No Constitutional Violation in GST RCM u/s 17(2) and 17(3) of CGST Act on Security Services: Bombay HC [Read Order]

The Bombay High Court has dismissed a writ petition challenging the constitutional validity of Sections 17(2) and 17(3) of the Central Goods and Services Tax (CGST) Act, 2017, in the context of security services rendered under the Reverse Charge Mechanism (RCM).

The assessee argued that treating taxable supplies under RCM as “exempt supplies” unfairly denied proprietorship entities the benefit of Input Tax Credit (ITC), thereby violating Articles 14 and 19(1)(g) of the Constitution. The petitioner contended that such treatment created inequality between corporate and non-corporate entities, increasing costs for small service providers and affecting their competitiveness.

The counsel for the Petitioner submitted that in the Notification a body corporate is excluded from the phrase "supplier of service” and, therefore, all other entities are discriminated and consequently equals have been treated unequally, thereby violating Article 14 of the Constitution of India. He further submitted that on account of the impugned provisions and the Notification issued, the Petitioner is unable to compete since the Petitioner is now not entitled to avail ITC, thereby resulting in increased cost of rendering service.

Therefore it was argued that the Petitioner’s right to carry on business under Article 19(1)(g) of the Constitution of India is violated. He further submits that the objective of the GST Act is to avoid cascading effect and seamless transfer of tax credit and the impugned provisions denying the benefit of ITC run contrary to the objective of the GST Act.

The Petitioner counsel also submits that the impugned provision to the extent it treats taxable supplies under RCM as exempt and consequently denies the benefit of ITC to the Petitioner is ultra vires the Constitution of India or at least the provisions of Section 17(2) and (3) should be read down to exclude the proprietorship form of entity.

The Court observed that classification between body corporates and other entities is a well-recognized principle in taxation and does not amount to treating equals unequally.

The bench reasoned that the GST framework explicitly provides that supplies taxable under RCM are deemed exempt in the hands of the supplier, meaning no output tax liability arises against which ITC can be claimed. Since ITC is a statutory concession rather than an absolute right, its availability is subject to conditions and restrictions laid down in law.

On the issue of alleged violation of the right to carry on business, the Court held that Article 19(1)(g) of the constitution guarantees freedom to conduct business but does not ensure competitiveness or profitability. It further noted that the petitioner sought GST registration in 2019, well after the RCM provisions for security services were introduced, and hence had full knowledge of the scheme.

The Bombay High Court cited precedents including R.K. Garg v. Union of India and Hoechst Pharmaceuticals v. State of Bihar, reiterating that economic legislation is based on experimentation and classification in taxation enjoys wide latitude.

The bench noted that “In matters of taxation, the Court must defer to legislative judgment and policy. Where a statute empowers the Government to grant exemption from tax to any specified class, in public interest, the Court would not question the policy of the Government in exercising this power or interfere merely because the exemption granted has been confined to new units and not extended to all units doing the same business. Mere excessiveness of tax or the absence of corrective machinery would not render the tax as an unreasonable burden and thereby violative of Article 19(1)(g).”

The Division Bench comprising Justices M.S. Sonak and Jitendra Jain rejected the challenge, holding that taxation laws enjoy a strong presumption of constitutionality and courts exercise limited interference in fiscal matters.

Concluding that no constitutional infirmity was made out, the Court upheld the validity of Sections 17(2) and 17(3) of the CGST Act, dismissing the petition.

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