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REVERSE CHARGE UNDER GST

Introduction

With the introduction of GST, came a new and maiden concept “Reverse Charge”. The concept of “Reverse Charge” was not available in any of the earlier laws. Under the GST rules, where in, a registered person receives any goods or services or both, which is taxable, from an unregistered person , the registered person shall be required to pay tax and comply with all the other compliances like issue of invoice, filing return and assessment of the same.

As per section 9(4) of the CGST Act , GST,  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.

Under the normal scenario, the supplier of goods/services collects GST from the recipient and then deposits the GST with the Government. However, under reverse charge mechanism, GST is paid and deposited by the recipient with the Government on behalf of the supplier of service.

The provisions of reverse charge are not applicable to inter-state supplies as inter-state supplies cannot be made by unregistered suppliers.

Applicability of Reverse Charge

  1.  Unregistered dealer selling to a registered dealer
  2. Goods and services notified by Government for levy of Reverse Charge Mechanism (Section 9(3) of the CGST Act)
  3. Services through an e-commerce operator

Applicability of “Reverse Charge” under Sec 9(4)

Few important conditions need to be satisfied for the applicability of reverse charge as given below:

  1. The transaction should be covered under the definition of "supply". If the transaction does not fall within the purview of supply, the concept of reverse charge will not be applicable. For eg - sale of land and sale of alcohol from unregistered to registered person is not considered as supply. So reverse charge is not applicable. 
  2. Supply should be in respect of taxable goods or services or both.If the supply involves exempt goods or services or both this section won’t be applicable. For example, a registered person stays in a hotel whose room tariff is less than Rs. 1,000/-. Reverse charge is not applicable since services by a hotel having declared tariff less than Rs. 1,000/- per day is an exempt service.
  3. Supplier should be unregistered.
  4. Recipient should be registered

Applicability of Reverse charge under Sec 9(3) – Goods and services notified by Government for levy of Reverse Charge Mechanism

Reverse charge under the above section is available both for inter-state and intra-state transactions. The goods and services on which GST shall be levied under Reverse Charge Mechanism is given as under:

Reverse charge on Goods under Section 9(3)

  1. Cashew nuts, not shelled or peeled supplied by an agriculturist. Recipient of supply is any registered person.
  2. Bidi wrapper leaves (tendu) supplied by an agriculturist. Recipient of supply is any registered person.
  3. Tobacco leaves supplied by an agriculturist. Recipient of supply is any registered person.
  4. Silk yarn supplied by a person who manufactures silk yarn from raw silk worm cocoons for supply of silk worm. Recipient of supply is any registered person.
  5. Supply of lottery by State Government, Union Territory or Local Authority. Recipient of supply is lottery Distributor or selling agent

Reverse charge on Services under Section 9(3)

Description of services

Supplier of services

Recipient of supply

 

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 taxable territory other than non-taxable online recipient.

 

Supply of services by Goods Transport Agency (GTA)

Goods Transport Agency (GTA)

Factory, Society, co-operative society, person registered under CGST, IGST, UTGST and SGST Act, any body corporate, partnership firm, casual taxable person established under their respective acts – located in taxable territory.

 

Services provided by an individual advocate

Any individual advocate including a Senior Advocate or firm of Advocates.

Any business entity located in the taxable territory.

 

Services provided by an Arbitral Tribunal to a business entity

Any Arbitral Tribunal

Any business entity located in the taxable territory.

 

Sponsorship service

Any person

A body corporate or partnership firm located in the taxable territory

 

Services provided by the Government or local authority, excluding – renting of immovable property, services provided by postal department, services in relation to an aircraft or a vessel, inside or outside the precincts of an airport or a port, transport of goods or passengers

Central Government, State Government, Union Territory, Local Authority

Any business entity located in the taxable territory.

 

 

 

 

Services provided or agreed to be provided by a Director of a Company or a Body Corporate to the said company to the said company or the Body corporate

A director of a company or a Body Corporate

a company or a Body Corporate

 

Service provided or agreed to be provided by an insurance agent

Insurance agent

Any person carrying on insurance business.

 

Services provided or agreed to be provided by a Recovery agent

Recovery Agent

A Banking company or a Financial Institution or a NBFC

 

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

A person located in non-taxable territory

Importer located in the taxable territory

 

 

 

Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use of a copyright.

Author or Music Composer, Photographer, Artist, etc

Publisher, Music company, Producer

 

Applicability of Reverse Charge in case of supply of services through an e-commerce operator

If an e-commerce operator supplies services then reverse charge will apply on the e-commerce operator. He will be liable to pay GST. If the e-commerce operator does not have 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.

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

Exemption under “Reverse charge”

Government has issued notification according to which exemption shall be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, is upto Rs.5,000/- in a day.

Registration

All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold limit of Rs.20 lakh in case of all states excepting North East and hill states where threshold limit is Rs.10 lakh.

Time of supply for goods under reverse charge

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

  1. date of receipt of goods
  2. date of payment*
  3. 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 the above methods, the time of supply shall be the date of entry in the books of account of the recipient.

                                   

Time of supply for services under reverse charge

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

  1. date of payment*
  2. 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 the above methods, the time of supply shall be the date of entry in the books of account of the receiver of service.

 

*   The date of payment (in both the above cases) 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

 

When supplier is located outside India

In case of ‘associated enterprises’, where the supplier of service is located outside India, the time of supply shall be earlier of

  1. date of entry in the books of account of the receiver 
  2. date of payment

 Input tax credit on reverse charge

Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The service recipient (i.e., who pays reverse tax) can avail input tax credit.

Tax Invoice

The supplier must mention in his tax invoice whether the tax is payable on reverse charge

Important points regarding levy of Reverse Charge Mechanism (RCM)

  1. GST levied under RCM should be deposited with the Government by the 20th of the following month.
  2. The details of GST paid under RCM, would not be auto-populated in the GSTR – 2. These details have to be furnished manually.
  3. In cases, where RCM is levied, the recipient shall raise an invoice on self. Invoice shall be issued on daily basis for all consolidated purchases made during the day under Reverse Charge.
  4. At the time of payment to the supplier, the recipient shall issue a payment voucher for the payment made.
  5. Input Tax Credit with the recipient cannot be used for payment of reverse charge to the Government.
  6. A registered person will not lose the Input Tax Credit of GST paid under reverse charge even if the payment is not made within 180 days.
  7. Reverse Charge is also applicable to recipients registered under the Composition scheme. No credit of RCM is available in such cases.
  8. RCM is levied on advance payments as well.

 

Disclaimer - The information provided in this document is for general information only. It is based on the information available publicly and the advice received from various professional experts regarding the GST law. The user of this document should be aware that the interpretation or implications of relevant GST rules may change/vary depending upon circumstances applicable to the user.

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