Reverse Charge Mechanism Under GST

Reverse charge, where the recipient is liable to pay tax, is common to many countries like Canada, Singapore etc. Normally, the supplier pays the tax on supply. In certain cases, the receiver becomes liable to pay the tax. The purpose of this charge is to increase tax compliance and tax revenues. Earlier, the government was unable to collect service tax from various unorganized sectors like goods transport agencies. Compliance and tax collections will therefore be increased through reverse charge mechanism. The concept of reverse charge mechanism was already present in service tax.

Reverse Charge under GST

Reverse charge means the liability to pay tax is by the recipient of goods/services instead of the supplier. Reverse charge may be applicable for both services as well as goods.

Provision of the Act levying Reverse Charge

  • Sec 9(3) of the CGST 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.

  • Sec 9(4) of the CGST Act 2017

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 the Government clarified through the notification vide Notification No.8/2017-Central Tax, that if the total inward supply from unregistered person exceeds Rs 5,000 in a day, then reverse charge will be applicable.

Example:

Mr. Anthony is not registered in GST as his aggregate turnover of taxable supplies is below threshold limit. Mr. Bond purchased goods from Mr. Anthony. In such case, Mr. Bond would be required to pay tax under reverse charge on value of such goods. It therefore appears that, threshold exemption for not-obtaining registration given under section 22(1) is only an administrative relief given to small business entities and it would not render the supplies made by them exempt.

It’s also important to note that, a taxable person who is eligible for payment of tax under composition scheme under section 10 of CGST / SGST Act, is also under obligation to pay tax under normal rates in respect of supply of goods/service received by him from unregistered persons, failing which benefit of composition scheme would not be applicable to him.

Key Features of RCM under GST

  • The scheme of partial reverse charge which was prevailing under the Service tax laws has been discontinued and Full Reverse Charge is applicable in GST.
  • Persons required to pay tax under reverse charge are required to obtain registration under the GST whether or not they make any outward supplies, and without having regard to the threshold limits for registration – in case of notified goods and services;
  • Composition suppliers being recipients of supplies on which tax is payable on reverse charge basis, will have to remit tax at the applicable rates, and not the concessional composition tax rates;
  • The recipient paying tax on reverse charge basis, should issue a ‘payment voucher’ at the time of making paying to the supplier;
  • The recipient paying tax on reverse charge basis on account of effecting inward supplies from unregistered persons, should issue an invoice in respect of the goods or services in warded, at the time of receipt of such goods or services.

Illustration:

Let’s assume that a GTA agency is procuring goods or service from an unregistered person for more than INR 5000 in a day. GTA by default should not be registered in GST as the GTA services provided by them to business entities are covered under reverse charge. So In this case the business entities being the recipient will be liable to pay GST under Reverse charge and when the GTA is providing service to individuals, it is exempt from GST.

So, now will GTA be required to get itself registered and pay tax under Reverse Charge by virtue of sec 9(4)? 

For this, let’s go back to Sec 9(4), which says that if any supply of goods and service is made by an unregistered person to a registered person, then the recipient will be liable to pay tax. In this example, GTA is not registered in GST. So it wouldn’t be liable to get itself compulsorily registered. Thus, it would not be liable to pay tax under Reverse charge.

1. 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.

Points to keep in mind:

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.

Only if the total supply from unregistered person exceeds Rs 5,000 in a day, then reverse charge will be applicable (Notification No.8/2017-Central Tax)

2.Supply of Specific Goods or Services

A) 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, XYZ Ltd provides services of plumbers, electricians, teachers, beauticians etc. XYZ Ltd 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.

B) Supply of certain goods and services specified by CBEC

CBEC has issued a list of goods (Notification No.4/2017-Central Tax Rate) and a list of services (Notification No. 13/2017- Central Tax Rate) on which reverse charge is applicable.

 

3. Sub-section (3) of section 5 of the Integrated Goods and Services Tax Act; (IGST)

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.

Sub-section (4) of section 5 of the Integrated Goods and Services Tax Act;

The integrated 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.

