Reverse Charge On GST

Usually, the seller collects GST from Buyers and pays it to the government. However, in some cases buyers pay GST directly to the government. This is called a reverse charge on GST.

There are two sorts of reverse charge scenarios provided in law. The first scenario is dependent on the nature of the supply and/or nature of the supplier. The first scenario includes section 9 (3) of the CGST/SGST (UTGST) Act and section 5 (3) of the IGST Act. The Second scenario includes section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act where taxable supplies by any unregistered person to a registered person is covered.

According to 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, with 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. Like-wise, 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 also 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 will 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.

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NOTE:-

The CBIC has amended the earlier Notification No. 13/2017-Central Tax (Rate) dated 28 June 2017 to state that RCM shall be applicable to renting an automobile designed to carry passengers where the value of the fuel is included in the consideration charged.

Reverse Charge is applicable under certain conditions:- 

  • Supply to a registered dealer from an unregistered dealer

In case 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 need to be paid directly by the receiver to the Government rather than the supplier.

Services through an e-commerce operator

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

Supply of certain goods & services specified by CBEC

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

The time of supply of goods and services

Time of Supply in case of Goods:

In the case of reverse charge, the time of supply shall be the earliest of the following dates:

  • The date of receipt of goods
  • The date of payment*
  • The date shortly after 30 days from the date of issue of an invoice by the supplier

In case it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

Time Of Supply in case of Services:

In the case of reverse charge, the time of supply shall be the earliest of the following dates:

  • The date of payment
  • The date shortly after 60 days from the date of issue of invoice by the supplier

In case it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

For Goods (Reverse charge)

CBEC has posted a list of goods on which reverse charge mechanism will be applicable under GST

Serial 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)

Silk yarn

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

Any registered person

4A)

Raw cotton

Agriculturist

Any registered person

5)

Supply of lottery

State Government, Union Territory or any local authority

Lottery distributor or selling agent

6)

Used vehicles, old and used goods, waste and scrap, seized and confiscated goods

Central Govt., State Govt., Union territory or a local authority

Any registered person

 

For Services (Reverse charges)

CBEC has posted a list of services on which reverse charge mechanism will be applicable under GST

Serial No.

Provider

Recipient

1)

Goods transport agency

Casual Taxable person, body corporate, partnership firm, any society, factory, a person registered under CGST, SGST, IGST Act

2)

Recovery Agent

Banking Company, NBFC or any financial institution

3)

A director of a corporation or a body corporate

A company or a body corporate

4)

An individual advocate or a firm of advocates, An arbitral tribunal

Any business entity

5)

An insurance agent

Any person carrying on insurance business

 

Points to be noted:

100% tax is going to be paid by the recipient if the reverse charge mechanism applies. The partial reverse charge will not be applicable under GST.

(1) In the case of B2B import of other services, the tax shall be payable by the recipient of services

(2) In the case of B2B import of goods, the tax shall be payable by the recipient of goods

Liability of Registration Under RCM (Reverse Charge Mechanism)

Under RCM who is liable to register in the new tax regime?

A person who pays taxes under reverse charge is required to register under GST regardless of the edge and annual threshold Limit is 20 lakhs (10 lakhs just in case of Hill states and North Eastern State)

Note: States, in the GST council meeting, were given liberty to imposed double threshold limit for registration i.e. 40 lakh up from the earlier INR 20 lakh.

The government, in the notification, has finally imposed the reverse charge mechanism starting from 1st February 2019 as per the GST acts and amendments. Also, to note that up to INR 5000 exemptions will be removed effectively.

RCM Provisions Under GSTR Forms – GSTR 1 and GSTR 2

This system is being extended from the VAT system. In case the supplier is registered, but the products or services come under reverse charge mechanism, the input tax credit cannot be claimed by the supplier because the tax is not credited by the supplier but the receiver is paying the taxes.

In the case of importers of goods, taxes got to be paid under reverse charge mechanism to the Government on the import. This is in addition to the import duties.

The details of the charges concerning the inward supply of goods or services are to be mentioned within the GSTR1. The details of inward supply are stated within the form GSTR 2.

A person who is liable to pay tax under the reverse charge mechanism must be registered under GST irrespective of the turnover.

The goods/service that supplier gets the input tax credit which is paid under the reverse charge. The only condition is that the input tax credit is used only for the advancement of the business.

The Manner of Payment of GST under the RCM

As per section 49(4) of the CGST Act 2017, ITC is often used for payment of output tax only. Therefore tax under reverse charge is often paid through cash only without availing the advantage of ITC. The supplier must mention in his tax invoice whether or not the tax is payable on reverse charge.

Input Tax Credit:

The service recipient can avail Input Tax credit on the Tax amount that’s paid under reverse charge on goods and services. The only condition is that the goods/services are used or will be used for business or furtherance of business.

If the composite dealer falls under RCM then the dealer is not eligible to claim any credit of tax paid. The tax will be paid at the standard applicable rates and not at the composition rates.

Registration Requirement under Reverse Charge Mechanism (RCM):

According to Section 24 of the CGST Act 2017, a person paying tax under the reverse charge mechanism has to compulsorily get registered even if the turnover is below the threshold limit.

Applicability of GST Compensation Cess:

GST Compensation Cess will be applicable to tax paid under RCM also. The aim is to compensate States for loss of revenue on the implementation of GST. This is going to be applicable for 5 years from the date GST gets implemented.

Important Points to be Taken Care Under Reverse Charge Mechanism:

  • Goods and services notified under section 9(3) or section 9(4) needs to have a person registered under
  • Under the RCM, the GST applicable must be submitted to the government on every 20th of next month
  • The input tax credit will be available for all the RCM goods and services used for the advancement of business according to the GST paid. And the service obtaining individual, who is also paying reverse charge can take the benefits of an input tax credit.
  • There will be no auto-population of details of the GST paid under the RCM in GSTR 2, but it will be subjected to the manual furnishing of details.
  • Wherever the reverse charge mechanism is applicable the invoice must be presented by the recipient on itself while the invoices along with the consolidated purchases should be issued on a regular basis on all the GST applicable who are under section 31(3).
  • The payment voucher must be presented by the recipient at the time period of the supplier’s payment.
  • The ITC is not applicable to the reverse charge payment to the authority.
  • The composition scheme registered individuals also come under the reverse charge, well there will be no credit of RCM be availed.
  • The RCM is also applicable to payments made in advance.

Note: In case, a dealer is unregistered under GST, then he’s not allowed to deal in any interstate transactions. For any RCM to applicable, there must be only intra-state transactions.

Conclusion: With the most important tax reform ready to be implemented, Reverse charge mechanism isn’t a new concept as we are already dealing with this in the service tax. But imposing a 100% reverse charge is certainly a big change. There are both pros and cons of this RCM but then no precise conclusion can be drawn currently as to how the society will be impacted by its imposition. On one hand it’ll definitely be burdensome for the small supply receivers, but on the other hand, it’ll increase tax compliance for the country as a whole and would increase transparency.

References:

  • Ekeeda - Commerce & Management
  • cbic.gov.in
  • Cleartax.in

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1 comment

  • Ramen Ghosh

    A plot of land jointly held by a family transferred the development right to a promoter for construction of residential and commercial apartments in sharing basis in the year 2014. The construction now completed. The promoter now apply for completion certificate for delivering the possession to the landowner. Who will pay the GST. The promoter or landowner.

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