Reverse Charge Mechanism under GST
Reverse Charge Mechanism under GST specifies for payment of tax by the recipient of goods & services rather than by the supplier of such services & goods to the government. Tax is implied under the Reverse Charge Mechanism only to widen the scope of a tax levy on the unorganized sector and to give exemption on certain goods and services to entities importing from abroad.
Meaning of Reverse Charge
Reverse charge means the liability on the recipient of goods and services to pay GST to the government under Section 9(3) and Section 9(4) of the CGST Act, 2017 and under Section 5(3) and Section 5(4) of the IGST Act, 2017.
In simple terms, Reverse charge is a liability on the recipient of goods or services to pay tax on behalf of the unregistered supplier of such goods & services especially in cases of some special goods & services notified by the government.
Reverse charge is applicable under cases:
- Importer of services with the exception of supplier of OIDAR services.
- Services are taken by the e-commerce operator.
- Receipt of supplies from unregistered dealers to a registered dealer.
- Receipt of supplies of notified goods and services.
Payment of GST under the Reverse Charge Mechanism
The GST law prescribes two situations where the recipient of the goods will be held liable to pay tax under the Reverse Charge Mechanism.
- Where the transaction is held with the particular good or service or with a particular supplier notified by the GST Council, for payment of GST under Reverse Charge Mechanism (Section 9(3) of CGST Act, 2017 & Section 5(3) of IGST Act, 2017).
For instance, if the supply of cashew nuts is received from an unregistered dealer, the tax liability shall have to be paid by the recipient using his existing registration or by applying for new registration under GST.
- Where the supply is taxably made by any unregistered person to any registered person, then GST is to be compulsorily paid by the registered recipient of the supply on behalf of the unregistered person. (Section 9(4) of CGST Act, 2017 & Section (5(4) of IGST Act, 2017).
For instance, supply received from an unregistered person exempted from GST registration, GST will have to be paid by the registered recipient receiving goods.
Registration of GST under the Reverse Charge Mechanism
Any person receiving supplies (recipient of supply of goods or services) or provisions specifically iterates for the liability of recipient of the supply, have to obtain GST registration. Section 24 of the CGST Act specifies for entities liable to pay GST under Reverse Charge Mechanism irrespective of any threshold limit provided by the department. Know more about who is liable to register under GST.
Some special exemptions and mandatory registration requirements under Reverse Charge Mechanism
- Supplies within Rs 5000: For Intra State supplies received from any unregistered dealer within Rs 5000, the recipient shall be exempted from payment of GST under reverse charge. (Amendment made through Section 94 of the CGST Act 2017).
- Supplies within rupees 5000 from multiple unregistered dealers: If a recipient registered or not under GST receive Intra State supplies under Reverse Charge Mechanism from multiple unregistered dealers exceeding the total value above Rs 5000 but individually below Rs 5000 from each supplier, the recipient has to file GST on reverse charge basis.
Generation of Invoices under Reverse Charge Mechanism
For receiving supplies from unregistered suppliers or for particular goods or services taxed under Reverse Charge Mechanism, the recipient has to issue an invoice or a payment voucher to the supplier at the time of making a payment or on receipt of goods or services under Reverse charge (Section 31).
In case multiple goods or services received from the supplier, a consolidated invoice is to be issued by the recipient under provisions of Section 31(3) read with Rule 46 of the CGST Act,2017.
Input Tax Credit under the Reverse Charge Mechanism
- Unregistered Supplier: For any unregistered dealer providing goods or services or other supplies to any registered dealer no input tax credit shall be provided as tax is being paid by the recipient of the supply.
- Registered Recipient: For supplies received from the unregistered dealers for goods or services under the Reverse Charge Mechanism, ITC can be claimed by the taxpayer for making payment on behalf of the supplier.
Note: ITC, as claimed by the recipient, cannot be further used for future reverse charge transactions, as each time for payment of tax under reverse charge, cash has to be paid.
