Reverse Charge Mechanism : GST

GST is payable by the person who consume goods and/or services but it is collected by the 'taxable supplier’ who is supplying goods and/or service, however, there are some exceptions to this rule, where the liability to pay GST on a specified supply is on the recipient itself. The mechanism of payment of GST on by the supply receiver is known as Reverse Charge mechanism, popularly known as RCM.

1.    Definition of Reverse charge

Section 2(98) defines reverse charge as “reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act;

The RCM introduced primarily to facilitate tax administration by reducing the number of tax assessees, for effective collection of tax and for reducing tax evasion. This mechanism is similar to the concept of “Tax Deduction at Source” in Income Tax Law.

2.    Factors considered before issuing such notifications:

(a)   Large number of assessees with small payment of tax from each assessee – where the number of supplier are very large and the recipient of Goods and/or services are few under such scenario the collection and administration of GST will be more beneficial if GST would collected from service receiver.

(b)   Jurisdiction - In case of import, the supplier is located outside India. The taxable territory is India, the Government has no jurisdiction to demand tax from the person located outside India. Thus, the recipient is casted with liability to pay the tax as Government can recover tax from recipient.

(c)   Collection of Tax - In many cases the Government finds it very difficult to recover tax from some class of assessees like individuals, like musician, authors, photographers etc in such cases, the corporate bodies who are more organized are casted with the duty to pay GST.

3.    The Applicability of reverse charge is dependent on the following factors:

a. Type of goods and services: Government notifies certain supply to be governed under RCM;

b. Status of the supplier and the receiver: Section 9(4) provides that all supply made by unregistered person to a registered person shall be governed by RCM;

c. Place of provision of Service: all import shall be taxed under RCM.

4.    Applicability of Reverse Charge:

Under GST framework, unless an express law or notification specify certain supplies to be governed under RCM, all transaction shall be levied under regular mechanism.

The provisions of Section 9(3) and (4) deal with levy and collection of GST under Reverse Charge Mechanism

4.1 Supply made by unregistered person to a registered person:

Section 9 (4) provides that, the central and state taxes in respect of the supply by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis.

4.2 Notified supply

Section 9(3) provide as, the Government may, on the recommendations of the Council, by notification, specify categories of supply, the tax on which shall be paid on reverse charge basis.

4.3 Notification for Reverse Charge

a.   Types of goods

The Central Government on the recommendation of the GST Council notified certain goods vide notification number 04/2017-Central Tax (Rate), dated 28.06.2017 tax liability on supply of which shall be paid by the recipient (i.e. reverse charge) of such goods in case of Intra State Supply. The notification has been effective from 01.07.2017.

                     i.   Cashew nuts, not shelled or peeled

                   ii.   Bidi wrapper leaves (tendu)

                  iii.   Tobacco leaves

                  iv.   Silk yarn

                   v.   Supply of lottery

b.   Types of Services

The Central Government on the recommendation of the GST council has notified (vide notification number 13/2017 – Central Tax (Rate), dated 28-06- 2017) following nine categories of services tax on supply of which shall be paid on “Reverse Charge” basis.

i.   Goods Transport Agency (GTA) : In respect of transportation of goods by road

ii.   An individual advocate including a senior advocate or firm of advocates

iii.   An arbitral tribunal

iv.   Service provided by any person by way of sponsorship.

v.   Service supplied by the Central Government, State Government, Union territory or Local authority except following services:

(a) Renting of immovable property

(b) Services by the department of posts by way of speed posts, express post, life insurance, and agency services provided to a person other than Central Government, State Government or Union Territory or Local Authority.

(c) Services in relation to an aircraft or a vessel inside or outside the precincts of port or an airport.

(d) Transport of goods or passengers

vi.   A Director of a company

vii.   An Insurance agent

viii.   A recovery agent

ix.   Author, music composer, photographer, artist or the like.

5.    Mechanism and compliances

5.1 Registration

All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold.

5.2 Time of Supply under RCM

Unless there is a uniform statutory principle is framed to determine the ‘time of supply’, it is very difficult to administer GST laws regarding payment and reporting of the supply. CGST/SGST Acts provides a clear guiding principle to determine time of supply and Sections 12(3) and 13(3) deal with time of time of ‘supply of goods’ and ‘supply of services’ respectively.

Time of supply of goods

As per Section 12(3) the time of supply of Goods under reverse charge mechanism shall be the earliest of the following dates, namely:—

(a) the date of the receipt of goods; or

(b) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(c) the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.

Time of supply of services

As per Section 13(3) the time of supply of Services under reverse charge mechanism shall be the earliest of the following dates, namely:—

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

(c)where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:

(d) In case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.

5.3 Invoicing in the case of Reverse Charge

A registered person, who is liable to pay tax under reverse charge under sec 9(3) or sec 9(4) of the GST Act and sec 5(3) or sec 5(4) of the ICST Act, shall issue an invoice in respect of goods/services received by him from the supplier who is not registered on the date of receipt of goods/services. Such registered person shall also issue a payment voucher at the time of making payment to the supplier.

5.4 Valuation of Supply under RCM

The valuation under RCM shall be done by recipient of supply, which shall be done according to the valuation rules, there is no separate rules to deal with reverse charge, therefore the GST will be applicable on Transaction Value.

5.5 Returns

The returns will also provide the details of all Reverse Charged based supply. All RCM supply whether it is inwards supply or outward supply is shown separately in the returns.

5.6 Input Tax Credit

a.   The recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services, provided such inputs is are used or will be used for business.

b.   ITC in RCM cannot be used to pay output tax.