REVERSE CHARGE MECHANISM
Reverse charge is a mechanism where the recipient of the goods and/or services is liable to pay GST instead of the supplier.
1. What is Reverse Charge?
2. When is Reverse Charge Applicable?
3. Time of Supply under Reverse Charge
4. What is Self-Invoicing?
5. Frequently Asked Questions(FAQ)
What is Reverse Charge ?
Normally, the supplier of goods or services pays the tax on supply. In the case of Reverse Charge, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed.
When is Reverse Charge Applicable ?
A. Supply from an Unregistered dealer to a Registered dealer If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier.
The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.
For Inter-state purchases the buyer has to pay IGST. For Intra-state purchased CGST and SGST has to be paid under RCM by the purchaser.
REVERSE CHARGE MECHANISM
B. Services through an e-commerce operator If an e-commerce operator supplies services then reverse charge will be applicable to the e-commerce operator. He will be liable to pay GST.
For example, Urban Clap provides services of plumbers, electricians, teachers, beauticians etc. Urban Clap is liable to pay GST and collect it from the customers instead of the registered service providers.
If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.
C. Supply of certain goods and services specified by CBEC
CBEC has issued a list of goods and a list of services on which reverse charge is applicable.
Time of Supply under Reverse Charge
A. Time Of Supply in case of Goods
In case of reverse charge, the time of supply shall be the earliest of the following dates:
the date of receipt of goods
the date of payment*
the date immediately after 30 days from the date of issue of an invoice by the supplier If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.
*This point is no more applicable based this Notification No. 66/2017 – Central Tax issued on 15.11.2017
Illustration:
Date of receipt of goods 15th May 2018
Date of invoice 1st June 2018
Date of entry in books of receiver 18th May 2018
The Time of supply of service, in this case, will be 15th May 2018
B. Time Of Supply in case of Services
In case of reverse charge, the time of supply shall be the earliest of the following dates:
The date of payment
The date immediately after 60 days from the date of issue of invoice by the supplier
If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.
Illustration:
Date of payment 15th July 2018
Date of invoice 15st May 2018
REVERSE CHARGE MECHANISM
Date of entry in books of receiver 18th July 2018
The Time of supply of service, in this case, will be 15th May 2018
What is Self Invoicing
Self-invoicing is to be done when you have purchased from an unregistered supplier AND such purchase of goods or services falls under reverse charge.
This is due to the fact that your supplier cannot issue a GST-compliant invoice to you, and thus you become liable to pay taxes on their behalf. Hence, self-invoicing, in this case, becomes necessary.
Frequently Asked Questions (FAQ)
What happens if the receiver of goods and/or services is required to pay tax under Reverse Charge but is not a registered dealer?
All taxpayers required to pay tax under reverse charge have to register for GST and the threshold of Rs 20 Lakhs is not applicable to them.
Is Input Tax Credit allowed under Reverse Charge?
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.
What if an Input Service Distributor receives supplies liable to Reverse Charge?
An ISD cannot make purchases liable to Reverse Charge. If the ISD wants to procure such supplies and take the Reverse Charge paid as credit, the ISD should register as a Normal Taxpayer.
REVERSE CHARGE MECHANISM
Reverse Charge Entries Under GST:
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
REVERSE CHARGE MECHANISM
1 What is meant by Reverse Charge? It means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply.
2 Is the reverse charge mechanism applicable only to services?
No, reverse charge applies to supplies of both goods or services, as notified by the Government on the recommendations of the GST Council.
3 What will be the implications in case of receipt of supply from unregistered persons?
In case of receipt of supply from an unregisteredperson, the registered person who is receiving goods or services shall be liable to pay tax under reverse charge mechanism.
4 How will a recipient who receives a supply under reverse charge mechanism pay GST?
A person who is required to pay tax under reverse charge has to compulsorily register under GST. The threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for special category States) is not applicable in such case.
5 What is the time of supply of goods in case of tax payable under reverse charge?
The time of supply will be the earliest of the following dates:
a) date of receipt of goods; or
b) date of payment as per books of account or date of debit in bank account, whichever is earlier; or
c) the date immediately following 30 days from the date of issue of invoice by the supplier.
6 What is the time of supply of service in case of tax payable under reverse charge?
The time of supply will be the earlier of the following dates:
a) date of payment as per books of account or date of debit in bank account, whichever is earlier; or
b) the date immediately following sixty days from the date of issue of invoice by the supplier.
7 Can GST paid on reverse charge basis be considered as input tax?
Yes. The definition of input tax includes the tax payable under reverse charge mechanism.
8 Can a person take input tax credit without payment of consideration for the supply along with tax to the supplier?
Yes, the recipient can take ITC. The condition of payment of consideration to along with tax within 180 days from the date of issue of invoice is not applicable where tax is payable on reverse charge basis.
