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Understanding Reverse Charge Mechanism under GST

Sandeep Rawat 
on 10 September 2018

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"Reverse charge mechanism under GST law is quite complicated. There is also misconception among the taxpayers. I have received a lot of queries related to the reverse charge mechanism. Therefore through this article, I have tried to prepare Critical analysis which may be useful to the taxpayers to avoid confliction."

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.

TWO TYPE OF REVERSE CHARGE SCENARIOS IN GST LAW.

  • First is dependent on the nature of supply and/or nature of supplier. This scenario is covered by section 9 (3) of the CGST/ SGST (UTGST) Act and section 5 (3) of the IGST Act.
  • Second scenario is covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 of the IGST Act where taxable supplies by any unregistered person to a registered person is covered.

As per the provisions of section 9(3) of CGST/SGST (UTGST) Act, 2017/section 5(3)of IGST Act, 2017, 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.

 Similarly, section 9(4) of CGST/SGST (UTGST) Act, 2017/section 5(4) of IGST Act, 2017 provides that 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.

Accordingly, 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.

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.

ITC: A supplier cannot take ITC of GST paid on goods or services used to make supplies on which the recipient  is liable to pay tax.

TIME OF SUPPLY

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:-

  1. date of receipt of goods; or
  2. date of payment as per books of account or date of debit in bank account, whichever is earlier; or
  3. the date immediately following thirty days from the date of issue of invoice or similar other document.

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

  1. date of payment as per books of account or date of debit in bank account, whichever is earlier; or
  2. the date immediately following sixty days from the date of issue of invoice or similar other document.

Where it is not possible to determine time of supply using above methods, the time of supply would be the date of entry in the books of account of the recipient.

SELF-INVOICING

Self-invoicing is to be done when you have purchased from an unregistered supplier AND such purchase of goods or services falls under reverse charge.

This is due to the fact that your supplier cannot issue a GST-compliant invoice to you, and thus you become liable to pay taxes on their behalf. Hence, self-invoicing, in this case, becomes necessary.

COMPLIANCES IN RESPECT OF SUPPLIES UNDER REVERSE CHARGE MECHANISM:

  1. As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge.
  2. Maintenance of accounts by registered persons: Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge
  3. 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.
  4. Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B ofGSTR-1.
  5. Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.

REVERSE CHARGE -APPLICABILITY

A. Supply from an unregistered dealer to a Registered dealer

If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier.

The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.

Purchases up to Rs. 5,000 per day from unregistered suppliers will not attract GST.  In other words, there is a reverse charge on buying from unregistered dealers if you are dealing with unregistered suppliers and making payments above Rs. 5,000.

For Inter-state purchases the buyer has to pay IGST. For Intra-state purchased CGST and SGST has to be paid under RCM by the purchaser.

(TILL DATE IT IS NOT EFFECTIVE)

B. Services through an e-commerce operator

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

For example, UBER provides services of passengers transport through cab. UBER 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.

C. Supply of certain goods and services specified by CBEC

CBEC has issued a list of goods and a list of services on which reverse charge is applicable.

SUPPLIES OF GOODS UNDER REVERSE CHARGE MECHANISM:


S. No.

Description of supply 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


SUPPLIES OF SERVICES UNDER REVERSE CHARGE MECHANISM:

Notification No. 10/2017- Integrated Tax (Rate)


S. No.

Description of supply of service

Supplier of service

Recipient of service

1.

Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient.

Any person located in a non-taxable territory

Any person located in the taxable territory other than non-taxable online recipient.

2.

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

3.

Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity.

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

Any business entity located in the taxable territory

4.

Services supplied by an arbitral tribunal to a business entity

An arbitral tribunal

Any business entity located in the taxable territory

5.

Services provided by way of sponsorship to anybody corporate or partnership firm

Any person

Anybody corporate or partnership firm located in the Taxable territory

6.

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

  • renting of immovable property, and
  • services specified below: -
  • 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;
  • services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
  • Transport of goods or passengers.

Central Government, State Government, Union territory or local authority

Any business entity located in the taxable territory

7.

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

8.

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

9.

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 non- banking financial company, located in the taxable territory

10

Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1)(a) of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like

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

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

11

Services supplied by a person located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.

A person located in non-taxable territory

Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory.


POINTS TO BE NOTED:

No partial reverse charge will be applicable under GST. 100% tax will be paid by the recipient if reverse charge mechanism applies.

  • In case of B2B import of other services, the tax shall be payable by the recipient of services
  • In case of B2B import of goods, the tax shall be payable by the recipient of goods

For further clarification and professional assistance, feel free to contact at sandeeprawatca@gmail.com

The author has vast experience & knowledge in dealing with Direct and Indirect Taxation. He is providing his expertise service as Managing Partner at SRT Consultancy & Service. He can also be reached at sandeeprawatca@gmail.com


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