As we embark to discuss the reverse charge under the Goods and Services Act, it is important to understand the mechanisms responsible for levying tax under the Act. Basically, GST subsists in two ways by which the tax liability is defined in a transaction, these are mainly the Forward Charge Mechanism and the Reverse Charge Mechanism.
Under the forward charge mechanism, when a taxable person supplies goods and services to a recipient, the tax liability is borne by the recipient, while the supplier makes the payment of such tax to the respective government. In the case of intra-state transactions, tax is paid equally to the Central and State governments; on the other hand, regarding inter-state transactions, it is paid to the Central government. On the contrary, under the reverse charge mechanism, a specified supply of goods and services is made by the unregistered supplier to the specified category of persons or recipient, wherein the tax liability is borne as well as paid by the recipient itself to the government.
Section 9(3), 9(4), and 9(5) of the CGST Act and 5(3), 5(4), and 5(5) of the IGST Act tell us about the Reverse Charges Mechanism, wherein the liability of paying the tax is upon the receiver of goods. As we have seen already, generally, the supplier of goods and services is liable to pay the tax under GST, i.e., through the Forward Charge Mechanism. Under these circumstances, the statutory liability to deposit GST and undertake compliance (i.e., obtaining registration under GST, depositing the tax with the government, filing returns, etc.) is on the supplier. Whereas, considering the Reverse Charge Mechanism, the statutory liability to bear the same lies on the recipient of goods and services. The primary objective of shifting the tax payment burden from the supplier to the recipient under the RCM is to prevent tax evasion and leakage. This approach ensures that tax is collected not only from the formal sector but also from the informal sector, which often operates outside regular compliance frameworks. By requiring the recipient to discharge the tax liability, the government ensures that taxable supplies are accounted for and revenue is safeguarded, even when supplies originate from entities outside the formal tax net.
Illustration, consider a person “A”, an unregistered person, makes a specified supply to any person classified in section 9(4) of the CGST and 5(4) of the IGST Act, thus, unlike under the generic circumstance where a registered taxable person is deemed to pay the taxes to the government, herein the recipient, being a registered person itself, will bear the onus of remitting the tax liability.
List of goods taxable under reverse charge includes;
i. Cashew nuts peeled,
ii. Bidi wrapper leaves,
iii. Tobacco leaves,
iv. Raw cotton,
v. Silk yarn,
vi. Supply of lottery by the state government, union territory, or any local authority,
vii. Used vehicles,
viii. Seized and confiscated goods,
ix. Old and used goods,
x. Waste and scrap supplied by the central government, state governments, and union territories.
List of services taxable under reverse charge; Services by,
i. Goods transport agency,
ii. Legal services,
iii. Arbitral tribunal,
iv. Sponsorship services,
v. Services supplied by government,
vi. Renting of immovable property by the government to a registered person,
vii. Renting of immovable property by any person to a registered person,
viii. Renting of any immovable property other than a residential dwelling,
ix. Director of a company,
x. Insurance agent,
xi. Recovery agent,
xii. Music composer, photographer, artist,
xiii. Author,
xiv. Member of the overseeing committee,
xv. Business facilitators,
xvi. Agents of business correspondence,
xvii. Security services,
xviii. and the renting of motor vehicles, are taxable under reverse charge. Therefore, on such purchases, the recipient is supposed to pay tax.
Let’s delve into the article further and draw an understanding of its provisions optimally and unequivocally.
I. Supply of specified goods and services as notified by CBIC:
Under section 9(3) of the CGST Act and 5(3) of the IGST Act, Central Board of Indirect Taxes and Customs, through a notification, carved out a specified category of goods and services aforementioned, which qualifies for the category of reverse charge, and the tax liability of the same shall be settled by the recipient.
II. Specified category of persons:
Section 9(4) of the CGST and 5(4) of the IGST Act sets out the category of persons who shall be regarded under the segment of reverse charge, which includes,
i. Factory as registered under The Factory Act, 1948,
ii. Society as registered under The Society Registration Act, 1860,
iii. Co-operative societies registered under The Co-operative Societies Act, 1912,
xi. Directors of a company
x. Partnership firm, whether registered or unregistered,
xi. Any person registered under the CGST, SGST, IGST, or UTGST Act,
xii. A casual taxpayer living in a taxable territory.
