When Does GST Become Payable? Levy, Time of Supply, RCM & Composition

Summary: GST liability does not arise merely because money changes hands or a business transaction takes place. The GST framework first requires determination of whether there is a taxable supply of goods or services and whether CGST and SGST/UTGST or IGST applies. Once the levy is established, the statutory time-of-supply provisions determine when GST becomes payable. For normal supplies, the supplier ordinarily discharges the tax liability, whereas under the Reverse Charge Mechanism (RCM), the liability shifts to the recipient for specified supplies and special time-of-supply rules apply. GST therefore may become payable even before consideration is actually received, depending upon relevant events such as issuance of invoice, supply, receipt of goods or services and payment. The Composition Scheme, on the other hand, provides a simplified method of paying GST for eligible small taxpayers subject to prescribed conditions and restrictions; it does not exempt them from the GST framework. Thus, levy determines whether GST can be imposed, time of supply determines when liability arises, normal or reverse charge determines who must discharge the tax, and the composition scheme provides an alternative compliance mechanism for eligible taxpayers.

When Does GST Become Payable? Understanding Levy, Composition and Reverse Charge

Abstract

The Goods and Services Tax has come to play an integral part in the indirect taxation system in India, impacting not just the businesses but also consumers on a daily basis in the transactions they make. However, there are confusions related to the time at which GST would become payable since there is more to GST apart from levying a tax on the transaction of goods or services. This article explains all about the basics of the levy of tax, time of supply, normal charge, reverse charge mechanism, and the composition scheme in clear terms. The core of this article lies in explaining the very concept of when liability to pay GST occurs and who shall discharge that liability. The role of the reverse charge mechanism in shifting the liability from the supplier to the recipient in certain cases and the process of composition scheme will also be covered. Through various examples, this article clarifies the misunderstanding regarding GST.It aims at simplifying the basic structure of GST framework for students and other laymen as well, without breaking away from the context of the GST framework, which is statutory in nature.

Keywords: Goods and Services Tax, GST Levy, Time of Supply, Reverse Charge Mechanism, Composition Scheme, GST Liability, Indirect Taxation.

1. Introduction

Goods and Services Tax or GST has gained prominence and significance in India’s day-to-day transactions between businesses and consumers. Be it purchasing a cell phone, ordering meals, receiving professional services or being in business there will be instances where GST will be involved in the transactions. But the confusion lies in the following aspect: When does GST actually become payable? GST cannot be termed as just a simple tax that gets charged at the time of every transaction that takes place in the form of sales. The process laid down in the law determines if the transaction is taxable, the nature of GST applicable, payment liability, and timing of the liability. Time of supply, GST levy, reverse charge, and composition scheme are some of the examples of the concepts that have relevance here. As the name suggests, GST is nothing but a destination-based tax on the consumption of goods and services.The tax is levied at various stages of the supply chain, but credit for the tax already paid at previous stages is available to the next stage, thus ultimately making the consumer of the product pay the tax. As per the ICAI study material, the objective of GST is to tax the value addition and not tax the same value over and over again. In India, there is dual GST. For intra-State supply, GST comprises of Central GST (CGST) and State GST (SGST), or Union Territory GST (UTGST) if applicable. For an inter-State supply, Integrated GST (IGST) will be applicable.Thus, knowledge of GST not only includes knowledge of the tax rate, but also the legal stage at which the tax is due and the person who has the liability to pay the same. This article will discuss the same in plain English with specific emphasis on levy, composition and reverse charge.

2. Meaning of GST

To begin with, it is worth mentioning that GST, in simple terms, refers to a tax which is levied on the supply of goods or services or both as per the provisions of the GST legislation. Unlike in the previous indirect tax system which had various indirect taxes at various stages, GST integrates many major indirect taxes in a single system.

However, the most salient feature of GST is that it is a destination based tax. In other words, the tax is essentially linked to the consumption of the goods or services rather than simply their production. While the GST will be levied at all the stages along the supply chain, there will be tax credits for any tax that was already paid at an earlier stage of the chain. Thus, in the process, the “tax on tax” problem (or the cascading effect) can be significantly addressed. For instance, let us imagine that a manufacturer supplies his product to a wholesaler, the wholesaler sells it to a retailer who, in turn, sells it to a consumer.

