Reverse Charge Mechanism under GST

Last Update Date : August 13, 2018

reverse charge

Normally, when GST is payable, the onus is on the supplier. However, there are certain situations, where the receiver is liable to pay the GST charges, which is known Reverse Charge Mechanism.  Let’s look at how Reverse Charge Mechanism works under GST under section 9(4).

History of Reverse Charge

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.

Reverse Charge under Service Tax (Old Regime)

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:

  • Insurance agent
  • Services of a director to a company
  • Manpower supply
  • Goods Transport Agencies
  • Non-resident service providers
  • Any service involving aggregators

What is Reverse Charge in GST?

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 applied 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 taxpayers but under reverse charge, there is no such limit. The person has to be registered under GST irrespective of the aggregate limit.

Section 9(4) of GST

Under the provisions of this section 9(4) of CGST Act 2017, GST is payable on the supply of goods or services or both from unregistered supplier to a registered supplier in the form on Reverse Charge Mechanism (RCM).

Reverse Charge Applicability

  • Services supplied by an electronic commerce operator will attract reverse charge and they will be liable to pay GST. If the assessee has no physical presence in the taxable area, then the representative of such e-commerce operator will be liable to pay tax. If there is no representative, then the assessee has to appoint one who will be liable to pay GST. Let’s look at this example of reverse charge under GST in this case. For Example: ABC supplies services of a plumber, a beautician, an electrician, etc. hence, instead of registered service providers, ABC have to pay GST and collect from customers.
  • If the registered dealer is buying goods or services from an unregistered dealer then, the registered dealer will be liable to pay tax on supply. However, purchases up to Rs 5,000 per day from unregistered suppliers will not attract GST. In other words, there is a reverse charge on buying from unregistered dealers if you are dealing with unregistered suppliers and making payments above Rs 5,000. Let’s understand this with the help of an example. For Example: Suppose a registered company called XYZ Ltd. has spent Rs 7,500 on purchases from an unregistered person. In this case, should it pay GST via Reverse Charge Mechanism on the whole amount or the amount exceeding the threshold limit? Once the limit of Rs 5,000 in a day is crossed, the GST is payable on the entire amount of Rs 7,500 via reverse charge mechanism and not the excess amount of Rs 2,500.
  • All other categories of supplies will be notified by Central or State government that will fall under reverse charge.

Provisions for Reverse Charge under GST

Registration under Reverse Charge

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.

Invoicing rules

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.

Payment of Tax

Payment of Tax under reverse charge mechanism shall be paid through Electronic Cash Ledger. Reverse Charge liability cannot be paid through Input Tax Credit.

Exemption from Paying Tax under GST

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.

Exemption from RCM

In case of intra-state supply of goods and services, government had exempted goods and services received by unregistered dealers under section 9(4), provided that the aggregate of such goods or services or both received in a day, from one or more suppliers must not exceed Rs. 5000/- a day. Hence,

  • This exemption is applied on when the goods and services are from Unregistered dealer.
  • Only in case of Intra-State supply.
  • In case the supplies of goods or services or both exceeds Rs. 5000/-, the exemption will not be available. GST is payable on the whole amount.

Composition Scheme under GST

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.

Time of supply

In Case of Goods

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:

  • Date of the receipt of goods, or
  • Date on which the payment is made, or
  • Date immediately after 30 days from the date of issue of the invoice by the supplier (30 days for goods), or
  • Date of debit in the books of accounts.

In Case of Services

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:

  • Date of the receipt of services, or
  • Date on which the payment is made, or
  • Date immediately after 60 days from the date of issue of the invoice by the supplier (60 days for services), or
  • Date of debit in the books of accounts.

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.

Difference Between Forward and Reverse Charge

Sr No Particulars Forward Charge Reverse Charge
1 Meaning Direct charge or forward charge is a mechanism where the supplied of goods/ services is liable to pay tax. Reverse charge is a mode of collecting GST on supplies of goods and services where the receiver of the service will be liable to pay GST to the government.
2 Tax Liability The tax liability is on the supplier of the goods or services or both. The tax liability is on the receiver of the goods or services or both.
3 Registration Registration is required once a supplier meets the threshold limit. All the people required to pay tax under reverse charge have to register themselves for GST irrespective of threshold.
4 Supplier A supplier can only be a registered supplier. An unregistered supplier cannot collect tax. A supplier can also be a registered supplier in case of supply of notified goods or services.
5 Recipient A recipient can be a registered or an unregistered person. A recipient should be registered in RCM in case of section 9(3) of CGST Act and section 5(3) of IGST Act.

Self Invoicing

Self-Invoicing is the invoicing done on behalf of the unregistered suppliers. If the purchase is made from the unregistered supplier, such supplier cannot issue the GST compliance invoice, but the purchaser is liable to pay tax on behave of the unregistered supplier.

The GST council has decided to pre-pone the reverse charge mechanism in the 27th GST Council meeting. It will only be applicable to a certain category of taxpayers in the initial stage.

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