Applicability of GST on Arbitration Fees
and its RCM Perspective: A Comprehensive Analysis
By Yogesh Verma
(CS/LLB) / 2
min read / GST Article
Introduction:
Arbitration is a widely used
alternative dispute resolution mechanism that allows parties to resolve their
disputes outside of courts. With its increasing use in business transactions,
understanding its taxation implications under the Goods and Services Tax (GST)
regime is essential. This article delves into the taxation of arbitration
services, specifically focusing on reverse charge mechanisms, valuation, and
place of supply under the GST law.
Arbitration: A Brief Overview
Arbitration involves resolving disputes between parties
through an arbitrator or an arbitral tribunal. It offers a faster and more
flexible dispute resolution process compared to traditional litigation.
Depending on the arrangement between the parties, arbitration can be classified
into two types:
1.
Ad-hoc
Arbitration – Parties independently appoint the
arbitrator(s).
2.
Institutional
Arbitration – An arbitration institution
facilitates the process, providing a panel of arbitrators and related
administrative services.
Both types of arbitration have implications under the GST
law, especially regarding the treatment of services provided by the arbitrator
and the institution.
GST Applicability on Arbitration
Services
Under the GST regime, the services provided by arbitral
tribunals to business entities are taxable. However, the tax liability differs
based on the business entity’s turnover and the nature of the arbitration
service.
Reverse Charge Mechanism (RCM) on
Arbitration Services
The Reverse Charge Mechanism (RCM) shifts the liability of
paying GST from the service provider to the recipient. In the context of
arbitration services, the GST law mandates the use of RCM for certain
transactions.
- RCM
on Arbitral Tribunal Services:
Under GST, the services provided by an arbitral tribunal to a business
entity are taxable under reverse charge if the entity's turnover in the
previous financial year exceeds the prescribed threshold of ₹20 lakh (₹10
lakh in special category states and ₹40 lakh for certain businesses). The
business entity (recipient) is liable to pay GST on these services.
- Exemption
for Small Businesses: If
the business entity's turnover is below the threshold limits, the arbitral
tribunal’s services are exempt from GST. This exemption aims to prevent
small businesses from being forced into compulsory GST registration under
Section 24 of the CGST Act if they obtain arbitration services.
GST on Ad-hoc and Institutional
Arbitration
Arbitration services can be either ad-hoc or institutional,
and the GST treatment varies between these two types.
- Ad-hoc
Arbitration: In ad-hoc arbitration, where
the parties appoint the arbitrator(s) directly, the arbitrator’s fee is
subject to RCM. The recipient business entity is required to discharge the
tax liability under reverse charge.
- Institutional
Arbitration: Institutional arbitration
involves two distinct services:
1.
Service
provided by the arbitral tribunal:
The arbitrator’s fee is subject to RCM, and the recipient business entity is
liable to pay the tax.
2.
Service
provided by the arbitration institution:
The arbitration institution typically charges an administration fee for
facilitating the arbitration process. Unlike the arbitrator’s fee, this service
is not covered under RCM. The institution is responsible for discharging GST on
the administrative fees under the forward charge mechanism.
Clarification by CBIC on
Institutional Arbitration
The Central Board of Indirect Taxes and Customs (CBIC), in
its Circular No. 193/03/2016 – ST, clarified the GST treatment for arbitration
services under the earlier service tax regime. This circular still holds
relevance under GST. It states:
- Services
provided by a panel of arbitrators to a business entity or an arbitration
institution are taxable under RCM if the recipient business entity is
located within the taxable territory and has a turnover exceeding ₹10
lakh.
- The
institution providing facilitation services is liable to pay GST under
forward charge.
Valuation of Arbitration Services
under GST
The valuation of arbitration services for GST purposes is
based on the “transaction value,” which refers to the price paid or payable for
the supply of goods or services. In the case of arbitration, the arbitrator’s
fee is considered the transaction value.
Incidental Expenses
While providing arbitration services, an arbitrator may
incur various incidental expenses, such as travel, accommodation, and
administrative costs. Under GST law, these expenses are considered part of the
value of supply if they are incidental to the main service. This means that any
reimbursement of such expenses by the recipient business entity would be
subject to GST.
For example:
- If
an arbitrator travels to another location to conduct hearings, the travel
and accommodation expenses incurred by the arbitrator are considered
incidental to the arbitration service and would be included in the value
of supply.
- Any
reimbursement of these expenses by the recipient business entity would
also be subject to GST under reverse charge, provided the main service
(arbitrator's fee) is taxable under RCM.
Place of Supply for Arbitration
Services
The determination of the place of supply is crucial under
GST, as it dictates whether the tax will be charged as Central GST (CGST) and
State GST (SGST) or Integrated GST (IGST). However, there is no specific
provision under the GST law that directly addresses arbitration services.
Therefore, the place of supply for such services is determined based on the
residual provisions of the GST Act.
Domestic Transactions (Section 12 of
the IGST Act)
For arbitration services provided within India, the place of
supply is determined as follows:
- For
registered recipients: If
the recipient of arbitration services is a registered person, the place of
supply is the location of the recipient.
- For
unregistered recipients:
If the recipient is unregistered, the place of supply is the address on
record. If there is no address on record, the place of supply is the
location of the supplier (i.e., the arbitrator or arbitral tribunal).
Cross-border Transactions (Section
13 of the IGST Act)
For arbitration services provided in cross-border
transactions (e.g., when one party is located outside India), the place of
supply is determined as follows:
- Recipient’s
location: If the recipient’s location
is available, the place of supply is the recipient’s location.
- Supplier’s
location: If the recipient’s location
is not available, the place of supply defaults to the supplier’s location.
This provision is particularly relevant when arbitration
services are provided to foreign clients or when an Indian business entity
avails services from a foreign arbitral tribunal.
GST Registration and Compliance for
Arbitrators
Under Section 24 of the CGST Act, certain categories of
suppliers are required to register for GST, regardless of their turnover.
Arbitrators, however, are not mandatorily required to register if they
exclusively provide services that are subject to RCM. Since the liability to
pay GST is on the recipient under RCM, the arbitrator does not need to collect
and deposit GST. However, if the arbitrator provides other taxable services in
addition to arbitral services, they may be required to register and comply with
GST provisions.
Conclusion
The application of GST on arbitration services is an important
aspect for businesses and arbitrators to consider. The imposition of tax under
the reverse charge mechanism ensures that the burden of compliance is shifted
to business entities with significant turnovers, while exempting smaller
entities from compulsory registration.
For ad-hoc arbitrations, the arbitrator’s fee is subject to
RCM, while for institutional arbitrations, the arbitrator’s fee is taxable
under RCM, and the arbitration institution must discharge GST on its
administrative services under forward charge. Additionally, incidental expenses
incurred by arbitrators form part of the value of supply and are subject to
GST.
The place of supply rules under GST ensure that the tax is
appropriately levied based on the location of the recipient or supplier, making
it easier to determine whether CGST, SGST, or IGST applies.
By understanding these provisions, businesses can ensure
compliance with GST regulations, and arbitrators can manage their services
without unnecessary tax complications.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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