GST under reverse charge

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The reverse charge mechanism (RCM) means the recipient of goods or services pays GST directly to the government, not the supplier. Normally, this GST is claimable as input tax credit if GST credit rules are met. However, if the recipient's final product is exempt, this credit isn't available, leading to a question of whether the GST paid under RCM becomes a direct expense or can be deducted from the payment to the supplier. While the GST amount remains the same, accounting treatment differs, with one view suggesting it's an expense and another suggesting a reduction in payment to the supplier.

manoj sonalkar

manoj sonalkar (Querist)
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26 March 2020 Sir

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. Thus liability to pay GST to government is of Receiver of those Goods / Services.

Normally , Recipient is eligible credit of this gst paid under reverse charge , provided conditions mentioned in gst credit rules satisfies.

( Hence below will be the accounting entry in books -
Freight Expenses ----------- DR 100
GST Receivable -------------DR 5 - [Cr.eligible on payment]
Transporter ---------------------CR 100
GST Payable-------------------- CR 5 )

However in case where the final product of Recipient is exempt under GST , credit of gst paid under reverse charge will not be available.

In this case question arises whether "the liability to pay tax" means "responsible to bear the expense".
Whether recipient should treat gst paid under reverse charge as his expenses or he can deduct the same while making payment to transporter. In both the cases gst paid under reverse charge will remain same.

( In our example , below will be the 2 different views -
View 1.
Freight Expenses ----------- DR 105
Transporter ---------------------CR 100
GST Payable-------------------- CR 5
View 2.
Freight Expenses ----------- DR 100
Transporter ---------------------CR 95
GST Payable-------------------- CR 5)

Whether both of the above views are correct.
Any supporting explanation / notification in gst.

Kindly Advice,

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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26 March 2020 View 1 is right. See RCM provisions section 9(3). GST payable under RCM it can't be deducted.

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manoj sonalkar

manoj sonalkar (Querist)
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26 March 2020 Thanks , In case transporter agrees to bear , is the view 2 is acceptable then.

CA Suresh Jain

CA Suresh Jain (Expert)
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26 March 2020 Even by the agreement, the liability to pay RCM can not be shifted. Pass entry No. 1 and issue a debit note to GTA for discount. Secondly, why RCM @ 5%. The option to pay 5% without ITC is available only to GTA service provider and not to the recipient of GTA service.

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manoj sonalkar

manoj sonalkar (Querist)
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27 March 2020 Thanks for input - CA Suresh Jain.

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