is not entirely available as Input Tax Credit to the Banks, NBFCs or Financial Institutions due to restrictions set in Section 17(4)
It is natural that the Banks, NBFCs or Financial Institutions would have to increase the price at which they render services to their clients or customers to absorb the higher input costs. Here we see the second cascading effect of GST on reverse charge.
6) Illustration of cascading effect of Reverse Charge in B2B environment –
The two impacts of cascading effect discussed in paragraph 6 above, can be illustrated by way of an illustration. The illustration is based on the following premises –
- The Sub-contractors of the company raise an invoice of Rs.10 Lakhs in a tax period,
- The margin of the Recovery Agent is fixed at 15% of the direct cost, excluding GST, and,
- The recipient, i.e., the Bank, NBFC or Financial Institution utilizes 50% of eligible Input Tax Credit in terms of Section 17(4).
| Illustration 1 – Current position under law (all amounts in Rs.) | |||||
| Invoice raised by the Sub-contractors | A | 10,00,000 | Bill received by the Bank, NBFC or Financial Institution from the Recovery Agent | A | 13,30,000 |
| GST levied by the Sub-contractors | B | 1,80,000 | GST paid thereon by the recipient under Reverse charge | B=18% of A | 2,39,400 |
| Gross amount paid to Sub-contractors | C=A+B | 11,80,000 | ITC Claimed by the recipient (assumed 50%) | C | 1,19,700 |
| Profit margin of the Recovery Agent | D=15% of A | 1,50,000 | ITC Lapsed which is a cost to the Bank, NBFC or Financial Institution | D | 1,19,700 |
| Gross amount billed to the Bank, NBFC or Financial Institution by the Recovery Agent (GST payable by recipient under Reverse Charge) | E=C+D | 13,30,000 | |||
| Illustration 2 – If Recovery Agent charges GST under Forward Charge(all amounts in Rs.) | |||||
| Invoice raised by the Sub- contractors | A | 10,00,000 | Bill received by the Bank, NBFC or Financial Institution from the Recovery Agent | A | 11,50,000 |
| GST levied by the Sub- contractors | B | 1,80,000 | GST paid to supplier on the bill | B=18% of A | 2,07,000 |
| Gross amount paid to Sub- contractors | C=A+B | 11,80,000 | ITC Claimed by the recipient (assumed 50%) | C | 1,03,500 |
| Profit margin of the Recovery Agent | D=15% of A | 1,50,000 | ITC Lapsed which is a cost to the Bank, NBFC or Financial Institution | D | 1,03,500 |
| Net amount billed to the Bank, NBFC or Financial Institution by the Recovery Agent | E=A+D | 11,50,000 | |||
| Add: GST under forward charge | F=18% of E | 2,07,000 | |||
| Gross amount billed to the Bank, NBFC or Financial Institution by the Recovery Agent | G=E+F | 13,57,000 | |||
| Gross amount billed to the Bank, NBFC or Financial Institution by the Recovery Agent | E=A+D | 11,50,000 | |||
| Reduction in cascading effect – | (Rs.) |
| Loss to recipient under current provision of law (Illustration 1) | 1,19,700 |
| Loss under proposed option (Illustration 2) | 1,03,500 |
| Reduction in cascading effect under proposed options | 16,200 |
The entire cascading effect of GST under the current provisions is ultimately borne by the end user of the services provided by the Banks, NBFCs or Financial Institutions.
This Government is committed to increase the accessibility of banking services in order to bring more businesses and individuals to the mainstream and reduce dependence on the ‘informal economy’. Given this objective, the reverse charge provisions and denial of Input Tax Credit to Recovery Agents operating in a B2B environment is certainly a retrograde step leading to cascading effect of GST and deserves the immediate attention of the GST Council.
- Corporate Insurance agents were shifted from Reverse Charge to Forward Charge under GST –
Interestingly, in case of corporate insurance agents who were also covered under reverse charge and therefore facing the same as problem currently faced by corporate Recovery Agents, had made a representation to the GST council to include them under forward charge so that they could utilize the ITC. The GST council saw sense in their request and obliged. Please see Notification No. 3/2018- Central Tax (Rate) dated January 25, 2018 for the consequential amendment for corporate insurance agents.
If corporate insurance agents can be shifted from reverse charge to forward charge GST, the question is why are corporate Recovery Agents being not being given the same treatment by the Government? Is this not discriminatory policy?
In view of the above, it is humble suggestion that –
- The services of a Recovery Agent in a B2B environment should be covered under Forward Charge and not under Reverse charge provisions. This would enable the Recovery Agent to absorb the GST charged by the sub-contractors and would result in lower cost of output services and avoid the cascading effect of GST, or,
- The Recovery Agent should be allowed to take the Input Tax Credit of GST charged to it by its sub-contractors (for Recovery Agent Services) against the GST payable on other output services supplied by the Recovery Agent where GST is payable under Forward charge at least in a B2B environment. A suitable amendment to the Act would result in lower cost of output services and avoid the cascading effect of GST.
Questions or comments of readers on this article are welcome.
Dipen Lathi,
Chartered Accountant
www.Lathico.com
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© Dipen Lathi
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