Reverse charge mechanism under GST law is quite complicated. There is also misconception among the taxpayers. I have received a lot of queries related to the reverse charge mechanism. Therefore through this article, I have tried to prepare Critical analysis which may be useful to the taxpayers to avoid confliction.

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.

Reverse Charge Mechanism Under GST

TWO TYPE OF REVERSE CHARGE SCENARIOS IN GST 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, 2017.

> Second scenario is covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 of the IGST Act where taxable supplies by any unregistered person to a registered person is

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 reverse charge 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, whenever a registered person procures supplies from an unregistered supplier, he needs to pay GST on reverse charge basis. However, supplies where the aggregate value of such supplies of goods or services 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.

Please Note Reverse Charge Mechanism under section 9(4) of CGST/SGST (UTGST) Act, 2017/section 5(4) of IGST Act, 2017 is been suspended till 30.09.2018. Further 28th GST Council has recommended to further defer the Reverse Charge Mechanism (RCM) upto 30 Sept. 2019.

Registration Compulsory to pay tax under reverse charge

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

Input Tax Credit (ITC)

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

Time of Supply

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: –

  • date of receipt of goods; or
  • date of payment as per books of account or date of debit in bank account, whichever is earlier; or
  • the date immediately following thirty days from the date of issue of invoice or similar other

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

  • date of payment as per books of account or date of debit in bank account, whichever is earlier; or
  • the date immediately following sixty days from the date of issue of invoice or similar other

Where it is not possible to determine time of supply using above methods, the time of supply would be the date of entry in the books of account of the recipient.

Self – Invoicing

Self-invoicing is to be done when you have purchased from an unregistered supplier AND such purchase of goods or services falls under reverse charge.

This is due to the fact that your supplier cannot issue a GST-compliant invoice to you, and thus you become liable to pay taxes on their behalf. Hence, self-invoicing, in this case, becomes necessary.

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

Reverse Charge -Applicability

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.

The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.

Purchases up to 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.

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.

(TILL DATE IT IS NOT EFFECTIVE)

B. Services through an e-commerce operator

If an e-commerce operator supplies services then reverse charge will be applicable to the e-commerce operator. He will be liable to pay GST.

For example, UBER provides services of passengers transport through cab. UBER 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.

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.

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 non-taxable territory Any person located in the taxable territory other than non-taxable online recipient.
2. GTA Services Goods Transport Agency (GTA) Any factory, society, co- operative 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 non-banking 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.

POINTS TO BE NOTED:

No partial reverse charge will be applicable under GST. 100% tax will be paid by the recipient if reverse charge mechanism applies.

  • In case of B2B import of other services, the tax shall be payable by the recipient of services
  • In case of B2B import of goods, the tax shall be payable by the recipient of goods

(Mr. Sandeep Rawat has vast experience & knowledge in dealing with Direct and Indirect Taxation. He is providing his expertise service as Managing Partner at SRT Consultancy & Service. He can be reached at sandeeprawatca@gmail.com)

GST Explained with Example

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Location: NEW DELHI, New Delhi, IN
Member Since: 14 Jul 2018 | Total Posts: 21
Mr. Sandeep Rawat brings more than 5 years of broad and progressive experience as a strategic business partner in addition to being an expert in taxation.he has vast experience in conducting financial audits and tax planning of government corporations, private industries, foreign companies, NGOs, ba View Full Profile

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24 Comments

  1. Mahek says:

    Kindly define the “Business Entity” in case of RCM on Advocates and Senior Advocates providing specified services to Business Entity.

  2. sachiin kumar says:

    Company X pay hiring charges for car to relative of the employees which is fixed every month and tds is being deducted.

    Q. is GST applicable under the RCM?

  3. Ankita Chauhan says:

    Sir,
    I want to know that on last year i.e 2017-2018 till which month i had to pay RCM…???
    As per my knowledge, it was applicable From July to Oct’18.
    Please help me in this regard…

  4. Ravi Chobe says:

    Service recipient B to B Under RCM liable to pay 100% GST to GOVT then How ? Service Supplier file GST 3B And GSTR -1 in which content under Form 3B the GST Amount to be Inserted.
    please guide

  5. Aadhi says:

    Kindly clarify till now purchases exceeding 5000 from URD don’t attract RCM GST till 2019 SEP ? Self invoicing can be done excluding RCM GST for purchasing from URD irrespective of the amount exceeding 5000 ?

  6. RAJNI says:

    Dear Sir,

    I m confused in GTA or Local transporters* who are enrolled in e-way bill portal and get GSTIN…
    1) Will services received from those transporters* attract Reverse Charge?
    2) Will those transporters* needs to file GST Return as they are holding GSTIN after enrolling in E way Bill portal?

    Please solve the queries…

    Thanks & Regards,
    Rajni

  7. Tiru Narayan says:

    I have an illogical GST levied. I think this practice has been in existence even before the advent of GST.

    When a bank account holder is levied a fine/fee, a GST is added to that. What service or goods did that account-holder receive, except get penalized? So, taxation on a penalty? That sounds unreasonably almost to the point being ridiculous. Can someone help me understand, other than explaining that the government has been levying such taxation for a long time?

  8. rm says:

    01. gst portal does not capture the input – output requirements of rcm in gst returns submission. .Put screen shorts of latest gst retrun formats sahaj-sugam etc in relation rcm data input in gstin portal

    02. rcm on gta and advocate fees are unfortunate and need to be at part with all b2b gst dealers requiring the gst registration compulsorilty. what is the logic behind the above two items inclusion in rcm instead of sac code with gst rate like other services need some expert guidance. has other tradess professionals and other service suppliers not challanged the gst provision in apex courts?

    03.gst on labour charges be removed as counter productive to labour gainful employment.If required above certain limit be brought under rcm

  9. Sanket Arunrao Amilkanthwar says:

    Dear Sir,
    You are not giving updated information about deferment of Reverse Charge Mechanism till 31st Sept 2018…. Refer latest ICAI GST Newsletter & ICAI GST updates….

    1. SANDEEP RAWAT says:

      HI Friend.
      Please Refer para “reverse charge applicability” point A.u/s 9(4) is not still effective.rcm on notified services under u/s 9(3) is still applicable.
      Hope your doubt is resolved.

    2. Sandeep rawat says:

      HI friend.
      please read article para “reverse charge applicability point A”only rcm under u/s 9(4) is deferred however rcm on notified service under u/s 9(3) is still applicable.
      Hope your doubthas been resolved

  10. Hitesh Pandya says:

    Reverse Charge Mechanism (in case of supplies made by unregistered persons to registered persons) to be applicable from 1st October 2018.

    Previously, this provision was applicable from 1st July 2018

  11. LAXMINARAYAN PATI says:

    Dear Sir,

    thanks for provide the RCM information, it is very helpful for us.
    Please provide the Forward charge mechanism information clearly for a transporter under GST.

  12. Bittoo Paswan says:

    The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.

    Dear Sir, with reference of above line, can you please share a formate of self invoicing

      1. subbu says:

        imported goods tax collected by custom officer, other wise that goods is exempted or if not tax collected you cannot take itc. so no question for RCM of imported goods

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