But the credit of the taxpayer is allowed for GST already paid on inputs, implying that tax is charged on the value added in every stage rather than on the total value at all stages.

The framework of GST also hinges on the basis of whether the supply is intra-State or inter-State. If the supplier as well as the place of supply is in the same State or Union Territory, then this transaction is generally considered an intra-State supply. In such instances, both CGST and SGST or UTGST apply. If the supplier as well as the place of supply is in different States or Union Territories, then this transaction is considered an inter-State supply, which involves IGST.

The most crucial point now arrives. Even after confirming the applicability of GST in a transaction, there is still a need to establish the period during which the tax becomes liable. This brings us close to the discussion about levy and, thereafter, time of supply.

3. What is GST Levy?

The term levy simply means charging tax by the Government legally. In the context of GST, levy helps determine the fundamental issue: Is GST leviable on this transaction?

Under the constitutional provisions, GST is defined as tax on the supply of goods or services or both except as provided under any law relating to the same. As per the ICAI study material, under Article 366(12A) inserted by the Constitution 101st Amendment Act, “GST” means any tax on the supply of goods or services or both except the supply of alcoholic liquor for human consumption.

Thus, GST is not applicable just based on the movement of money. The first step is to ascertain whether there is supply of goods or services under the GST Act and whether such goods or services fall under the ambit of GST.

Levy of GST also depends on the type of supply made. If the supply is in the intra-state jurisdiction, then CGST and SGST/UTGST is levied, while the supply is generally taxed under IGST in the case of inter-state supply.

According to the ICAI study material, the following scenario falls under India’s dual GST framework as the Centre and States have different constitutional and legislative powers.

For example, take the case of a business in Punjab which sells taxable goods to a customer in Punjab. Assuming that such a transaction is intra-State in nature, CGST and SGST of Punjab will apply. Now, in case of a transaction between the business and a customer in another State, such a transaction shall be considered as inter-State transaction and IGST will apply.

But levy and payment are not one and the same thing. First, levy determines whether the GST is liable to be charged according to law. Next comes the question of when liability for such payment arises. Here lies the importance of the term time of supply.

It is necessary for a taxpayer to understand that while he knows about the applicability of GST, he needs to understand when such a liability for payment becomes statutory. Such an answer would differ based on whether the transaction is in accordance with the normal process or under the Reverse Charge Mechanism (RCM).

4. When is the GST Due?

After knowing whether a GST is due on a particular transaction, one should think about a more practical matter; when will the liability of paying GST arise?

The determination of this matter takes place on the basis of a very important term called “Time of Supply” which basically refers to the specific period in time when the law considers that the supply has been made and the liability for paying GST has arisen. There are different provisions under the Central GST regarding time of supply for goods and services. There are also special rules for the reverse charge mechanism transactions.

Under the reverse charge mechanism, the buyer of the good or service becomes liable to pay the GST. However, the actual moment of such liability is not always the date when the buyer pays for the transaction. Depending on the type of transaction, the date of invoice, date of supply and payment could be relevant.

This is significant since businesses tend to believe that GST will become payable only after receiving money from the buyer. This may not always be true. The GST law functions on statutory time of supply provisions, which implies that the liability for tax will be there even though no money has been received as of yet. The guidance provided by CBIC clarifies that payment terms do not necessarily determine the taxability of supply.

Time of Supply of Goods

For normal supply of goods, the time of supply will be determined through the statutory provision under Section 12 of the CGST Act. The time of supply for this would include the date of issuance of invoice, the due date of invoice issuance, and receipt of money as per the statutory provision.

This implies that businesses cannot fix their time of supply of goods on their own accord.

For instance, assume that a taxpayer supplies goods which attract tax and issues an invoice in respect of them on 10 August. Where, under the time-of-supply provisions, such an invoice issue date is treated as the relevant date, the tax liability could be arising with reference to such a date despite payment being made later by the buyer.

The aim of these rules is to introduce certainty into the GST regime. Rather than leaving the question of liability to be taxed purely to the discretion of the taxpayers, the law prescribes certain statutory rules for determining the relevant time.

