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