GST: Reverse Charge Mechanism

CA Manu Tayal

What is Reverse Charge Mechanism?

• Reverse Charge as defined in Section 2(98) of CGST Act, 2017 which says that 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.
• Power to levy GST on recipient under reverse charge arrives from Section 9(3) of CGST Act, 2017 which says that “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.”

Central Government in terms of Notification No. 4/2017- Central Tax (Rates) DT: 28.06.2017 has notified certain goods, taxes on which shall be paid by recipient subject to some conditions.

Statement showing supplies of goods under reverse charge
Sr. No.	Description of Goods under reverse charge	Supplier of goods	Recipient of supply (Person liable to pay GST under Reverse Charge)
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	Silk Yarn	Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn	Any registered person
5	Supply of Lottery	State Government, Union Territory or any local authority	Lottery distributor or selling agent

1. Thus in serial number 1, 2 and 3, if supplier of these goods is agriculturist and the recipient is any registered person, taxes needs to be paid by such registered person under reverse charge. However if recipient is unregistered, the supply would fall under normal charge.

2. In case of Silk Yarn, if supplier is manufacturer of silk yarn and recipient is any registered person, GST needs to be paid by such registered person under reverse charge.

3. In case of Lottery, if supplier of lottery is State Government, UT or any local authority and recipient is lottery distributor or selling agent, GST needs to be paid by such lottery distributor or selling agent.

4. For all other supplies of goods, GST will be paid by the supplier under forward charge. However taxes needs to be paid under reverse charge for any supply of goods if supplier of goods is an un-registered person and recipient is registered.

Central Government in terms of Notification No. 13/2017- Central Tax (Rates) DT: 28.06.2017 has notified certain services, taxes on which shall be paid by recipient subject to some conditions.

Category of Supply of Services	Supplier of service	Recipient of Service
Supply of Services by a goods transport agency (GTA)	Goods Transport Agency (GTA)	(a) Any factory registered under or governed by the Factories Act, 1948(63 of 1948); or (b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or (c) any co-operative society established by or under any law; or (d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the 2 Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or (e) any body corporate established, by or under any law; or (f) any partnership firm whether registered or not under any law including association of persons; or (g) any casual taxable person. Union Territory Goods and Services Tax Act; or (e) any body corporate established, by or under any law; or (f) any partnership firm whether registered or not under any law including association of persons; or (g) any casual taxable person; located in the taxable territory
Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority by way of legal services, to a business entity.	An individual advocate including a senior advocate or firm of advocates	Any business entity located in the taxable territory
Services supplied by an arbitral tribunal to a business entity.	An arbitral tribunal	Any business entity located in the taxable territory
Services provided by way of sponsorship to a body corporate or partnership firm.	Any person	A body corporate or partnership firm located in the taxable territory.
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.
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.
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.
Services supplied by a recovery agent to a banking company or a financial institution or a nonbanking financial company.	A recovery agent	A banking company or a financial institution or a non-banking financial company, located in the taxable territory.
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 clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer	Author or music composer, photographer, artist, or the like	Publisher, music company, producer or the like, located in the taxable territory

• Section 9(4)of CGST Act, 2017 or Sec 5(4) of IGST Act, 2017 provides as follows “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”.
• However Notification No. 8/2017- Central Tax (Rate) dated 28.06.2017, gives an exemption to the aforesaid provision by providing that “the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts intra- State supplies of goods or services or both received by a registered person from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the Central Goods and Services Tax Act, 2017. Provided that the said exemption shall not be applicable where the aggregate value of such suppliesof goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day.” 

Section 9(4) shall come into play if the below conditions are met:

a. There should be supply.

b. Supply should be in respect of taxable goods or services or both.

c. Supply must be by unregistered person.

d. Supply must be to registered person.

1. If the supply involved exempt goods or services or both this section won’t be applicable.

Examples:

1. A registered person hire auto rickshaw for commuting from one place to another. Section 9(4) would not be applicable since transportation of passenger by auto rickshaw is exempted services.

2. A registered person stay in a hotel whose room tariff is less than Rs. 1,000. Section 9(4) won’t be applicable since services by a hotel having declared tariff less than Rs. 1,000 per day or equivalent is an exempt service.

3. Supply is intra- state, supplier of goods is an un-registered person and recipient is registered, and the aggregate value of all such supplies in a day exceeds Rs. 5,000 then GST on such supply will needs to be paid by the recipient under reverse charge.

• However there is no such monetary threshold notified under IGST Act, 2017 meaning thereby in case of Inter-state supplies, even supplies of less than Rs. 5000 will attract tax on reverse charge if supplier is un-registered and recipient is registered.

Persons not liable for Registration?

• As per Section 23(2) of CGST Act,2017 ”The Government on the recommendations of the Council, by notification specify the category of persons who may be exempted from obtaining registration under this Act.

Central Government in terms of Notification No. 5/2017- Central Tax DT: 19.06.2017:” The Central Government hereby specifies the persons who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both under sub-section (3) of section 9 of the said Act as the category of persons exempted from obtaining registration under the aforesaid Act.”

• So persons who are providing only services like GTA of goods , an insurance agent to any person carrying on insurance business or goods like tobacco, silk yarn or both which are covered under reverse charge, then they are not required to get registration under this Act irrespective of their aggregate turnover exceeding 20 lakhs.

Compulsory Registration in Certain Cases?

• As per clause (ii) of Section 24 of CGST Act 2017, Persons who are required to pay tax under reverse charge shall be required to be registered under this Act irrespective of the threshold limit of 20 lakhs (Rs 10 lakhs for North eastern and hill states).

