Reverse Charge Mechanism and Remission of Tax under GST Regime

Introduction:  Under normal circumstances Service tax is payable only by the Service Providers, but for certain services instead of Service Provider, Service Receiver is liable to pay the Service Tax either fully or jointly or partly with Service Provider. It is called Reverse Charge mechanism.  At present Reverse Charge Mechanism is applicable in Service Tax for about 15 Services. Cenvat Credit is eligible on eligible services to the Service receiver paid under Reverse Charge, based on the payment challan viz., GAR 7. Under the State VAT Act, when a dealer purchases taxable commodities from unregistered dealers (URD) then under Reverse Charge, instead of the supplier of goods, the manufacturer dealer is supposed to discharge tax liability on such purchases and Input Tax Credit (ITC) can be availed also.  Such type of Reverse Charge mechanism is continuing in the proposed GST regime also.

Reverse Charge under GST law:  The reverse charge applies to supplies of both goods and services also in the GST regime. “Reverse charge” means the liability to pay tax by the person receiving goods and/or services instead of the person supplying the goods and/or services in respect of such categories of supplies as the Central or a State Government may, on the recommendation of the Council, by notification, specify – clause 2(85) of Model GST Law, 2016.

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Clause 7(3) of Model GST Law, 2016 deals with Services and persons Covered under reverse charge which reads as follows:

Notwithstanding anything contained in sub-section (2), the Central or a State Government may, on the recommendation of the Council, by notification, specify categories of supply of goods and/or services the tax on which is payable on reverse charge basis and the tax thereon shall be paid by the person receiving such goods and/or services and all the provisions of this Act shall apply to such person as if he is the person liable for paying the tax in relation to such goods and/or services.

Central or State Government on the recommendation of the Council would notify the categories of supplies of goods / services on which tax would be payable on reverse charge basis. Therefore, only such goods and/or services would be covered under reverse charge mechanism as may be notified.

The Liability to pay Tax on the goods and/or services notified under the reverse charge mechanism would be on the recipient of the goods and/or services and he would be treated as the only person liable to pay tax on such good and/or services and not the service provider or supplier of the goods.

Those who are covered under Reverse Charge provisions; they have to see the following three aspects.

1. Exemption limit of Rs.20 Lakh is not available.
2. Registration is must from zero point and they have to file all the connected returns.
3. Pay the required taxes on time and comply with all the rules and regulations of GST law.

Section 12(3) deals with Time of supply of Goods, wherein for Reverse Charge cases, the time of supply would be the earliest of the following dates,

(a) The date of the receipt of goods, or

(b) The date on which the payment is made, or

(c) The date immediately following thirty days from the date of issue of invoice by the supplier:

Q. What will be the implications in case of purchase of goods from unregistered dealers under GST law?

The receiver of goods will not be able to get the ITC.  And the recipients who are registered under composition schemes would be liable to pay tax under reverse charge.

Q. In respect of exchange of goods, e.g Gold watch for restaurant services, will the transaction be taxable as two different supplies or will it be taxable only in the hands of the main supplier?

No.  In the above case, the transaction of supply of watch from consumer to the restaurant will not be an independent supply as the same is not in the course of business.  It is a consideration for a supply made by the restaurant to him. The same will be a taxable supply by the restaurant.

Remission of Tax/Duty:  In the Central Excise provisons, “remission” means relieving the tax payer from the obligation to pay tax on goods when they are lost or destroyed due to any natural causes.  Remission is subject to conditions stipulated under the law and rules made thereunder.

Q. Whether such type of remission is allowed under GST law?

Yes.  The proposed section 11 of the Model GT law permits remission of tax on supply of goods.

Q. Whether remission is allowed for goods lost or destroyed before supply?

Remission of tax will apply only when tax is payable as per law i.e taxable event should have happened and tax is required to be paid as per law. Under GST law, levy is applicable upon supply of goods. Where goods are lost or destroyed before supply, taxable even does not occur in order to pay tax.  Accordingly remission of tax does not arise. So, on plain reading of the language used in Section 11, remission is allowed only for those cases where supply of goods is found to be deficient in quantity due to natural causes

Taxable event under GST:

Supply of goods and /or services.  CGST & SGST will be levied on intra state supplies while IGST will be levied on inter-state supplies.  The charging section is section 7 (1) of CGST/SGST and section 4 (1) of the IGST Act.

Conclusion:  As there is no threshold limit for the persons covered under Reverse Charge mechanism under GST law, they must apply for GST registration from the zero point and comply with all the GST provisions like, filing of applicable returns, payment of taxes on the due date etc., However, Clause (c) of Section 9(3) provides exemption in respect of services as notified, that where a person has received notified services upto a certain limit (limit to be notified subsequently) for personal use and other than in the course or furtherance of his business, then no tax under reverse charge would have to be paid.