No Credit Without Output: Bombay HC Upholds GST Reverse Charge Rules in Security Services Case

Recently, a company wanted to continue claiming a tax credit even though, under RCM, it does not charge or pay GST. The court explained that since the company is not paying tax under GST now, it cannot claim the benefit of input credit. This is how the system works. The Court upheld the law and refused to change it just because it makes her business more expensive or less competitive.

The current writ petition (W.P. No.1687 of 2024) is being filed in the Bombay High Court by a company named M/s. Eagle Security & Personnel (petitioner) against the Union of India, the State of Maharashtra, the GST Council, and the Central Board of Indirect Taxes and Customs (respondents), before the benches of Honourable Judges M. S. Sonak and Jitendra Jain, JJ.

A woman (petitioner) who runs a proprietorship business registered under the CGST Act with effect from 1st July 2019, providing security services, challenges certain provisions under the Goods and Services Tax (GST) laws, specifically the CGST Act and MGST Act, related to Reverse Charge Mechanism (RCM) and Input Tax Credit (ITC). The woman was seeking the following reliefs in the High Court under Article 226 of the Constitution of India:

“(a) That this Hon’ble Court be pleased to issue a writ of mandamus or certiorari, or any other writ, order, or direction by reading down Section 17(3) of the CGST Act and MGST Act insofar as the same treats the taxable supplies under RCM as exempt supplies without there being any reasonable basis for such classification.

(b) that this Hon’ble Court be pleased to issue a writ of mandamus or certiorari, or any other writ, order, or direction quashing and setting aside subsection 17(2) of the CGST Act and MGST Act introduced vide the Impugned Notifications to the extent it denies the benefit of ITC claim to the Petitioner for being ultra vires of the CGST Act, MGST Act, and rules made thereunder and the Constitution.”

Basically, she is asking the court to read down (modify) Section 17(3) of the GST Act so that services provided under RCM are not treated as exempt, because treating them as exempt denies ITC. Further, she asks the court to strike down or modify the notification and Section 17(2), which prevents her from claiming ITC, calling it unfair, unconstitutional, and bad for business.

She argued this violates Article 14 (Right to equality)and Article 19(1)(g) (Right to practice any profession or carry on any business) of the Indian Constitution, as it treats proprietors and corporations unequally, and she is unable to compete fairly.

What Is Her Grievance?

Initially, before 1st January 2019, security services were taxed under a forward charge mechanism, meaning the person providing the service (like the Petitioner) paid GST and could claim Input Tax Credit (ITC) for GST paid on inputs (goods or services purchased to provide the service).

However, after 1st January 2019, the government shifted security services under RCM through a notification. This means that now the recipient (customer) of the security service pays the GST, not the service provider (like the petitioner).

Because of this shift:

• The petitioner can no longer charge GST on her invoices.
• Therefore, she has no output tax liability.
• And as per GST rules, she cannot claim ITC for GST she paid on inputs (because there’s no output tax to set it off against).

This has made her service costlier to provide, while competitors like private limited companies (body corporates) can still charge GST under forward charge, pay tax, and claim ITC, giving them a competitive advantage.

What Does the Court Say?

The Court analysed the structure of the GST law. It explained that the GST system allows ITC only on output tax liability. Under RCM, the service provider (like her) has no output tax liability. Therefore, she cannot claim ITC, as per the law. This is how the scheme of the law works, and the Court cannot interfere in this policy decision unless it clearly violates the Constitution.

When the court cited a previous Supreme Court judgement, it ruled that since the argument that the law and the notification are unconstitutional has already been rejected, it also rejects the petitioner’s request to change (or “read down”) the law to treat sole proprietors the same as bodies corporate. Therefore, the petition is dismissed. The Court has refused to strike down or change Notification No. 29 of 2018 (which amended Notification No. 13 of 2017) and Sections 17(2) and 17(3) of the CGST Act. The Court has not accepted the Petitioner’s request as described at the start, and there is no order regarding costs, meaning each party will bear their own legal expenses.