ECO - RCM applicability & ITC reversal requirements

Electronic commerce operator (ECO) means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce. Under GST law there are certain services notified in respect of which the E-commerce operators are required to pay tax under reverse charge. Here we are about to discuss about these services and will also discuss about whether an electronic commerce operator who is required to pay tax under RCM is liable to reverse the proportionate input tax credit availed in respect of inputs and input services availed by them to the extent of the supplies made under section 9(5) of the CGST Act.

Section 9(5) of CGST Act 2017 gives the power to the Government to notify the services on which tax is to be paid by the E-commerce Operator (ECO). In the exercise of the power conferred by section 9(5) of CGST Act 2017 the central government on the recommendations of the council had issued a Notification No. 17/2017 CT(R) wherein the services are notified on which the E-commerce Operator (ECO) would be liable to pay the tax under reverse charge. In the said notification the following four services are notified on which the liability to pay tax has been shifted to the ECO subject to the conditions mentioned therein:

(i) The services by way of transportation of passengers by a radio-taxi, motorcab, maxicab, motor cycle or any other motor vehicle.

(ii) Services by way of providing accommodation in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes.

(iii) Services by way of house-keeping, such as plumbing, carpentering etc.

(iv) Supply of restaurant service other than the services supplied by restaurant, eating joints etc.

Thus in respect of the above services the ECO is required to pay tax under RCM. However, in case an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax.

Where an electronic commerce operator does not have a physical presence in the taxable territory and also he does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax.

Since the ECO is required to pay tax under RCM in respect of certain services which are mentioned above, in this respect it is important to know that as per section 17(2) of CGST Act 2017, where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

For this purpose the value of exempt supply shall include the 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.

In simple words, if a registered person is making any supply in respect of which the tax is to be paid by the recipient under RCM, then in such case the said supply would be treated as an exempt supply in the hands of said registered person. Accordingly, as per section 17(2) the said registered person would be eligible to claim the ITC in respect of goods or services attributable to the taxable supplies.

Thus in respect of ECO the same question arised among the taxpayers that whether the electronic commerce operator, who is required to pay tax under section 9(5) of CGST Act, is liable to reverse proportionate input tax credit on his inputs and input services to the extent of supplies made under section 9(5) of the CGST Act.

In this respect the CBIC has issued a Circular No. 167/23/2021 dated 17.12.2021 in the question number 6 of the said circular it was clarified that electronic commerce operator required to pay tax under section 9(5) of CGST Act, 2017 are not required to reverse input tax credit (ITC) in respect of supply of restaurant services through their platform. It has also been clarified that the input tax credit will not be allowed to be utilized for payment of tax liability under section 9(5) and whole of the tax liability under section 9(5) will be required to be paid in cash.

However, the said circular has specifically provided the clarification in respect of the restaurant services. The said circular has not covered other services on which the ECO is required to pay tax under RCM as per section 9(5), hence the said circular has left the scope of ambiguity in this respect. Thus in this regard, representations have been received seeking clarification regarding requirement of reversal of ITC, if any, in respect of supply of services, other than restaurant services, under section 9(5) of CGST Act.

To ensure the uniformity in the implementation of the law across the field formations a Circular No. 240/34/2024 was issued on 31^st December 2024 wherein it has been clarified vide question no. 6 of Circular No. 167/23/2021 that the ECO shall not be required to reverse input tax credit on account of restaurant services on which he pays tax under section 9(5) of the CGST Act. The principle, which has been outlined in question no. 6 of Circular No. 167/23/2021, also applies to the supplies made in respect of other services specified under section 9(5) of CGST Act.

In view of this, it was clarified that ECO, who is liable to pay tax under section 9(5) of CGST Act in respect of specified services, is not required to reverse the input tax credit on his inputs and input services proportionately under section 17(1) or section 17(2) of CGST Act to the extent of supplies made under section 9(5) of the CGST Act.

It is further clarified that ECO will be required to pay the full tax liability on account of supplies under section 9(5) of the CGST Act only through electronic cash ledger. The credit availed by him in relation to the inputs and input services used to facilitate such supplies cannot be used for discharge of such tax liability under section 9(5) of the CGST Act.

Conclusion: The ECO is liable to pay tax under RCM in respect of the services notified in the Notification No. 17/2017 CT(R) read with section 9(5). These services are Services by way of transportation of passengers, Services by way of providing accommodation in hotels, inns, guest houses, Services by way of house-keeping, Supply of restaurant services. Further, as per the clarification given by the Circular No. 240/34/2024 the ECO is not required to proportionately reverse any ITC on his inputs and input services under section 17(1) or section 17(2) of CGST Act to the extent of supplies made under section 9(5) of the CGST Act 2017.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.