A welcome Step: Sponsorship services provided by body corporate under forward charge mechanism

A welcome Step: Sponsorship services provided by body corporate under forward charge mechanism

55th GST Council Meeting: It is recommended to bring the supply of sponsorship services by the body corporates under forward charge mechanism.


Under GST, sponsorship services provided by any person to a body corporate or partnership firm (including Limited Liability partnership) located in the taxable territory is liable to GST on reverse charge basis2 ('RCM') i.e. body corporate or partnership firm including LLP receiving sponsorship services are liable to pay GST under RCM.

The RCM was introduced to simplify tax compliance for smaller or unregistered entities. However, there may be instances where the sponsorship services are supplied by body corporates and the recipient is required to pay tax under RCM. To streamline this process, the GST council has recommended to bring the levy of GST on supply of sponsorship services by a body corporate under the forward charge mechanism ('FCM').

It is important to note that services provided by any person other than body corporate such as individuals, unincorporated entities, firms will continue to be taxed under RCM.

The recommendation to bring sponsorship services by a body corporate under FCM will entail the following benefits:

• Improve cash flows for the recipients as credits under RCM can be claimed only after making GST payment in cash which is no longer required post this amendment.

• The move to bring sponsorship services under the FCM ensures that suppliers can retain the full ITC without needing to reverse a proportionate ITC under Section 17(2) and Section 17(3) of the CGST Act. This is because these services will no longer be classified as exempt supplies.

• The businesses at times face challenge to determine whether a particular supply will qualify to be sponsorship service. The challenge to whether such supplies will be liable to GST under FCM or RCM will also get resolved thereby bringing greater certainty to the person liable to pay tax thereon.

While this recommendation is a welcome move to simplify taxation, the Council may consider making similar recommendations for other services currently liable to RCM such as the services of a recovery agent specifically when rendered by a body corporate.

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