Time of Supply of Services

There are separate time-of-supply provisions for services. Section 13 of the CGST Act contains rules to determine the time of supply of services in relation to which the tax liability is to be determined. The relevant dates could be the date of invoice, the date of providing services and the date of receiving payments.

This difference in treatment of goods and services is significant since the GST law does not apply a common formula to all transactions.

5. Reverse Charge Mechanism

The standard system of GST works on the basis of a relatively simple principle: the supplier makes the supply and charges the GST accordingly and pays this tax to the government.

However, there are provisions under GST laws wherein this liability is shifted from the supplier to the recipient. This is called the Reverse Charge Mechanism (RCM).

Under reverse charge, the responsibility for payment of GST shifts from the supplier to the recipient but in the category of supplies in respect of which GST laws provide for reverse charge. As per CBIC, the reverse charge mechanism refers to the tax liability being cast upon the recipient for specified categories of supplies. It may be applicable both to goods and services according to the provisions and notifications.

This is why the term “reverse” has been used. In the normal mechanism, the tax liability is normally cast in this manner:

Supplier → charges GST → pays GST to Government

Under reverse charge, the liability changes in this manner:

Recipient → liable to pay GST → pays GST to Government

It should be noted here that the application of reverse charge does not mean that every purchase becomes automatically subject to reverse charge.

GST When Becomes Due Under Reverse Charge Mechanism?

Unlike in case of the ordinary mechanism of time of supply, the RCM time of supply is different in that the recipient becomes liable to pay the tax.

Time of supply for goods when supplied under reverse charge shall be earliest of:

• Date of receipt of goods.
• Date of entry of receipt of payment in books of the recipient or the date of debiting the amount from the recipient’s bank account, whichever is earlier or
• The day immediately following the lapse of 30 days after the date of supplier’s invoice.

Provisions also exist in the law to determine the time of supply when the above criteria cannot be applied.

In case of services supplied under reverse charge mechanism, the time of supply will be earliest of:

• Date of entry of receipt of payment in the books of the recipient or the date of debit from the recipient’s bank account, whichever is earlier or
• Day immediately following the expiry of 60 days from the date of invoice by the supplier.

Example, Assume that a business gets supplied with goods covered by the provisions of RCM. An invoice is generated by the supplier, but the receipt of the goods is done on a certain date. In case the date of receipt is the earliest relevant event as per the statutory provision, then the GST liability of the recipient may arise on account of the date.

It shows that under reverse charge, the recipient is not allowed to defer payment of the GST on its convenience. The law itself defines the relevant time of supply.

Reverse charge GST is also considered as the input tax, provided that the recipient meets the necessary conditions for claiming input tax credit. CBIC clarifies that GST payable under reverse charge is regarded as the input tax.

Therefore, reverse charge mechanism alters two aspects of GST liability:

Who pays the tax?

The recipient.

When does the liability arise?

As per the special rules of time of supply of reverse charge.

6. Composition Scheme under GST

All businesses do not have the same size. An eligible small business or a small trader might find the conventional GST compliance system rather difficult, considering that this system requires a number of compliance requirements.

GST makes it simpler for the eligible taxpayers by providing them with a Composition Scheme. The composition scheme is basically a simplified method for payment of GST which is made available for those eligible small taxpayers who fulfill the conditions of the law. In fact, according to the study material of ICAI, the composition scheme happens to be one of the benefits offered by the GST regime to small businesses.

The concept underlying the scheme is rather straightforward – an eligible taxpayer can choose composition and pay tax at the composition rates applicable instead of adopting the conventional GST system in the same way as a normal taxpayer.

It should be kept in mind that the adoption of the composition scheme does not imply that the taxpayer is exempt from GST.

This makes an important distinction between a regular taxpayer and a composition taxpayer.

In general, the regular taxpayer operates on the basis of the following framework:

Sales -> GST charged -> Customer pays GST -> ITC eligible -> Taxes paid

The composition taxpayer works on the following simplified framework, based on the terms of the scheme:

Sales -> Composition tax liability -> Composition tax payment under scheme

The composition scheme also has certain restrictions. Hence, a taxpayer cannot automatically assume that it would be able to choose composition just because it is small. The criteria of eligibility and other statutory criteria need to be considered before choosing the composition scheme. An important thing to note is that composition taxpayers may also face liability in case of reverse charge liability, as per GST law. CBIC guidelines state that composition taxpayers may have liabilities in respect of reverse charge goods or services under GST law.

