Reverse Charge Mechanism under GST- A Study

A. Understanding portion

1. Generally, the liability to pay tax always resides on the taxable person who is the supplier.

But, where the mechanism of reverse charge is put into operation, then the supplier will be supplemented with the recipient for discharging the liability to deposit tax levied.

2. Reverse charge is a not new concept, recall the concept of service tax, certain payment being required from the service recipient. Reverse charge is how excise duty was collected in case of molasses in some instances. GST only makes good use of this form on administering tax.

3. GST defines ‘reverse charge’ very plainly that the ‘recipient of supply’ is liable to pay tax in cases specifically provided by section 9(3) and in other cases provided by section 9(4) of the CGST Act.

4. Three test for RCM:

a. In order to attract collection of tax from the recipient, the levy of tax on the supply must first be established.

Supply is have following six parameters under GST:

i. Supply of goods or services. Supply of anything other than goods or services does not attract GST.

ii. Supply should be made for a consideration ( Except Schedule 1 services ).

iii. Supply should be made in the course or furtherance of business

iv. Supply should be a taxable supply.

v. Supply should be made within the taxable territory.

b. After the levy has attracted, the next step would be to identify the recipient in order to fasten this liability

Generally: “recipient” of supply of goods or services or both, means— where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration.

c. Now last test is liability means who will pay

For 9(3): Once the liability to pay GST is placed on the shoulders of the recipient, then it must be recognized that that liability never resided on the shoulders of the supplier.

There is no recourse back to the supplier in any circumstance

But, For 9(4) but if the recipient does not fit the description in the notification, then the third step stands ‘reversed’. That is, the liability to pay tax reverts back to the supplier.

5. This is an interesting general rule but has exceptions (i.e. no RCM will apply), namely:

i. Exempt CGST and SGST , where the aggregate value of such supplies of goods/services by a registered person from any or all the suppliers, who is or are not registered,  do not exceeds five thousand rupees in a day. (Notification No.8/2017-Central Tax Rate dated 28th June, 2017)

ii. Supplies that are excluded by schedule III such as payments to employees and duly subjected to income-tax as salary.

iii. Expenses accounting towards depreciation and amortization as they do not represent supply much less taxable supply

iv. Supplies such as interest on loans and other inward supplies that are specifically exempted

6. The entire discussion above has been based on ‘intra-State’ supplies. With identical provisions appearing in section 5(3) and (4) of IGST Act, the above discussion will apply even in case of ‘inter-State’ supply,

In simple words generally inter state supplier needs to take registration , but if he did not took registration( any reason) and making inter state supplies then it is recipient’s liability to pay tax under RCM.

B. Technical Portion

7. How to show in GSTR:

i. For inward supply mentioned in section 9(3): Supplier will upload in his GSTR 1 by mentioning specifically that supply covered under RCM ( covered 5 types of goods and 11 types of services) and this will not be auto populated in recipient’s GSTR2.

ii. For inward supply mentioned in section 9(4): Show it in GSTR2 inward supply from unregistered dealer.

8. Time Of Supply

In case of Goods

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.

Illustration:

1. Date of receipt of goods 15th August 2018
2. Date of payment 15th October 2018
3. Date of invoice 1st September 2018
4. Date of entry in books of receiver 18th October 2018

The Time of supply of service in this case will be 15th August 2018.

In case of Services

In case of reverse charge, the time of supply shall be the earliest of the following dates:

(1) The date of payment** OR

(2) The date immediately after SIXTY days from the date of issue of invoice by the supplier

If it is not possible to determine the time of supply under (1) or (2), the time of supply shall be the date of entry in the books of account of the recipient.

Illustration:

1. Date of payment 15th October 2018
2. Date of invoice 15th August 2018
3. Date of entry in books of receiver 18th October 2018

The Time of supply of service in this case will be 13th October 2018 i.e. 60 days from the date of invoice.

9. Input Tax Credit

Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The recipient (i.e., who pays reverse tax) can avail input tax credit.

10. Invoice

For section 9(3): The supplier must mention in his tax invoice if the tax is payable on reverse charge

For Section 9(4): Recipient needs to issue invoice (section 31) and also payment voucher is to be issued at the time of making payments (section 31)

Proviso to rule 46 says that recipient may issue consolidated invoice at the end of month.

11. Other Points:

i. A supplier who has opted for composition would not charge GST on his supply but he is liable under section 9(3) and (4) of CGST Act, 2017. Also can not take credit of such payment.

ii. All persons who are required to pay tax under reverse charge(only for person covered under section 9(3)) have to register for GST irrespective of the threshold.

iii. ITC can not be utilized for payment under RCM only cash ledger will apply.

iv. Registered person will not loose inputs of GST paid under RCM even if payment is not made within 180 days .

v. RCM is levied on advance payment as well.

vi. The details of GST paid under RCM would not be auto populated in the GSTR 2 and would required to fill manually.

Conclusion

Reverse charge is not a routing provision of administration but GST has crafted it into a powerful tool for inclusive growth and compliance management.

Examples:

1.A registered person hires auto rickshaw for commuting from one place to another.

This section will not apply as the transportation of passenger by auto rickshaw is exempted from GST.

2. A registered person stays in a budget hotel whose tariff is Rs. 800 per day. Is GST applicable on RCM?

Since the room tariff is less than ₹1,000 it is exempted from GST. The question of RCM does not arise.

3. A printer sends a bill of Rs. 7,000 for printing 1400 books. The printer sends a simple bill of Rs. 7,000 only without any GST. Then the registered person will calculate GST @12% on Rs. 7,000 and pay Rs.840 to the government.

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