III. For a supply to qualify under RCM, it shall take place in a transaction where the supplier of the goods and services is an unregistered person, making a supply to the registered person, i.e., the recipient. The onus to raise an invoice and pay the tax liability to the respective government shall be on the receiver.
IV. Supply of goods and services through an E-Commerce Operator:
Under section 9(5) of the CGST and 5(5) of the IGST Act, in a case where the supplier as well as the recipient in a transaction are unregistered, the supply can be made through an e-commerce platform. Under this system, an unregistered supplier makes the supply to the unregistered receiver by means of a platform, and the liability arising out of such transaction shall be discharged by the e-commerce platform. Examples are Ola services, Urban Clap services, Make My Trip, etc. Further, in cases where the e-commerce does not have a physical presence in the taxable territory, the tax shall be paid by the person representing such platform, and if there is no representative either, then the operator will appoint one, who will be liable to pay the tax.
Time of supply of goods and services under the provisions of the Reverse Charge Mechanism
Under GST, it is important to determine the time of supply of goods and services, as it ascertains the
time to discharge the tax liability and the input tax credit claimable by the recipient on the given supply.
The time of supply of goods under the reverse charge mechanism shall be considered the earliest of the following:
i. Date of receipt of the goods by the recipient,
ii. Date of payment for goods,
iii. Or 30 days from the date of issue of the invoice by the unregistered supplier.
In the case where it is difficult to determine the time of supply according to the above-mentioned provisions, it shall be the date on which the recipient enters the records of such supply in its books of accounts.
The time of supply of services shall be considered the earliest of the following:
i. Date of receipt of service,
ii. Date of issue of invoice by the recipient,
iii. 60 days immediately after issuing the invoice by the unregistered supplier.
Similar to the supply of goods, in the case where it is difficult to determine the time of supply as per the above-mentioned provisions, it shall be the date on which the recipient enters the records of such supply in its books of accounts.
Compliance with the Reverse Charge Mechanism
A registered taxpayer should adhere to compliance across the spectrum of this Act to ensure fair tax administration, simplified collection in specific scenarios, facilitate proper claim of input tax credit, and guarantee transparency and accountability. Listing below some of the key obligations;
i. The recipient of the goods and services should be a registered specified person as mentioned in section 9(4) and 5(4) of the CGST and IGST Act, receiving the supply of goods and services as stated under section 9(3) of the CGST and 5(3) of the IGST Act.
ii. The records of such transactions shall be maintained, updated regularly for reconciliation and audits.
iii. The invoice generated should specifically mention the nature of the transaction as a reverse charge.
iv. A recipient is required to self-generate the invoice on the reception of the supply, as well as issue a payment voucher at the time of making the payment to the supplier.
v. The tax liability for such transaction shall be settled by means of the electronic cash ledger and not the electronic credit ledger. The amount of tax discharged can be claimed as input tax credit by the recipient, unless he is a composition dealer.
vi. The tax paid by the recipient under the reverse charge scheme shall be separately mentioned by him while filing his return for GSTR-1.
Conclusion
The Reverse Charge Mechanism under the Goods and Services Act plays a vital role in curbing the fallacies of tax leakage and evasion. It instils transparency and fairness by transposing the tax liability from the supplier to the recipient, also strengthening the tax administration system by encompassing those sectors that underreport or suffer from the issue of unregistered vendors. Thought it chips in various compliance obligations as stated supra, which could be tolling at times, but it has also been influential and significant in augmenting the prevailing indirect tax system in India, balancing the government revenues and taxpayers’ obligations, fostering a fair, dynamic, and equitable market.
Author Bio
Sec. 9(5) of CGST Act, 2017 and Sec. 5(5) of IGST Act, 2017 are not related to reverse charge mechanism.