Payment of GST on Supply of Goods under Reverse Charge Mechanism: A big dilemma

Prior to introduction of GST, Reverse Charge Mechanism was common for Service Sector as several of the services were in Reverse Charge. Thus Service Sector is well comfortable with the Reverse Charge provisions. However the goods sector is in dilemma as with GST set to be roll-out from the mid-night of 30th June, the manufacturing and trading sector will face a big change with respect to Payment of GST on Reverse Charge in respect of Goods.

Power to levy GST on recipient under reverse charge arrives from Section 9(3) of CGST Act, 2017 and Section 5(3) of IGST Act, 2017 which says that "The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the  supply of such goods or services or both."

Central Government in terms of Notification No. 4/2017- Central Tax (Rates) and Notification No. 4/2017- Integrated Tax (Rates) has notified certain goods, taxes on which shall be paid by recipient subject to some conditions.

Thus in serial number 1, 2 and 3, if supplier of these goods is agriculturist and the recipient is any registered person, taxes needs to be paid by such registered person under reverse charge. However if recipient is unregistered, the supply would fall under normal charge.

In case of Silk Yarn, if supplier is manufacturer of silk yarn and recipient is any registered person, GST needs to be paid by such registered person under reverse charge.

In case of Lottery, if supplier of lottery is State Government, UT or any local authority and recipient is lottery distributor or selling agent, GST needs to be paid by such lottery distributor or selling agent.

For all other supplies of goods, GST will be paid by the supplier under forward charge. However taxes needs to be paid under reverse charge for any supply of goods if supplier of goods is an un-registered person and recipient is registered.

Section 9(4)of CGST Act, 2017 or Sec 5(4) of IGST Act, 2017 provides as follows “The tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in  relation to the supply of such goods or services or both.”

However Notification No. 8/2017- Central Tax (Rate) dated 28.06.2017, gives an exemption to the aforesaid provision by providing that the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts intra-State supplies of goods or services or both received by a registered person from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the Central Goods and Services Tax Act, 2017.

Provided that the said exemption shall not be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day.

Thus if supply is intra-state,  supplier of goods is an un-registered person and recipient is registered, and the aggregate value of all such supplies in a day exceeds Rs. 5,000 then GST on such supply will needs to be paid by the recipient under reverse charge.

However there is no such monetary threshold notified under IGST Act, 2017 meaning thereby in case of Inter-state supplies, even supplies of less than Rs. 5000 will attract tax on reverse charge if supplier is un-registered and recipient is registered.

The aforesaid provisions of reverse charge may also give birth to Cascading effect as credit chain will be blocked and there may be some double taxation. Thus all the procurement needs to be well planned.

There are several procedural requirements as well in case of any reverse charge supply received by recipient.

• Issuance of Invoice by recipient for all reverse charge supplies.
• Issuance of Payment Vouchers by recipient in case of payment in respect of reverse charge supplies.
• Determination of time of supply of goods in such cases.
• Upload of invoice particulars for reverse charge liability.
• Payment of GST by E-cash ledger as credit is not permitted to be utilized for reverse charge liability thus leading to Working Capital Blockage.
• Claim of Input Tax Credit of taxes paid under reverse charge subject to eligibility as per the act.

Although a little relaxation have been given by providing a monetary threshold of RS. 5,000 for a day, Reverse Charge Mechanism will prove to be a big hurdle for a manufacturing sector or for small traders. It may also lead to discouraging the purchases from small tax payers who are within the threshold of Rs. 20 Lakhs.

Disclaimer: This write up is based on the understanding and interpretation of author and the same is not intended to be a professional advice.

The author is a Chartered Accountant and can also be reached at goyalcanitin@gmail.com