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Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the liability may be cast on the recipient under the reverse charge mechanism. Reverse charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply.

When is reverse charge mechanism applicable?

GST reverse charge mechanism is applicable only under circumstances specified under section 9(3) & 9(4), which have been explained as below:

Supply from unregistered dealer to registered dealer as per Sec 9(4):

Whenever a registered person procures supplies from an unregistered supplier, he needs to pay GST on reverse charge basis. However, supplies where the aggregate value of such supplies of goods or services or both received by a registered person from any or all the unregistered suppliers is less than five thousand rupees in a day are exempted. (Notification No. 08/2017 dated 28/06/2017)

Note:

1.  An unregistered dealer cannot make interstate supplies. This means that Reverse Charge in this case will apply only in case of intra-state supply by an unregistered dealer.

2. In case of supply of exempt goods and services, reverse charge mechanism shall not be applicable.

Goods & Services notified by Govt. for levy of Reverse Charge Mechanism- Sec 9(3):

Supply of goods under reverse charge mechanism (Vide notification No. 04/2017 dated 28th June 2017):

S. No. 

Description of Goods

Supplier of Goods

Recipient of Goods

1.

Cashew nuts, not shelled or peeled

Agriculturist

Any registered person

2.

Bidi wrapper leaves (tendu)

Agriculturist

Any registered person

3.

Tobacco leaves

Agriculturist

Any registered person

4.

Supply of lottery

State Government, Union Territory or any local authority

Lottery distributor or selling agent

5.

Silk yarn

Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn

Any registered person

Supply of services notified under reverse charge mechanism:

S. No.

Description of services

Supplier of Services

Recipient of Services

1.

GTA Services

Goods Transport Agency (GTA)

Any factory, society, co-operative society, registered person, body corporate, partnership firm, casual taxable person; located in the taxable territory

2.

Legal Services by advocate

An individual advocate, including a senior advocate or a firm of advocates

Any business entity located in the taxable territory

3.

Services supplied by an arbitral tribunal to a business entity

An arbitral tribunal

Any business entity located in the taxable territory

4.

Services provided by way of sponsorship to any body corporate or partnership firm

Any person

Any body corporate or partnership firm located in the taxable territory

5.

Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding: -

 (1) renting of immovable property, and (2) services specified below: -

 (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority;

 (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

 (iii) transport of goods or passengers.

Central Government, State Government, Union territory or local authority

Any business entity located in the taxable territory

6.

Services supplied by a director of a company or a body corporate to the said company or the body corporate

A director of a company or a body corporate

The company or a body corporate located in the taxable territory

7.

Services supplied by an insurance agent to any person carrying on insurance business

An insurance agent

Any person carrying on insurance business, located in the taxable territory

8.

Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company

A recovery agent

A banking company or a financial institution or a nonbanking financial company, located in the taxable territory

9.

A banking company or a financial institution or a nonbanking financial company, located in the taxable territory

Author or music composer, photograph her, artist, or the like

Publisher, music company, producer or the like, located in the taxable territory

Services through an E Commerce Operator:

If an E Commerce operator supplies operator services then reverse charge will be applicable to the e- commerce operator. He will be liable to pay GST

For example, UrbanClap provides services of plumbers, electricians, teachers, beauticians etc. UrbanClap is liable to pay GST and collect it from the customers instead of the registered service providers.

If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.

Registration:

A person who is required to pay tax under reverse charge has to compulsorily register under GST and the threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for special category states except J & K) is not applicable to him.

Input Tax Credit (ITC):

GST paid under the Reverse charge mechanism (RCM) would be available for Input Tax Credit if such Goods. Services are used for furtherance of business. The service recipient (i.e. who pays reverse charge) can avail Input Tax credit.

Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.

How to determine Time of supply under Reverse Charge?

The time of supply is the point when the supply is liable to GST. One of the factor relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, the recipient is liable to pay GST. Thus, time of supply for supplies under reverse charge is different from the supplies which are under forward charge.

In case of supply of goods, time of supply is earliest of: -

  • The date of receipt of Goods, OR
  • The date of payment, OR
  • The date immediately after THIRTY days from the date of issue of invoice by the supplier.

If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.

Note: The date of payment shall be earlier of:

  • The date on which the recipient entered the payment in his books OR
  • The date on which the payment is debited from his bank account.

Example:

  1. Date of receipt of goods 17th May 2018
  2. Date of payment 18th July 2018
  3. Date of invoice 2st June 2018
  4. Date of entry in books of receiver 20th May 2018

The Time of supply of service in this case will be 17th May 2018

If for some reason time of supply could not be determined supply under (1), (2) or (3) then it would be 20th May 2018 i.e., date of entry.

In case of supply of services, time of supply is earliest of: -

  • The date of payment, OR
  • The date immediately after SIXTY days from the date of issue of Invoice by the supplier.

If it is not possible to determine the time of supply under (1) or (2), the time of supply shall be the date of entry in the books of account of the recipient.

The date of payment shall be earlier of:

  • The date on which the recipient entered the payment in his books  OR
  • The date on which the payment is debited from his bank account

Illustration:

  1. Date of payment 10th August 2018
  2. Date of invoice 21st July 2018
  3. Date of entry in books of receiver 01st August 2018

The Time of supply of service in this case will be 10th August 2018

If for some reason time of supply could not be determined supply under (1) or (2) then it would be 01st August 2018 i.e., date of entry in books.

Some Important Points regarding Reverse Charge Mechanism (RCM):

1. Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge.

2. Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.

3. Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.

4. GST levied under the reverse Charge mechanism should be deposited with the Govt. by the 20th of the next month.

5. The details of GST paid under RCM would not be auto populated in the GSTR-2 and these details would be required to be manually furnished.

6. At the time of payment made to the supplier, the recipient shall also issue an payment voucher for the payment made.

7. A registered person will not loose input tax credit of GST paid under Reverse Charge even if the payment is not made within 180 days.

8. Reverse charge is also applicable to recipient registered under Composition scheme. No credit of RCM is available in such case.

The author can also be reached at agarwal.caaarti@gmail.com


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Category GST, Other Articles by - Arti Agarwal 



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