Reverse Charge Mechanism Under Goods & Services Tax (GST )

Reverse charge under GST:

Generally, the supplier of goods or services is liable to pay GST. However, in specified cases the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services under reverse charge mechanism.

Scenarios when reverse charge is applicable:

There are two scenarios provided in law when reverse charge is applicable. Section 9(3) and 9(4) of CGST/ SGST (UTGST) Act, 2017 and Section 5(3) and 5(4) of IGST Act, 2017 deals with reverse charge mechanism. Scenarios when reverse charge is applicable are as follows:

1. Supply of specified goods or services or both:

As per the provisions of section 9(3) of CGST / SGST (UTGST) Act, 2017 / section 5(3) of IGST Act, 2017, tax on specified categories of supply of goods or services or both 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.

The government vide different notifications has notified goods or services the tax on which shall be paid on reverse charge basis.

Supply of goods under reverse charge mechanism:

S.  No.	Description of  supply of Goods	Supplier of  goods	Recipient of Goods	Notification No.
1	Cashew nuts, not shelled or peeled	Agriculturist	Any registered person	Notification No. 4/2017-Central Tax (Rate) dated 28th June, 2017
2	Bidi wrapper leaves (tendu)	Agriculturist	Any registered person	–do–
3	Tobacco leaves	Agriculturist	Any registered person	–do–
4	Silk yarn	Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn	Any registered person	–do–
4A	Raw cotton	Agriculturist	Any registered person.	Inserted vide Notification No. 43/2017-Central Tax (Rate) dated 14th November, 2017
5	Supply of lottery	State Government, Union Territory or any local au­thority	Lottery distributor or selling agent	Notification No. 4/2017-Central Tax (Rate) dated 28th June, 2017
6	Used vehicles, seized and confiscated goods, old and   used    goods, waste and scrap	Central Government, State Government, Union territory or a local authority	Any registered person	Inserted vide Notification No. 36/2017-Central Tax (Rate) dt 13th October, 2017

 Supply of services under reverse charge mechanism under:

S. No.	Description of supply of Service	Supplier of service	Recipient of service	Notification No.
1	GTA Services [who has not paid central tax at the rate of 6%] 1	Goods Transport Agency (GTA)	Any factory, society, cooperative society, registered person, body corporate, partnership firm including LLP1, casual taxable person; located in the taxable territory	Notification No. 13/2017- Central Tax (Rate) dt 28th June, 2017 1Inserted vide Notification no 22/2017- Central Tax (Rate) dt 22nd August, 2017
2	Legal Services by advocate	An individual advocate including a senior advocate or firm of advocates	Any business entity located in the taxable territory	–do–
3	Services supplied by an arbitral tribunal to a business entity	An arbitral  tribunal	Any business entity located in the taxable territory	–do–
4	Services provided by way of sponsorship to any body corporate or partnership firm	Any person	Any body corporate or partnership firm located in the taxable territory	–do–
5	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	–do–
5A 2	Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the CGST Act, 2017	Central Government, State Government, Union territory or local authority	Any person registered under the CGST Act, 2017	2 Inserted vide Notification No. 3/2018 – Central Tax (Rate) dt 25.01.2018
6	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	Notification No. 13/2017- Central Tax (Rate) dt 28th June, 2017
7	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	–do–
8	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	–do–
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 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	–do–
10 3	Supply of services by the members of Overseeing Committee to Reserve Bank of India	Members of Overseeing Committee constituted by the Reserve Bank of India	Reserve Bank of India.	3 Inserted vide Notification No. 33/2017 – Central Tax (Rate) dt 13.10.2017
All above entries are covered under IGST Act, with these two additional entries which are specified for the purpose of IGST Act on which reverse charge is applicable:
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	Notification No. 10/2017- Integrated Tax (Rate) dt 28th June, 2017
2	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.	–do–

2. Supply from unregistered dealer to a registered dealer:

Section 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017 provides that If a unregistered person supply taxable goods or services or both to a registered person then the registered person shall be liable to pay tax under reverse charge basis as 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, supplies where the aggregate value of such supplies of goods or service 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 vide Notification 8/2017-Central Tax (Rate) dated 28.06.2017).

This provisions will not be applicable to supplies made to a TDS deductor in terms of Notification no. 9/2017-Central Tax (Rate) dated 28.06.2017. Thus, Government entities who are TDS Deductors under Section 51 of CGST Act, 2017, need not pay GST under reverse charge in case of procurements from unregistered suppliers.

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 second hand goods received by a registered person, dealing in buying and selling of second hand goods and who pays the central tax on the value of outward supply of such second hand goods as determined under sub-rule (5) of rule 32 of the Central Goods and Services tax Rules, 2017, 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 Good and Services Tax Act, 2017. Notification No.10/2017-Central Tax (Rate) dated 28th June, 2017.

However, vide Notification No. 38/2017 – Central Tax (Rate) dated 13th October, 2017 (corresponding IGST Notification no. 32/2017-Integrated Tax (Rate) dated 13.10.2017) and Notification No. 10/2018 – Central Tax (Rate) dated 23rd March, 2018 (corresponding IGST Notification no. 11/2018-Integrated Tax (Rate) dated 23.03.2018) the provision of section 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017, till 30.06.2018

Compliances in respect of supplies under reverse charge mechanism: 

Registration: 

A person who is required to pay tax under reverse charge (Recipient) has to compulsorily register under GST as per the provisions of Section 24(iii) of CGST Act, 2017 and the threshold limit of Rs. 20 lakh (Rs. 10 lakh for special category states except J & K) is not applicable to them.

However, vide Notification No. 5/2017 – Central Tax dated 19^th June, 2017, Government has notified that the persons (Suppliers) 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 CGST Act, 2017 are exempted from obtaining registration.

Invoice

Recipient of supplies who is liable to pay tax under reverse charge is required to raise tax invoice. Invoice shall be raised as per the provisions of section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017. Invoice shall be issued on the date of receipt of goods or services or both and in case of advance payment recipient shall issue a receipt voucher at time of making payment to supplier.

A registered person may issue a consolidated invoice at the end of a month for supplies covered under section 9(4), the aggregate value of such supplies exceeds Rs.5,000/- in a day from any or all the suppliers.

ITC:

A supplier cannot take ITC of GST paid on goods or services used to make supplies on which recipient is liable to pay tax. Recipient is allowed to take credit of tax paid under reverse charge if it is not specifically blocked under the Act. 

Time of Supply

The Time of supply is the point when the supply is liable to GST. In reverse charge, recipient is liable to pay GST, thus 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 –

a) date of receipt of goods; or

b) date of payment; or

c) the date immediately following 30 days from the date of issue of invoice or similar other document by supplier.

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

a) date of payment; or

b) the date immediately following 60 days from the date of issue of invoice or similar other document.

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

Payment of GST tax under reverse charge:

Any amount payable under reverse charge shall be paid by cash only. 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.