The levy of tax on supply of goods and / or services can be grouped under three categories :-
(i) in the hands of the supplier or
(ii) in the hands of the recipient of goods / services under reverse charge mechanism and,
(iii) in case of specified services, in the hands of electronic commerce operator
The terms “reverse charge” means liability to pay tax by the recipient instead of the supplier of goods or services or both. Reverse charge apply to both goods & services.
As per Sec 2(98) of the CGST Act,2017 “reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection.
Generally, the person effecting taxable supplies is liable to pay taxes. However in case of supply of certain goods or services as may be notified by the Government on the recommendations of the GST Council, the tax shall be paid by the recipient, which is called payment under reverse charge.
It is thus mandatory to obtain registration under GST for the persons who are liable to pay tax under reverse charge mechanism (RCM), irrespective of turnover & whether supplying taxable goods or service or not.
Incidence of Reverse Charge
Nature of supply of Goods or services or both
In terms of Sec 9(3) of CGST Act,2017 & Sec 5(3) of the IGST Act, 2017 ,the Central Government, vide Notification No.4/2017-Central Tax (Rate) Dated 28th June 2017 (for goods) & vide Notification No.13/2017-Central Tax (Rate) Dated 28th June 2017 (for services) has specifies the supply, tax on which shall be paid on reverse charge basis by the recipient of such goods, if he is a registered person.
Supply by un-registered to registered person
In terms of Sec 9(4) of CGST Act,2017 & Sec 5(4) of the IGST Act, 2017 in case of supply of any goods or services or both by an un- registered person to registered person, the registered person( i.e recipient) shall be liable to pay GST on reverse charge basis.
Accordingly, all other provisions of the IGST Act, 2017 and CGST Act, 2017 as applicable, will apply to the recipient of such goods and / or services, as if the recipient is the “supplier” & liable to pay tax in relation to supply of such goods and / or services.
As per Sec 31(3) of the CGST Act, 2017 in respect of goods or services or both received by a registered person from the supplier who is not registered shall issue an invoice on the date of receipt of goods or services or both and a payment voucher at the time of making payment to the un-registered supplier.
Exception to the Rule of Reverse Charge on intra state supply by un-registered person
Intra state supplies of goods or services or both by a registered person from an unregistered person is exempted from payment of tax under reverse charge provided the aggregate value of such supplies received by a registered person from all or any of the suppliers does not exceed Rs. 5000/- in a day.
As per Sec 31 of CGST Act, 2017 read with rule 46 of the CGST Rule, 2017, every tax invoice has to mention whether the tax in respect of supply on the invoice is payable on reverse charge.
Inter state supply
The provision of section 5 (4) of the IGST Act, 2017 would be applicable in case of import of goods or services where supplier is located outside India but the place of supply and location of recipient of service is in India. It means only import ( which is treated as inter-state supply) is permitted from un-registered person.
Hence, if the supplier is located in one state and the place of supply is in another State, the unregistered supplier has to compulsorily obtain registration and charge IGST. There is no threshold exemption limit in case of inter- state supply, subject to following exceptions.
Person exempted from registration for making inter-state supply
A job worker, who has not obtained registration by virtue of its “aggregate” turnover below threshold limit are permitted to make interstate supply, except for goods such as jewellery, gold smiths & silversmiths ware & other article mentioned in Chapter 71)
Persons making inter-State taxable supplies of handicraft goods are exempted from obtaining registration Provided that the aggregate value of such supplies, to be computed on all India basis, does not exceed the threshold limit (i.e Rs.20 lakhs/ 10 lakhs as the case may be).
However, the unregistered person is required to obtain PAN & generate e-way bill in accordance with the provisions of rule 138 of the Central Goods and Services Tax Rules, 2017, while making interstate supply.
Discharge of tax liability
Reverse charge tax liability is to be paid by cash by debiting electronic cash ledger & can not be discharge by using input tax credit.
Goods Covered under Reverse Charge
The Central Government, vide Notification No.4/2017-Central Tax (Rate) Dated 28th June 2017 has specifies the supply of following goods, tax on which shall be paid on reverse charge basis by the recipient of such goods, if he is a registered person.
Services Covered under Reverse Charge
The Central Government, vide Notification No.13/2017-Central Tax (Rate) & vide Notification No.10/2017- Integrated Tax Dated 28th June 2017 has specifies the supply of following services, tax on which shall be paid on reverse charge basis by the recipient of such service, who is a person covered in the said notification
1. Service provided by a Goods Transport Agency (GTA) in respect of transportation of goods by road to specified category of person.
2. Legal service by an advocate including Senior advocate or firm of advocates before any court, tribunal or authority to a business entity
3. Services supplied by an arbitral tribunal to a business entity.
4. Services provided by way of sponsorship to any body corporate or partnership firm.
5. Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding
a) renting of immovable property
b) service provided by department of post
c) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
d) transport of goods or passenger
6. Services supplied by a director of a company or a body corporate to the said company or the body corporate.
7. Services supplied by an insurance agent to any person carrying on insurance business
8. Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company
9. 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
Reverse charge mechanism shall not apply to supply of following items for the simple reason that GST is not applicable on these items :
As per Sec 125 of the CGST Act, 2017, any person, who contravenes any of the provisions of the GST Act or any rules made there under for which no penalty is separately provided for, in the CGST Act, shall be liable to a penalty which may extend to twenty-five thousand rupees.
(The Author is a Fellow Member of ICAI, New Delhi & ICAI, Kolkata and can be reached at email@example.com, WahtsApp 9805072910.)