Thus, it needs to be understood that composition scheme is a simplified GST framework for eligible taxpayers.

7. Levy, Normal Charge, Reverse Charge and Composition: Understanding the Difference

On a superficial level, phrases such as levy, normal charge, reverse charge and composition look like similar concepts within the same GST scheme. But they all have different implications. The knowledge of this is what makes GST very easy to comprehend.

GST Levy is concerned with the power of imposing the GST. In layman’s terms, levy is used to mean “can GST be legally imposed on this transaction.” GST is imposed on the supply of goods and services as per the provisions of the GST law. The Constitution of India is the one that gives the structure of levy and collection of GST.

Normal Charge involves the question of who will normally be liable for the payment of tax in a GST transaction. In any normal GST transaction, the supplier collects GST applicable from the recipient and pays the tax to the government.

Reverse charge scheme, on the contrary, makes an exception to the common practice. In some particular cases, it is the recipient who needs to pay GST instead of the supplier. Hence, it is not another kind of tax but rather a new way of fulfilling tax liabilities. According to CBIC, the reverse charge works for particular notified kinds of goods and services when the liability of payment is shifted to the recipient.

Composition scheme is distinct from the ordinary and reverse schemes. It is a simplified taxation regime for small taxpayers that meet the conditions prescribed by law. Unlike the general GST regime, a taxpayer operating under the composition scheme uses the prescribed composition rate and is subject to particular restrictions stipulated by the scheme. According to the ICAI, the composition scheme is designed for simplification purposes for small traders and entrepreneurs.

For this reason, the above terms cannot be used interchangeably. According to Levy, GST is levied, normal charge identifies the person liable for such tax, while reverse charge makes the recipient liable under specified circumstances; composition is the method used by eligible taxpayers.

8. Practical Examples: How Does This Work in Real Life?

Some of the legal provisions may appear quite complex if studied separately. A couple of illustrative examples may be used to understand the differences between these two GST aspects.

Example 1: Ordinary GST Supply

Assume that a registered entity makes sales of office furniture worth ₹1,00,000 to another business entity. GST should be charged on the supply under the applicable rate of taxation. In this case, GST will be charged by the supplier who will collect it from the recipient.

Here we are talking about the ordinary GST provision where the tax should be paid to the government by the seller according to the legal provisions.

It is significant that the GST liability should not be based only on the fact that the two parties engaged in business operations. Relevant time-of-supply provision determines when the GST liability appears.

Example 2: Reverse Charge

Let’s suppose that an enterprise gets a service within a category for which the reverse charge was notified. In such a situation, the ordinary scheme is changed. Here it is not the supplier who pays GST but the recipient who should cover the GST liability.

This explains why it is important for businesses to determine whether a transaction comes under reverse charge when recording their GST transactions. The recipient should not take the presumption that the supplier will always pay the GST.

There are certain requirements as far as timing of payment in case of reverse charge. In relation to goods, time of supply usually depends on various events including receipt of goods, payments, and the period after the invoice issued by the supplier. In respect of services, time of supply includes payment and period after the invoice, as per the provisions of law.

Example 3: Composition Taxpayer

Imagine an eligible small business which has taken up the composition option. This business does not act as regular taxpayer but complies with the requirements of composition taxpayer.

The composition taxpayer usually issues bill of supply in place of tax invoice for taxable supplies and does not collect GST separately from the customer.

The above examples prove why asking whether “GST is applicable?” alone is not sufficient. It becomes necessary to ask “Who will pay the tax? When does the liability arise? Which GST system is applicable?”

9. Common Misconceptions About GST

Now GST has become a routine part of the business dealings but there are many misconceptions prevailing regarding the applicability and incidence of GST liability.

One such misconception is that GST liability arises when the customer makes payments to the supplier. This is not necessarily true in every case. The GST law has provisions relating to the ‘time of supply’ and the date will depend upon the nature of supply and the circumstances under which the supply was made. Hence, the date of actual payment will not always be the determining factor.