 

 

List of exempted services (Reverse Charge in GST)

Services provided by:-

(a) An arbitral tribunal to –
(i) Any person other than a business entity; or
(ii) A business entity with a turnover up to (20 lakh rupees) rupees twenty lakh (10 lakh rupees in a special category state) in the preceding F.Y;
(b) A partnership firm of advocates or an individual as an advocate other than a senior advocates, by way of legal services to-
(i) An advocate or partnership firm of advocates providing legal services;
(ii) Any person other than a business entity; or
(iii) A business entity with a turnover up to (20 lakh rupees) rupees twenty lakh (10 lakh rupees in a special category state) in the preceding financial year; or
(c) A senior advocate by way of legal services to-
(i) Any person other than a business entity; or
(ii) A business entity up to rupees 20 lakh (10 lakh rupees in a special category state) in the preceding F.Y;

 

4. (A) Time of Supply of Goods – Reverse Charge

 

Where tax is payable on reverse charge basis, the time of supply is appointed to be the earliest of

  • Date of receipt of goods, (b) date of payment or (c) 30 days from the date of issue of invoice by the supplier.

If for any reason, one or these three dates cannot be determined then the time of supply will be the date of recording the supply in the books of the recipient.

 

Keeping in mind the definition of reverse charge in section 2(98), the above provision does not apply to payment of tax by an electronic commerce operator but only to those cases of supply which fall under sub-section 5 to section 9 of the Act.

 

Exceptions: date of receipt of payment shall be the date on which the payment is accounted in the books of the supplier or the date reflected in the bank account of the supplier, whichever is earlier.

ILLUSTRATION

  • On 25 may 2017, PQR Ltd has purchased stationary from an unregistered dealer.
  • On 26 may 2017, PQR ltd received the stationary in my office.
  • Payment for stationary has been made on 1st June, 2017
  • Now PQR is liable to pay GST under reverse charge since the supplier is an unregistered person.

 

What will be the “Time of supply” in such a scenario?

In this case“Time of supply” would be 26 may 2017 the date of receipt of goods.

 

(B) Time of Supply of Service – Reverse Charge

Where tax is payable on reverse charge basis, the time of supply is appointed to be the earlier of date of payment or 60 days from the date of issue of invoice by the supplier. If for any reason, one or all of these two dates cannot be determined then the time of supply will be the date of recording the supply in the books of the recipient. In case of transactions between ‘associated enterprises’ and the supplier is located outside India, the date of recording the supply in the books of the recipient alone will be relevant.

Again, please note that in view of the definition of reverse charge in section 2(98), the above provision does not apply to payment of tax by an electronic commerce operator under subsection 5 to section 9 of the Act.

Exceptions:  date of receipt of payment shall be the date on which the payment is accounted in the books of the supplier or the date reflected in the bank account of the supplier, whichever is earlier.

ILLUSTRATION

  • XYZ ltd is a goods transport agency (GTA) and providing service to ABC ltd
  • Since reverse charge is applicable on GTA service. Thus ABC as a recipient is liable to pay tax under reverse charge.
  • Let’s say the date of provision of service and date of issue of invoice is 25 may 2017.
  • The date of payment is 10 June 2017. What is the “Time of Supply” would be the date of payment i.e. 10 June 2017.

Now let us assume that ABC has not made the payment to XYZ within 60 days. So now the “Time of Supply” shall be 60 days from the date of invoice i.e. 26 July 2017.

 

5CGST Exemption limit for Reverse Charge transactions notified

Section 9(4) of the CGST Act 2017 provides that central 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.

Thus in order to provide marginal relief to Registered Taxable person, Central Government vide Notification No. 08/2017-Central Tax (Rate), dt. 28-06-2017 has w.e.f 1st July 2017 exempted supplies of goods or service or both received by a registered person from any or all such unregistered supplier(s) if the aggregate value of such supplies does not exceed Rs. 5000 in a day.