9 Whether old gold jewellery sold by an individual to a jeweller will be taxed under reverse charge mechanism?
No, even though the sale of old gold by an individual is for a consideration, it cannot be said to be in the course or furtherance of his business (as selling old gold jewellery is not the business of the said individual), and hence does not qualify to be a supply per se. Accordingly, the sale of old jewellery by an individual to a jeweller will not attract the provisions of Section 9(4) and jeweller will not be liable to pay tax under reverse charge mechanism on such purchases.
10 Whether old gold jewellery sold by an unregistered supplier will be taxed under reverse charge mechanism?
Yes, as the sale is for consideration and is in the course or furtherance of business of such unregistered supplier.
11 Does aggregate turnover include value of inward supplies received on which RCM is payable?
Aggregate turnover does not include value of inward supplies on which tax is payable on reverse charge basis. In other words, aggregate turnover, in the hands of supplier, would include value of those supplies on which tax is not payable by him but by the recipient of such supplies.
REVERSE CHARGE MECHANISM
12 Whether legal services provided by advocate firm are under reverse charge?
Yes.
13 Is an advocate providing interstate supply chargeable under Reverse Charge liable for registration?
No, suppliers who are making only those supplies on which recipient is liable to discharge GST under RCM are exempted from registration.
14 A person receives a supply from an unregistered person in another state. Whether he has to pay tax on reverse charge basis?
No, the person supplying the inter-state supply will have to compulsorily register irrespective of his turnover and will be liable to pay tax, unless the supplier has been exempted from taking registration Thus question of unregistered supplies making interstate supplies does not arise.
15 Who will issue the tax invoice in case of reverse charge supplies?
The recipient receiving supplies from unregistered supplier will have to issue invoice on self and pay tax. In other words, the recipient receiving supplies, which are subject to reverse charge, from a registered person need not issue a tax invoice.
16 Under supply from unregistered dealer the purchaser have to pay GST on RCM basis. so whether stipend paid to intern will also come under RCM?
No, stipend paid to interns will be employer-employee transactions. Hence, not liable for GST.
17 Do even small sundry purchases from unregistered persons have to be levied to tax on reverse charge basis?
No, purchases by registered persons from any or all unregistered persons of up to Rs. 5000/- per day are exempted from GST.
18 A registered person purchases goods worth Rs.6000/- on a single day from unregistered persons.
Whether he has to pay GST on Rs. 1000/- or Rs. 6000/-?
He will have to pay GST on Rs. 6000/-. Exemption is available only if the value of purchases per day is less than Rs. 5000/-.
19 If an Assessee pays GST on behalf of an unregistered supplier/SSI/exempted unit, will he be able to take Input Tax Credit of the GST paid on reverse charge basis?
Yes, input tax credit of tax paid on reverse charge basis by the recipient is allowed to the recipient and the credit can be taken even in the same month.
20 Whether, any Indian providing services to PayPal on contract basis is required to pay reverse charges on charges deducted by PayPal?
It depends on the nature of charges deducted.The place of supply is outside India but as the supplier is located in India, it is a case of inter-State supply and subject to IGST. It will be zero rated if the sale proceeds are realized in convertible foreign exchange.
21 Under the new GST Act, the liability or payment of GST still with consignee or consignor?
Reverse charge mechanism has been provided in GST law for GTA and the recipient of GTA service ( he may be consignor or consignee) is required to pay GST. Notification No 13/2017-Central tax (rate) may be referred to.
22 Whether RCM is applicable on payments made for hiring of transport from unregistered GST traders?
RCM under section 9(3) is applicable for GTA and not for transport of goods. Where the vehicle is taken on rent or lease , it will be supply of service under 9966 or 9973 and supply of service will be taxable under RCM under section 9(4). REVERSE CHARGE MECHANISM
23 We are also paying small payments like unloading charges, detention charges and under miscellaneous payments to petty contractors. Is GSTN under reverse charge applicable for these payments?
If you are not registered, payment on reverse charge under section 9(4) of CGST Act, 2017 is not required. That said, if such services availed fall within the domain of any service that is subject to reverse charge under section 9(3) of CGST Act, 2017 you have to get yourself registered and GST has to be paid.
24 Can any unregistered transporter having a turnover below 20 lacks carry the goods for a registered dealer?
Yes, GTA can carry the goods. GST on GTA services is liable to be paid on RCM basis by the recipient. The supply of services of goods transport by road transporter other than a GTA and a courier is exempted under Notification No. 9/2017- Central Tax (rate).
25 Whether reimbursement of expenses to staff comes under RCM?
Re-imbursement is an expense in the course or furtherance of business and if the same is against a taxable supply taken from an unregistered supplier, RCM will apply.
26 Whether tax under RCM is applicable for expenses incurred towards doctor sponsorship programme?
As per notification no. 13/2017-Central Tax (Rate), Sl. No. 4 sponsorship to anybody Corporate/Partnership firm comes under RCM.
