Reverse Charge Mechanism in GST

The aim of reverse charge is to bring unorganised sector into the tax umbrella. It also removes the burden of tax compliance from individuals with limited resources to large companies with enough resources.

Reverse Charge Meaning- Section 2(98) of CGST Act, 2017

“Reverse Charge” has been defined u/s 2(98) of CGST Act, 2017 which means the liability to pay tax by the recipient of the supply of 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 unorganized sectors like goods transport. Compliances and tax collections will therefore be increased through reverse charge mechanism.

Current Scenario:

The concept of reverse charge mechanism is already present in service tax. In GST regime, reverse charge may be applicable for both services as well as goods. Reverse Charge concept for goods would certainly be a new concept (except Purchase Tax in few goods in few states).

At present, similar provisions of Reverse Charge are available in Service Tax for the services like-

·         Insurance agent

·         Services of a director to a company

·         Manpower supply

·         Goods Transport Agencies

·         Non-resident service providers

·         Any service involving aggregators

Under GST:

Under GST regime, 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.

**All provisions of GST will apply on the recipient (i.e., the buyer).

1.    Situations where reverse charge will apply

i. Unregistered dealer selling to a registered dealer

In such a case, the registered dealer has to pay GST on the supply.

ii. 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.

For example, UrbanClap provides services of plumbers, electricians, teachers, beauticians etc. UrbanClap 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 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.

iii. CBEC has issued a list of services on which reverse charge is applicable.

2.    Registration

All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold [Threshold: Turnover in a financial year exceeds Rs.20 lakhs (Rs.10 lakhs for North eastern and hill states)]

3.    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—
(a) the date of receipt of goods OR

(b) the date of payment OR

(c) the date immediately after THIRTY days from the date of issue of invoice by the supplier (60 days for services)

If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.

For clause (b)- the date of payment shall be earlier of-

1. The date on which the recipient entered the payment in his books OR

2. The date on which the payment is debited from his bank account

4.    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—
(a) The date of payment OR

(b) The date immediately after SIXTY days from the date of issue of invoice by the supplier (30 days for goods)

If it is not possible to determine the time of supply under (a) or (b), the time of supply shall be the date of entry in the books of account of the receiver of service.

For clause (a)- the date of payment shall be earlier of-

1.    The date on which the recipient entered the payment in his books OR 

2.    The date on which the payment is debited from his bank account

5.    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-

the date of entry in the books of account of the receiver OR

the date of payment

-whichever is earlier

6.    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.

7.    Tax Invoice

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

8.    GST Compensation Cess

GST Compensation Cess will also be applicable on reverse charge.

GST Compensation Cess will be levied and collected at a rate which will be notified later. This will apply on all supplies of goods and services, including imports and reverse charge supplies. The purpose is to compensate States for loss of revenue on implementation of GST. This will be applicable for 5 years from the date GST gets implemented.

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