 6. Goods or services on which tax will be payable under reverse charge mechanism under CGST Act and IGST Act

Central Government vide Notification No. 04/2017-Central Tax (Rate), dt. 28-06-2017 and Notification No. 04/2017-Integrated Tax (Rate), dt. 28-06-2017 has w.e.f 1st July 2017 provided that CGST/IGST on needs to be paid on the reverse charge basis completely (100%) by the recipient of such goods. The detailed list of such goods is as follows:

S.NoDescription of Supply of goodsSupplier of goodsRecipient of Supply
i.Cashew nuts, not shelled or peeledAgriculturistAny registered person
ii.Bidi wrapper leaves (tendu)AgriculturistAny registered person
iii.Tobacco leavesAgriculturistAny registered person
iv.Silk yarnAny person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarnAny registered person
v.Supply of lotteryState Government, Union Territory or any local authorityLottery distributor or selling agent

 

7. Central Govt vide Notification No. 13/2017-Central Tax (Rate), dt. 28-06-2017 and Notification No. 10/2017-Integrated Tax (Rate), dt. 28-06-2017 has e.f 1st July 2017 provided the category of services on which CGST/IGST needs to be paid on the reverse charge basis completely (100%) by the recipient of such services. The detailed list of such services is as follows:

S.NoSupplier of ServiceCategory of Supply of ServiceRecipient of Service
i.Goods Transport Agency (GTA)Supply of Services by a goods transport agency (GTA) in respect(a) any factory registered under or governed by the
of transportation of goods by road to-Factories Act, 1948 or
(a) any factory registered under or governed by the Factories(b) any society registered under the Societies
Act, 1948 orRegistration Act, 1860 or under any other law for the
(b) any society registered under the Societies Registration Act,time being in force in any part of India; or
1860 or under any other law for the time being in force in any(c) any co-operative society established by or under
part of India; orany law; or
(c) any co-operative society established by or under any law; or(d) any person registered under the Central Goods and
(d) any person registered under the Central Goods and ServicesServices Tax Act or the Integrated Goods and Services
Tax Act or the Integrated Goods and Services Tax Act or theTax Act or the State Goods and Services Tax Act or the
State Goods and Services Tax Act or the Union Territory GoodsUnion Territory Goods and Services Tax Act; or
and Services Tax Act; or(e) anybody corporate established, by or under any
(e) anybody corporate established, by or under any law; orlaw; or
(f) any partnership firm whether registered or not under any(f) any partnership firm whether registered or not
law including association of persons; orunder any law including association of persons; or
(g) Any casual taxable person.(g) any casual taxable person
located in the taxable territory
ii.An individual advocateServices supplied by an individual advocate including a seniorAny business entity located in the taxable territory.
including a senior advocate oradvocate by way of representational services before any court,
firm of advocatestribunal 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.
iii.An arbitral tribunalServices supplied by an arbitral tribunal to a business entityAny business entity located in the taxable territory.
iv.Any PersonServices provided by way of sponsorship to anybody corporate or partnership firm.Anybody corporate or partnership firm located in the
Taxable territory.
v.Central Government, State Government, Union territory or local authorityServices supplied by the Central Government, StateAny business entity located in the taxable territory
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
vi.A director of a company orServices supplied by a director of a company or a bodyThe company or a body corporate located in the
a body corporatecorporate to the said company or the body corporatetaxable territory
vii.An insurance agentServices supplied by an insurance agent to any person carryingAny person carrying on insurance business, located in
on insurance businessthe taxable territory
viii.A recovery agentServices supplied by a recovery agent to a banking company or a financial institution or a nonbanking financial companyA banking company or a financial institution or a nonbanking financial company, located in the taxable territory
ix.Author or music composer,Supply of services by an author, music composer, photographer,Publisher, music company, producer or the like, located
photographer, artist, or the likeartist or the like by way of transfer or permitting the use orin the taxable territory
enjoyment of a copyright covered under clause (a) of subsection
(1) of section 13 of the Copyright Act, 1957 relating to original
literary, dramatic, musical or artistic works to a publisher,
 Music company, producer or the like.

 

8. Two more category of services have been notified on which IGST needs to be paid on the reverse charge basis completely (100%) by the recipient of such services: –

S.NoSupplier of ServiceCategory of Supply of ServiceRecipient of Service
i.Any person located in a non-taxable territoryAny service supplied by any person who is located in a nontaxable Territory to any person other than non-taxable online recipient.Any person located in the taxable territory Other than nontaxable online recipient.
ii.A person located in a non-taxable territoryServices supplied by a person located in nontaxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.Importer, as defined in clause (26) of section 2 of the Customs Act, 1962, located in the taxable territory.