Another misconception is that if it is a reverse charge then there is no liability to pay the tax. This is not true. Reverse charge does not make any difference to the tax liability. All it does is make the recipient liable to pay the GST.

Another common misperception about GST is that the composition taxpayers are totally outside GST. That is not true. Composition taxpayers are part of GST through a simplified GST system for those who are eligible. As with any other system, the composition system too comes with its own terms and conditions. In case of composition taxpayers, it means that such taxpayers cannot charge GST separately from the customer and can give a bill of supply in place of the tax invoice.

The next misconception regarding GST is that there is no difference between levy of GST and payment of GST. There is a difference between both concepts. While levy refers to the imposition of tax, the time-of-supply rules help in determining the time of occurrence of liability to pay such tax. Separately, the liability of discharge of such liability can be determined on the basis of the supplier or recipient of the supply.

The last common misperception is that GST is an additional tax levied at each step of the supply chain. GST is supposed to be a value-added tax system, where the role of the input tax credit is crucial to reduce the cascading effect of taxes.

This is necessary since complying with GST does not just involve computing a percentage but also establishing what kind of supply has been made, how the supply must be treated, and when.

10. Key Takeaways

Understanding the components that make up GST separately makes the subject matter clear. Levy determines the legality of imposing GST on a taxable supply. Time of supply determines when the liability for paying the tax arises. In the case of normal charge, it is the supplier who discharges the liability of GST; however, in the case of reverse charge, the liability is discharged by the recipient for notified supplies.

Composition scheme provides an alternative compliance system for eligible small taxpayers; however, it does not mean that the small taxpayers are exempt from GST.

The most important thing is that there is no one answer to the question, “When does GST become payable?” The answer to the question is dependent on the type of supply, time of supply rules and the mechanism of payment of GST.

For everyone dealing with GST, either as a businessman, a student, professional or a consumer, knowing the basic distinctions can help them avoid many simple mistakes. The mistake that people often make is that they only focus on the tax rate but overlook other aspects such as whether the tax is leviable, who pays it and when it is payable.

11. Conclusion

Knowing when GST will be payable is not just about knowing the rate of taxation that will apply. There are a number of inter-related considerations under GST including determination of taxability of the transaction, determination of the point in time when there is tax liability, determination of the party liable to pay and the special mechanism where applicable. Firstly, there must be levy of GST. Levy forms the basis for imposition of GST upon supply. Once it is determined that there is GST liability, it is then possible to focus on the time-of-supply rules. Under the normal mechanism, the liability will fall upon the supplier while the reverse charge mechanism will make the recipient liable in certain specific cases.

The composition scheme is yet another aspect of the GST system. While providing an easy way for complying with GST requirements for eligible taxpayers, the composition scheme works under some conditions. Composition taxpayers cannot be treated the same way as ordinary GST taxpayers.In essence, the introduction of GST came about due to the fact that GST was to become a destination-based tax system that sought to introduce a harmonized tax structure and eliminate the cascading effect of taxes.According to the ICAI material, GST is a tax on value added where the burden is mainly placed on the final consumer.To businesses, the above information will be very crucial since any misapplication of the concept or misidentification of the time when liability arises will make one liable for any incorrect reporting of GST. To the consumer, the above information helps him/her understand why GST is charged on certain transactions and why the party who pays the tax to the government may not necessarily be the one bearing the tax burden.

12. References

• The Constitution of India- Article 246A, 269A and 366(12A)
• The Central Goods and Services Tax Act, 2017- levy and collection of CGST
• The Integrated Goods and Services Tax Act, 2017- inter-State supplies and the levy and collection of IGST
• The Union Territory Goods and Services Tax Act, 2017-levy and collection of GST in Union Territories covered by the legislation.
• The Goods and Services Tax (Compensation to States) Act, 2017
• The Institute of Chartered Accountants of India (ICAI), “GST in India”
• India Code, Ministry of Law and Justice, Government of India
• CBIC, Reverse Charge Mechanism under GST
• Central Goods and Services Tax Rules, 2017