Reverse Charge Mechanism in GST

Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the liability may be cast on the recipient under the reverse charge mechanism. Reverse Charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply.There are two type of reverse charge scenarios provided in law. First is dependent on the nature of supply and/or nature of supplier. This scenario is covered by section 9 (3) of the CGST/SGST (UTGST) Act and section 5 (3) of the IGST Act. Second scenario is covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act where taxable supplies by any unregistered person to a registered person is covered.

As per the provisions of section 9(3) of CGST / SGST (UTGST) Act, 2017 / section 5(3)of IGST Act, 2017, 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 reversecharge 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.

Similarly, section 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017 provides that the tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient 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. Accordingly, wherever a registered person procures supplies from an unregistered supplier, he need to pay GST on reverse charge basis.

However, supplies where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the unregistered suppliers is less than five thousand rupees in a day are exempted. ( Notification 8/2017-Central Tax (Rate) dated 28.06.2017). However, vide notification no.38/2017-Central Tax (Rate) dated 13.10.2017, (corresponding IGST notification no.32/2017-Integrated Tax (Rate) dated 13.10.2017) all categories of registered persons are exempted from the provisions of reverse charge under 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017, till 31.03.2018. This exemption is available only till 31.03.2018.

The provisions of section 9(4) of the CGST Act, 2017, will not be applicable to supplies made to a TDS deductor in terms of notification no.9/2017-Central Tax (Rate) dated 28.06.2017. Thus, Government entitieswho are TDS Deductors under Section 51 of CGST Act, 2015, need not pay GST under reverse charge in case of procurements from unregistered suppliers.

Registration: A person who is required to pay tax underreverse charge has to compulsorily register under GST and the threshold limit of Rs. 20 lakh (Rs. 10 lakh for special category states except J & K) is not applicable to them.

ITC:

A supplier cannot take ITC of GST paid on goods or services used to make supplies on which recipient is liable to pay tax.

Time of Supply

The Time of supply is the point when the supply is liable to GST. One of the factor relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, recipient is liable to pay GST. Thus time of supply for supplies under reverse charge is different from the supplies which are under forward charge.

In case of supply of goods, time of supply is earliest of –

  1. date of receipt of goods; or
  2. date of payment as per books of account or date of deb-it in bank account, whichever is earlier; or
  3. the date immediately following thirty days from the date of issue of invoice or similar otherdocument.

In case of supply of services, time of supply is earliest of –

  1. date of payment as per books of account or date of deb-it in bank account, whichever is earlier; or
  2. the date immediately following sixty days from thedate of issue of invoice or similar other document. Where it is not possible to determine time of supply using above methods, time of supply would be date of entry in the books of account of the recipient.

Compliances in respect of supplies under reverse charge mechanism:

  1. As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge.
  2. Maintenance of accounts by registered persons: Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge
  3. Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.
  4. Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.
  5. Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.

Supplies of goods under reverse charge mechanism:

S/ Description of Supplier of Recipient of
No. supply of Goods goods Goods
1 Cashew nuts, not Agriculturist Any regis-
shelled or peeled tered person
2 Bidi wrapper Agriculturist Any regis-
leaves (tendu) tered person
3 Tobacco leaves Agriculturist Any regis-
tered person
4 Silk yarn Any person Any regis-
who manufac- tered person
tures silk yarn
from raw silk
or silk worm
cocoons for
supply of silk
yarn
4A Raw cotton Agriculturist Any regis-
tered person.
5 Supply of lottery State Govern- Lottery dis-
ment, Union tributor or
Territory or selling agent
any local au-
thority
6 Used vehicles, Central Gov- Any regis-
seized and confis- ernment, tered person
cated goods,  old State Govern-
and used  goods,
waste and scrap ment, Union
territory or a
local authority

Supplies of services under reverse charge mechanism:

S/ Description Supplier of Recipient of
No. of supply of service service
Service
Any service Any person Any person
supplied by any located in a located in
person who non-taxable the taxable
is located in territory other
territory
a non-taxable than non-
territory to any taxable online
person other recipient.
than non-
taxable online
recipient.
2 GTA Services Goods Any factory,
Transport society, co-
Agency (GTA) operative
who has not society,
paid integrated registered
tax at the rate person, body
of 12% corporate,
partnership
firm, casual
taxable person;
located in
the taxable
territory
3 Legal Services An individual Any business
by advocate advocate entity located
including a in the taxable
senior advocate territory
or firm of
advocates
4 Services An arbitral Any business
supplied by an tribunal entity located
arbitral tribunal in the taxable
to a business territory
entity
5 Services Any person Any body
provided by way corporate or
of sponsorship partnership
to any body firm located
corporate or in the taxable
partnership territory
firm
6 Services Central Any business
supplied by Government, entity located
the Central State in the taxable
Government, Government, territory
State Union territory
Government, or local
Union territory authority
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;

  1. services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
  1. transport

of goods or passengers.

7 Services A director of a The company
supplied by a company or a or a body
director of a body corporate corporate
company or a located in
body corporate the taxable
to the said territory
company or the
body corporate
8 Services An insurance Any person
supplied by agent carrying on
an insurance insurance
agent to any business,
person carrying located in
on insurance the taxable
business territory
9 Services A recovery A banking
supplied by a agent company or
recovery agent a financial
to a banking institution or
company or a non-banking
a financial financial
institution or company,
a non-banking located in
financial the taxable
company territory
10 Services A person Importer, as
supplied by a located in defined in
person located non-taxable clause (26) of
in non- taxable territory section 2 of
territory the Customs
by way of Act, 1962(52
transportation of 1962),
of goods by a located in
vessel from a the taxable
place outside territory
India up to the
customs station
of clearance in
India
11 Supply of Author Publisher,
services by an or music music
author, music composer, company,
composer, photograph producer
photographer, her, artist, or or the like,
artist or the the like located in
like by way the taxable
of transfer or territory
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
12 Supply of Members of Reserve Bank
services by the Overseeing of
members of Committee India.
Overseeing
constituted by
Committee to
the Reserve
Reserve Bank
Bank of India
of India
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