 

 

9. Tax on RCM on gold ornaments – Clarification

Section 9(4) of the CGST Act, 2017 mandates that tax on supply of taxable goods by an unregistered supplier to a registered person will be paid by the registered person under reverse charge mechanism. This provision, however, must be read in conjunction with section 2(105) read with section 7 of the CGST Act, 2017. Section 2 (105) defines supplier as a person supplying the goods or services. Section 7 provides that a supply is a transaction for a consideration by a person in the course or furtherance of business.

 

Even though the sale of old gold by an individual is for a consideration, it cannot be said to be in the course or furtherance of his business (as selling old gold jewellery is not the business of the said individual), and hence does not qualify to be a supply per se. Accordingly, the sale of old jewellery by an individual to a jeweller will not attract the provisions of Section 9(4) and jeweller will not be liable to pay tax under reverse charge mechanism on such purchases. However, if an unregistered supplier (who is dealing in such trade) of gold ornaments sells it to registered supplier, the tax under RCM will apply.

10. Input Tax Credit

The recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services. The only condition is that the goods and services are used or will be used for business or furtherance of business. Unfortunately, ITC cannot be used to pay output tax, which means that payment mode is only through cash under reverse charge.

11. Invoice

The supplier has to mention in his tax invoice that the tax is payable on reverse charge.

12. Miscellaneous Points

  • If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim any credit of tax paid. Along with the dealer is liable to pay tax at normal rates applicable to such supply and not the rate applicable for composition scheme.
  • Even advance payments are subject to Reverse charge mechanism.
  • Unlike Service Tax, there is no concept of partial reverse charge. The recipient has to pay 100% tax on the supply.
  • As per the proposed Bill, GST compensation cess will be levied and collected at a date which will be notified by the government at a later date.
  • All persons who are required to pay tax under reverse charge have to register for GSTirrespective of the threshold*.

*Threshold: Turnover in a financial year exceeds Rs 20 lakhs (Rs 10 lakhs for North eastern and HP)

 

FAQs

1. What does the payment of tax under reverse charge mean?

Ans. In terms of Section 2(98), the terms reverse charge is defined to mean liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both.

2. Can one use input tax credit for payment of tax under reverse charge basis?

Ans. No, the amount available in the electronic credit ledger may be used for making any payment towards ‘output tax’. Further, the definition of output tax u/s 2 (82) specifically excludes tax payable under reverse charge basis. Therefore, input tax credit cannot be used for payment of tax under reverse charge basis.

3. What are the categories of supplies which are liable to tax under reverse charge mechanism?

Ans. The categories of supplies which are liable to tax under reverse charge mechanism are yet to be notified. Such categories of supplies may involve supply of goods or services or both as may be notified by the Government as per the recommendations of the council. However, in terms of Section 5(4), it is specified that the registered recipient of goods or services or both is liable to pay tax under reverse charge in the event supplier of goods is not registered.

4. Whether the Job worker is liable to pay GST under reverse charge mechanism on the goods or services if notified?

Ans. Yes. In terms of section 9(3) of CGST Act, 2017 on the specified categories of supply of goods and/or services, the recipient of such goods and/or services is liable to pay GST under reverse charge basis. Further, Section 143 of CGST Act, 2017 does not provide any exemption to job worker in this regard.

5. How do we compute GST liability on supplies which are liable to tax under reverse charge?

Ans. Separate provisions have been provided under the present service tax laws to determine the service tax payable on reverse charge mechanism which is linked to date of payment to the service provider unless the payment is made within 3 months of the date of invoice. However, such provisions are not forthcoming from the CGST Act, 2017. Accordingly, general provisions relating to change in rate of tax shall be applied in determining the appropriate rate of tax.

6. What are the different types of supplies which are liable to tax under reverse charge mechanism?

Ans.  As per Section 9 of the CGST Act, 2017 there are two types of supplies which are liable to tax under reverse charge mechanism which are:-

  1. Specified categories of supply of goods or services or both as notified by government on recommendation of the council.
  2. Supply of taxable goods or services or both by an unregistered supplier to a registered person.

