Reverse charge means that the liability to pay tax lies with the recipient of the supply of goods or services (or both) instead of the supplier of such goods or services (or both) instead of the supplier of such goods or services (or both) under sub section (3) or sub section (4) of section 9.
Reverse charge, where the recipient is liable to pay tax, is common to many countries like Canada where it is applicable on imports of services and intangible properties. Normally, the supplier pays the tax on supply. In certain cases, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed which is why it is called reverse charge.
In India, this is a partly new concept introduced under GST. The purpose of this charge is to increase tax compliance and tax revenues. Earlier, the government was unable to collect service tax from various unorganised sectors like goods transport. Compliances and tax collections will therefore be increased through reverse charge mechanism.
The concept of reverse charge mechanism was already present in service tax (old regime). In GST regime, reverse charge is applicable for both services as well as goods. Reverse Charge concept for goods is a new concept (except Purchase Tax in few goods in few states).
Some of services, where Reverse Charge was there under Service Tax regime (old) are:
It is a new concept that is introduced in GST in India, to increase tax revenues, coverage and compliance from partly or unorganized sectors.
Earlier goods were exempt from this scheme, now the collection of GST will increase tremendously. In GST, the supplier will be liable to collect tax on goods and services provided. But the central government has the power to notify categories of supplies against which service recipient has to discharge the tax liability. Hence, all the provisions of the Act will now be applicable to the recipient of such goods or services as if he is the supplier of such goods or services. When a person becomes liable to pay tax on the reverse charge, certain provisions like threshold exemption, time of supply, availing of input credit changes. There is a threshold limit for turnover aggregating to Rs 20 lakh for registration for normal tax payers but under reverse charge, there is no such limit. The person has to be registered under GST irrespective of the aggregate limit.
The Central Government has on 19th June 2016 via Notification No. 5/2017 exempted such persons from obtaining registration who are only engaged in making supplies of taxable goods or services, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services.
Every person who is paying tax on the basis of reverse charge has to mention this fact in his tax invoice that is being issued. A registered person who is liable to pay tax under reverse charge i.e., the buyer has to mandatorily issue an invoice in respect of goods or services received by him from the supplier who is not registered.
In general, a person supplying goods/services up to an aggregate turnover of Rs 20 lakhs in a financial year is exempted from paying tax. But, taxpayers paying tax on the basis of reverse charge under GST are not eligible for this threshold exemption.
In general, small taxpayers with the aggregate turnover of Rs 75 lakhs in a financial year are eligible to pay tax under composition scheme. But, taxpayers paying tax on the basis of reverse charge under GST are not eligible for composition scheme.
In the case of supplies of goods when tax is payable under reverse charge mechanism, the time of supply should be earliest of the following dates:
In the case of supplies of services when tax is payable under reverse charge mechanism, the time of supply should be of earliest of the following dates:
Note: When the supplier is located outside India then, time of supply shall be the earlier of the Date of the entry in the books of account of the receiver or date of the payment.