Time of Supply under Reverse Charge Mechanism
Goods under Reverse Charge (Section (12(3) of CGST Act, 2017):
For payment of tax, goods received under Reverse Charge, the time of supply shall be considered earliest of the following:
- The date of actual receipt of goods; or
- The date of payment as entered in books of accounts of the recipient or the date on which the payment is debited in the books of account, whichever is earlier; or
- The date immediately after 30 days from the date of issuing an invoice or any other document.
If any of the above is not applicable, the date of actual entry of the supply in the books of the recipient will be considered as the time of supply.
For instance, supply is received on 10 January where payment or payment voucher for the supply is made on 15 January, entry of the supply is made in the books on 16 January – the time of supply shall be considered 10 January. In other cases, it will be on 16th January.
Services under Reverse Charge Mechanism (Section 13(3) of CGST Act,2017)
For services received from an unregistered dealer, the time of supply would be considered as earliest of the following:
- Date of actual payment (as entered in BOA of the recipient) or date of payment deduction from the bank account (whichever is earlier); or
- Date after 60 days, immediately from the date of issue of invoice or any other document to the supplier of services.
In other cases, the time of supply could not determine the date of entry made in the books of accounts or the payment debited from the bank account, whichever is earlier will be considered as a time of supply of services.
Compliance Conditions for transactions under the Reverse Charge Mechanism
- Every registered person filing taxes under reverse charge mechanism has to prepare books of accounts keeping a record of supplies received under reverse charge, taxes paid and ITC claimed.
- For invoices issued in course of reverse charge transactions, it has to be mentioned on invoices or payment vouchers issued to the supplier as “payment of tax to be made on reverse charge basis “.
- Payment of tax is to be made only by debiting the cash ledger and not the offsetting with the ITC availed in the credit ledger.
- For advances paid to the supplier in cases of reverse charge transactions, the tax shall also be levied on the advance payment transactions.
- Advance paid for reverse charge supplies is also liveable to GST. The person making the advance payment has to pay tax on a reverse charge basis, the time of supply shall be the earliest of the following dates, namely:—
(a) the date of the receipt of goods; or
(b) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(c) the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:
Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of the supply.
Disclosure of Reverse Charge Transaction under GST
For supplies received on a reverse charge basis, the recipient has to report transactions by filling in Column 4B in GSTR – 1 selecting the checkbox “Supply attracts Reverse-Charge”.
Q1. I am a composition dealer, do provisions of reverse charge apply to me?
Yes, the reverse charge mechanism also applies to a composition dealer.
Q3. Is RCM under GST applicable to interstate supplies?
The first condition for making interstate supplies is obtaining GST registration, thus provisions of RCM under GST are not applicable in this case.
Q4. What are the various goods and services on which tax on the reverse charge is payable?
List of goods and services notified under reverse charge mechanism are as follows
Provided by Agriculturist
- Cashew nuts, not shelled or peeled
- Bidi wrapper leaves (tendu)
- Tobacco leaves
- Raw cotton
Provided by Any person who manufactures silk yarn from raw silk or silkworm cocoons for the supply of silk yarn
- Silk yarn
Provided by State Government, Union Territory or any local authority
- Supply of lottery.
- Used vehicles, seized and confiscated goods, old and used goods, waste and scrap
Provided by Goods Transport Agency (GTA) who has not paid central and state tax at the rate of 6% each, or integrated tax at the rate of 12%
- Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road to-
(a) any factory registered under or governed by the Factories Act, 1948(63 of 1948); or
(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or
- c) any co-operative society established by or under any law; or (d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or (e) anybody corporate established, by or under any law; or (f) any partnership firm whether registered or not under any law including association of persons; or (g) any casual taxable person.
Provided by An individual advocate including a senior advocate or firm* of advocates.
- Services supplied by an individual advocate including a senior advocate or firm* of advocates by way of legal services, directly or indirectly, 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.”
Provided by an arbitral tribunal
- Services supplied by an arbitral tribunal to a business entity.
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