 

7. What will be the time of supply where tax is liable to be paid under reverse charge mechanism?

Ans. In case of tax liable to be paid under reverse charge mechanism, the time of supply shall be the earliest of the following:

  • Date of receipt of goods by the recipient; or
  • Date on which the payment is entered in the books of accounts of the recipient; or
  • Date on which payment is debited in the bank account of the recipient; or
  • Date immediately following thirty days from the date of issue of invoice by the supplier.

Where the time of supply cannot be ascertained as above, the date of entry in the books of accounts of the recipient shall be the time of supply of goods.

To illustrate, Mr. A being registered taxable person procures goods from Mr. B who is unregistered. The chronology of events are as follows:

 

Date of receipt of goods by Mr. A15-Jul-17Time of supply shall be July 15,
Date on which the payment is entered in the books of accounts of Mr. A20-Jul-17
Date on which payment is debited in the bank account of Mr. A22-Jul-17

 

In the event, the above details are not available and the date of entry relating to purchase of goods in the books of Mr. A is July 30, 2017, the time of supply of goods will be July 30, 2017.

8. What would be the time of supply of services taxable under reverse charge mechanism?

Ans. In terms of Section 13(3) of the CGST Act, 2017, the time of supply of services for remittance of tax under reverse charge mechanism shall be the earliest of the following:

  • Date of payment recorded in the books of accounts;
  • Date of debit in bank account;
  • Sixty days from the date of issue of invoice or any other document by the supplier; or
  • Date of entry in the books of accounts of the recipient

 

9. Time of supply of services under reverse charge mechanism where the supplier of service is associated enterprises?

Ans. In case of associated enterprises located within India, the time of supply in terms of Section 13(3) shall be the earliest of the following:

  • Date of payment as per books of accounts; or
  • Date on which payment is debited in the bank account of the supplier; or
  • Sixty days from the date of issuing invoice by the supplier; or
  • Date of entry in the books of accounts of the recipient.

Where associated enterprises is located outside India, the time of supply shall be the earliest of the following dates:

  • Date of entry in the books of accounts of the recipient; or
  • Date of payment.

 

ParticularsNon-associated enterprisesAssociated Enterprises
Date on which payment is entered in books of accountsDecember 15,2017December 15,2017
Date on which payment is debited to bank accountDecember 17,2017December 17,2017
Date of issuance of invoiceDecember 10,2017December 10,2017
Sixty days from the date of issuing invoiceFebruary 09,2018February 09,2018
Date of entry in the books of accounts of the recipientDecember 10,2017December 10,2017
Time of supplyDecember 10,2017December 15,2017

 

10. What is the invoice or other documentation required in case reverse charge cases?

Ans. In case of categories of goods or services that are notified, on which tax is payable on reverse charge basis, the recipient of the goods or services would be required to issue a payment voucher at the time of making payment to the supplier- Sec31(3)(g).

Further, where the tax liability is cast on the recipient for the reason that the supplier of goods or services is an unregistered person, the recipient will be required to issue an invoice in respect of such goods or services -Sec31(3)(f).

 

11. Who is responsible to pay taxes?

Ans. Generally, the person effecting taxable supplies is liable to pay taxes. However, following are certain exceptions:

  • Reverse charge: In terms of Section 5(3) of the IGST Act, 2017, supply of goods or services or both, as may be notified by the Government on the recommendations of the Council, the tax shall be paid by the recipient under reverse charge; and
  • E-Commerce: Categories of services as may be notified by the Government on the recommendation of Council the tax on which shall be paid by the electronic commerce operator if such services are supplied through it.

12. Should we discharge GST liability for all reverse charge having small amounts of Transaction or any amount limit is there?

Ans. It has been decided that Rs. 5,000/- per day exemption will be given in respect of supplier received from unregistered person. For Supplies above this amount, a monthly consolidated bill can be raised.

 

Related Article: https://www.getsetbusiness.com/gst-articles/decision-on-rcm

 


The views expressed in this article must not be treated as a legal opinion or consultancy in any manner. The objective of the article is to discuss the key features of reverse charge mechanism under GST.

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