Time of supply for goods under reverse charge ?

As per Section 12(3) of CGST Act 2017, “In case of reverse charge, the time of supply shall be the earliest of the following dates—

(a) the date of receipt of goods OR

(b) the date of payment OR

(c) the date immediately after THIRTY days from the date of issue of invoice by the supplier .

If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.

For clause (b)- the date of payment shall be earlier of-

1. The date on which the recipient entered the payment in his books

OR

2. The date on which the payment is debited from his bank account

Example:

1. Date of receipt of goods 15th May 2017

2. Date of payment 15th July 2017

3. Date of invoice 1st June 2017

4. Date of entry in books of receiver 18th May 2017

Time of supply of goods 15th May 2017

If for some reason time of supply could not be determined supply under (1), (2) or (3) then it would be 18th May 2017 i.e., date of entry.

Time of supply for services under reverse charge ?

• As per Section 13(3) of CGST Act 2017, “In case of reverse charge, the time of supply shall be the earliest of the following dates—

(a) The date of payment

OR

(b) The date immediately after SIXTY days from the date of issue of invoice by the supplier (30 days for goods)

If it is not possible to determine the time of supply under (a) or (b), the time of supply shall be the date of entry in the books of account of the receiver of service.

For clause (a)- the date of payment shall be earlier of-

1. The date on which the recipient entered the payment in his books

OR

2. The date on which the payment is debited from his bank account

When supplier is located outside India

In case of ‘associated enterprises’, where the supplier of service is located outside India, the time of supply shall be-

1. the date of entry in the books of account of the receiver OR

2. the date of payment

-whichever is earlier

Example for reverse charge:

1. Date of payment 15th July 2017

2. Date of invoice 1st July 2017

3. Date of entry in books of receiver 18th July 2017

Time of supply of service 15th May 2017

If for some reason time of supply could not be determined supply under (a) or (b) then it would be 18th July 2017 i.e., date of entry in books.

Invoice in case of reverse charge ?

• As per section 31(3)(f), person discharging GST liability under reverse charge under section 9(3) or 9(4) shall issue an invoice in respect of goods or services or both received by him from the supplier.
• As per 31(3) (g) shall issue a payment voucher at the time of making payment to the supplier.

GST on reverse charge To be Paid Through Cash/Bank .

• As per Section 41(1) of CGST Act 2017, “ Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on provisional basis to his electronic credit ledger.”

As per Section 41(2) of CGST Act 2017,” The credit referred to in sub – section (1) shall be utilized only for payment of self assessed output tax as per the return referred to in the said sub section.

• As per Section 49(4) of CGST Act 2017, the amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the IGST Act in such manner and subject to such conditions and within such time as may be prescribed.
• Section 2(82) of CGST Act 2017, “output tax” means the tax chargeable under this Act on taxable supply of goods or services or both made by him or his agent but excludes tax payable by him on reverse charge basis.
• So while reading Section 41(2), Section 49(4)  with 2(82) of CGST Act 2017, it is cleared that GST payable on reverse charge basis first have to be deposited to GST Department through cash/bank, such GST on reverse charge payable  cannot be adjusted with credit of eligible input tax/ electronic credit ledger.

Availability of Input Tax Credit of GST Paid on reverse charge basis .

• As per Section 16(1) of CGST Act 2017,”Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”
• Section 2(62) of CGST Act 2017, “input tax” means-the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—

(a) the integrated goods and services tax charged on import of goods;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;( Reverse Charge )

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or

(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy;

• So while reading Section 16(1) with 2(62) of CGST Act 2017, it is cleared that GST paid on reverse charge basis shall be eligible for input tax credit only condition being that the goods or services or both will be used in business or furtherance of business.

Entry for Purchase of Goods / Services Availed:

If purchases/services are availed within the state (Intra State)

Purchase / Expense A/c. ———10,000

Input CGST A/c. ——————- 900

Input SGST A/c.  ——————- 900

To Creditors A/c. or Cash/Bank Ac —— 10,000

To CGST A/c Payable ———————–900

To SGST A/c Payable ———————–900

If purchases / services are availed from other state (Inter State)

Purchase / Expense A/c. ———10,000

Input IGST A/c. ——————– 1,800

To Creditors A/c. or Cash/Bank A/c. —— 10,000

To IGST A/c Payable ———————–1,800

If purchases / services are availed from other Country (Import)

Purchase / Expense A/c. ———10,000

Input IGST A/c. ——————– 1,800

To Creditors A/c. or Cash/Bank A/c. —— 10,000

To IGST A/c Payable ———————–1,800

Some Other Important Points.

• 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. The Composite dealer can pay the tax by the 18^thday of the month succeeding the quarter in which supplies were received. The information relating to such supplies should be shown by the composition taxpayer in FORM GSTR 4.
• 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.
• The supplier must mention in his tax invoice whether the tax is payable on reverse charge.
• Interestingly Section 5(4) of the IGST Act2017 provides that the IGST on supply of goods or services or both provided by a non registered  person to a registered person in course of interstate trade, tax on such supply of goods/services shall be paid by the recipient on reverse charge basis. However Section 24 of CGST Act 2017 provides mandatory registration in case of interstate supplies. So if an unregistered dealer cannot make interstate supplies then how can a registered person purchase goods/services in the course of interstate trade or commerce from unregistered dealer ? So the question of paying tax on reverse charge basis does not arise at all. So what is the purpose of adding section 5(4) of IGST Act 2017.

(Author can be reached at camanutayal@gmail.com)

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