Reverse Charge Under GST
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Goods and Service tax, popularly known, as GST is the new tax regime that has replaced many of the current indirect taxes and
has remove the complexities of it. In India, earlier we had the tax system which was origin-based, and now under GST it is destination-based tax system.
It will replace a total of 17 taxes such as Service
Tax, VAT, Excise Duty, Counter Veiling Duty (CVD), SAD, Entry Tax, Purchase Tax etc. Central Government has enacted 4 GST
Bills until now,
to get GST implemented to the whole nation.
- CGST (Central GST)
- IGST (Integrated GST)
- UTGST (Union territory GST)
- Bill to compensate states.
A well-designed GST has not only eliminate cascading effect and double taxation but has also smoothened the functioning of
the business. It is projected that India will have an increased growth by 2% and will boost revenues for the government
because it will affect both manufacturing and service sector.
India is a country where there are organized, partly organized and unorganized sectors, which require continuous monitoring
for better tax compliance and coverage. To carry out this function smoothly, the government had introduced
REVERSE CHARGE MECHANISM.
Earlier, the reverse charge concept was only there in Service Tax and was applicable to only services and not for goods. Under GST Law, Government have notified
certain services and goods, on which GST is payable on the reverse charge basis.
What is Reverse Charge in GST?
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 applicable 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 Lakhs for registration for normal tax payers but under reverse charge, there is no such limit. The person has to be registered under GST irrespective of the aggregate limit.
Also read about GST composition scheme.
Situations Where The Reverse Charge Will Apply
- If the registered dealer is buying goods or services from an unregistered dealer then, the registered dealer will be liable to pay tax on supply.
- All other categories of supplies will be notified by Central or State government that will fall under reverse charge.
Time Of Supply For Goods Under Reverse Charge
Provisions are different under reverse charge than normal scenario. Time of supply will be the earliest of the below dates:
- When the goods are received i.e. the date of receipt.
- When the amount is paid i.e. the date of payment.
- Date of payment shall be earliest of ‘The date on which payment has been debited from suppliers bank account’ Or ‘When the recipient records the payment in his books of account’
- The date immediately after 30 days from the date the supplier issues invoice.
If the assessee fails to determine the time of supply from the above-mentioned clauses, then the time of supply shall be the date on which recipient enters in his books of account.
For Example:
Date of receipt of goods 16th May 2017
Date of Payment - 16th July 2017
Date of Invoice - 1st June 2017
Date of Entry in books by recipient - 18th May 2017
Thus, Time of supply will be 16th May 2017. If by any chance time of supply could not be determined under mentioned clauses then it will be 18th May 2017, i.e. Date of entry.
Time of Supply for Services Under Reverse Charge
Similarly, provisions are different for services under reverse charge. Time of supply will be the earliest of the below dates:
- When the amount is paid i.e. the date of payment OR
- Date of payment shall be earliest of ‘The date on which payment has been debited from suppliers bank account’ Or ‘When the recipient records the payment in his books of account’.
- The date immediately after 30 days from the date the supplier issues invoice.
If the assesse fails to determine the time of supply from the above-mentioned clauses, then the time of supply shall be the date on which recipient of service enters in his books of account.
For Example:
Date of Payment - 16th June 2017
Date of Invoice - 1st July 2017
Date of Entry in books by recipient - 18th June 2017
Thus, Time of supply will be 16th June 2017. If by any chance, time of supply could not be determined under mentioned clauses then it will be 18th June 2017, i.e. Date of entry.
If the supplier is located outside India, then the time of supply shall be the earliest of - ‘When the amount is paid i.e. the date of payment’ OR ‘When the recipient records the payment in his books of account’.
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.
Self Invoice:
The taxable person paying tax under reverse charge is requried to issue self-invoice.
E-commerce Operator
Below is the list of services notified by the Government on which tax is to be paid by the e-commerce 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 e-commerce operator on behalf of the supplier are not covered reverse charge mechanism.
Miscellaneous Points for Attention:
- If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim any credit of tax paid. Along with the dealer is liable to pay tax at normal rates applicable to such supply and not the rate applicable for composition scheme.
- Even advance payments are subject to Reverse charge mechanism.
- Unlike Service Tax, there is no concept of partial reverse charge. The recipient has to pay 100% tax on the supply.
- As per the proposed Bill, GST compensation cess will be levied and collected at a date which will be notified by the government at a later date.
Below is a list of goods and services covered under reverse charge
These lists are notified by the government. Under reverse charge, the recipient is liable to pay GST but in case if the recipient is located in the non-taxable territory then, the tax will be payable by the service provider of goods/service
| Service Provider | Service Receiver | Other Information |
| Goods Transport Agency |
The person mentioned above should be located in taxable territory
| |
| Legal Services Services supplied by
by way of representational services before court, tribunal, authority. | Business entity whose turnover in preceding financial year was more than 20 lakhs. | The below-mentioned services are exempted under GST if they are provided to
|
| Services by Arbitral Tribunal | Business entity, whose turnover in preceding financial year is exceeding Rs 20 Lakhs and are located in taxable territory | The below-mentioned services are exempted under GST if they are provided to-
|
| Sponsorship services | Any body corporate or partnership firm | |
| Government or Local Authority | Business entity located in taxable territory | For the services mentioned below service provider is liable to pay GST -
|
| Services supplied by a director of a company or a body corporate |
| |
| Insurance agent | Any person carrying on insurance business | |
| Recovery Agent |
| |
| Author, music composer, photographer, artists | Publisher, Music company, Producer | |
| Members of Overseeing Committee | Reserve Bank of India |
Below is the list of Goods on which GST will be paid on recipient on reverse charge
| Supplier | Recipient |
Supplier of goods is agriculturist supplying-
| Recipient is the registered person |
| Manufactures silk yarn from raw silk or silk warm cocoons for the supply of silk yarns | Recipient is the registered person |
| The state government, the union territory or any local authority | Recipient of supply is lottery distributor or selling agent. |
| Used vehicles, seized and confiscated goods, old and used goods, waste and scrap is Central Government, State Government, Union territory or a local authority | Recipient is the registered person |
GST is a completely new revolution to tax regime and has already taken India by storm. With many new concepts such as Reverse Charge Mechanism, Composition Scheme, Mixed supply, it will be definitely challenging for every individual or body corporate. The transition of business and application of GST is the next big thing that every person has to be ready for.
How Can You Comply Better With GST
Even if you have a CA to look after your financial accounting, its advisable to implement a good GST compliant accounting software which should simplify the whole process.
ProfitBooks is one such accounting software which not only helps you create GST invoices, track purchases, manage inventory but also helps you to file GST returns online with just few clicks.
Its trusted by thousands of businesses and CAs across India. It takes just 2 minutes to signup.
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Also Read:
Important GST concepts every business should know
Types of GST returns
Importance of place of supply in GST
12 Inventory management techniques to cut losses
