Gst Reverse Charge.docx

GST Reverse Charge: A Three Phased Analysis  

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A Brief Introduction: Meaning: Reverse charge is a mechanism where the recipient of the goods and/or services is liable to pay GST instead of the supplier. Normally, the supplier of goods or services pays the tax on supply. In the case of Reverse Charge, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed.

Applicability: When is Reverse Charge Applicable? A. Supply from an Unregistered dealer to a Registered dealer If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier. Purchases upto 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. The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made. For Inter-state purchases the buyer has to pay IGST. For Intra-state purchased CGST and SGST has to be paid under RCM by the purchaser.

Effect: This will increase working capital, compliances, classification disputes etc. for registered businesses. Registered businesses may prefer to deal with other registered dealers only to ease business processes and reduce complications. This could hamper the business of unregistered dealers. In order to maintain market share they might be required to voluntarily register or at least assist their registered customers in GST compliance (such as identify HSN Codes, applicable GST rates etc.) B. Services through an e-commerce operator If an e-commerce operator supplies services then reverse charge will be applicable to the ecommerce 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 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. Below is the list of services notified by the Government on which tax is to be paid by the ecommerce operator,  Transportation of Passengers by Radio-tax, Motor-cab, Maxi cab and Motor Cycle  Services of Short Term Accommodation  Services by way of housekeeping, such as plumbing, carpentering and etc In the above case, E-commerce operator is neither the supplier nor the receiver of service, he is only providing the platform to connect supplier and recipient. Thus the tax paid by the ecommerce operator on behalf of the supplier are not covered reverse charge mechanism. C. Supply of certain goods and services specified by CBEC CBEC has issued a list of goods and a list of services on which reverse charge is applicable.

 Time of Supply under Reverse Charge A. Time of Supply in case of Goods In case of reverse charge, the time of supply shall be the earliest of the following dates:   

the date of receipt of goods the date of payment* the date immediately after 30 days from the date of issue of an invoice by the supplier If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

*This point is no more applicable based this Notification No. 66/2017 – Central Tax issued on 15.11.2017 B. Time Of Supply in case of Services In case of reverse charge, the time of supply shall be the earliest of the following dates:   

The date of payment The date immediately after 60 days from the date of issue of invoice by the supplier If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

 Input Tax Credit: The service recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services. The only condition is that the goods and services are used or will be used for business or furtherance of business. Unfortunately, ITC cannot be used to pay output tax, which means that payment mode is only through cash under reverse charge.

 Requirements under the reverse charge mechanism The recipient of goods/services must be registered under GST. Every registered business owner should maintain accurate records of supplies that would incur reverse charge. Wherever reverse charge applies, the supplier must clearly mention on the invoice that the tax payable for that specific transaction is through reverse charge. Similarly, the same should be mentioned on receipt vouchers and refunds vouchers. Advance paid on supplies that incur reverse charge is taxable under GST. The taxpayer making advance payment should pay tax on reverse charge basis.

 Difference Between Forward and Reverse Charge

Sr No

1

Particulars

Forward Charge

Reverse Charge

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

3

4

5

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.

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.

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.

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.

Recipient

 Supplies Of Goods Under Reverse Charge Mechanism: S. No.

Description of supply of goods

Supplier of goods

Recipient of goods

1.

Cashew nuts, not shelled or peeled

Agriculturist

Any registered person

2.

Bidi wrapper leaves (tendu)

Agriculturist

Any registered person

3.

Tobacco leaves

Agriculturist

Any registered person

4.

Supply of lottery

State Government, Union Territory or any local authority

Lottery distributor or selling agent

5.

Silk yarn

Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn

Any registered person

 Supplies of Services Under Reverse Charge Mechanism: Notification No. 10/2017- Integrated Tax (Rate)

S. No.

Description of supply of service

Supplier of service

Recipient of service

1.

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 nontaxable territory

Any person located in the taxable territory other than non-taxable online recipient.

2.

GTA Services

Goods Transport Agency (GTA)

Any factory, society, cooperative society, registered person, body corporate, partnership firm, casual taxable person; located in the taxable territory

3.

Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity.

An individual advocate, including a senior advocate or a firm of advocates

Any business entity located in the taxable territory

4.

Services supplied by an arbitral tribunal to a business entity

An arbitral tribunal

Any business entity located in the taxable territory

5.

Services provided by way of sponsorship to anybody corporate or partnership firm

Any person

Anybody corporate or partnership firm located in the Taxable territory

6.

Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding: – (1) renting of immovable property, and (2) services specified below: – (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) Transport of goods or passengers.

Central Government, State Government, Union territory or local authority

Any business entity located in the taxable territory

7.

Services supplied by a director of a company or a body corporate to the said company or the body corporate

A director of a company or a body corporate

The company or a body corporate located in the taxable territory

8.

Services supplied by an insurance agent to any person carrying on insurance business

An insurance agent

Any person carrying on insurance business, located in the taxable territory

9.

Services supplied by a recovery agent to a banking company or a financial institution or a nonbanking financial company

A recovery agent

A banking company or a financial institution or a non- banking financial company, located in the taxable territory

10

Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1)(a) of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like

Author or music composer, photograph her, artist, or the like

Publisher, music company, producer or the like, located in the taxable territory

11

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

A person located in non-taxable territory

Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory.

This is an interesting general rule but has exceptions (i.e. no RCM will apply), namely: i. Exempt CGST and SGST , where the aggregate value of such supplies of goods/services by a registered person from any or all the suppliers, who is or are not registered, do not exceeds five thousand rupees in a day. (Notification No.8/2017-Central Tax Rate dated 28th June, 2017) ii. Supplies that are excluded by schedule III such as payments to employees and duly subjected to income-tax as salary. iii. Expenses accounting towards depreciation and amortization as they do not represent supply much less taxable supply iv. Supplies such as interest on loans and other inward supplies that are specifically exempted

 Latest announcements 

6th Aug 2018: Reverse Charge Mechanism (in case of supplies made by unregistered persons to registered persons) deferred to 30th Sept 2019.Previously, this provision was applicable from 1st Oct 2018.

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28th May 2018: List of items under RCM updated to include the Priority Sector Lending Certificate by a GST registered person to another GST registered person now falls under Reverse charge via CGST Rate Notification.