Reverse Charge Under GST

What is Reverse Charge?

Normally, under the GST regime, the supplier of goods or services pays the tax on supply. But in case of Reverse Charge, the receiver of goods/ services becomes liable to pay the tax. (Section 9(4) of CGST Act 2017)

The purpose of applying reverse charge is to increase tax revenues, coverage and compliance from partly or unorganized sectors.

When is Reverse Charge Applicable?

1. In case an unregistered dealer supplies goods to a registered person, the GST will have to be paid directly by the receiver to the Government instead of the supplier. For this, the registered dealer has to do self-invoicing for the purchases made. For Inter-state purchases, the purchaser has to pay IGST and for Intra-state purchases, CGST and SGST have to be paid by the buyer.
2. 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, UrbanClap provides services of plumbers, electricians, teachers, beauticians etc. UrbanClap is liable to pay GST and collect it from the customers instead of the registered service providers.

3. Supply of certain goods and services specified by Central Board of Excise and Customs (CBEC) attract a reverse charge.

Time of Supply under Reverse Charge1. In case of Goods

In case of supplies of goods, 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
• Date of entry in the books of account of the recipient.

Illustration:

Date of receipt of goods 15th September 2018

Date of invoice 1st October 2018

Date of entry in books of receiver 18th September 2018

The Time of supply of goods, in this case, will be 15th September 2018

2. In case of Services

In case of supplies of services, the time of supply shall be the earliest of the following dates:

• The date of receipt of services
• The date of payment
• The date immediately after 60 days from the date of issue of invoice by the supplier
• The date of entry in the books of account of the recipient.

Illustration:

Date of payment 15th May 2018

Date of invoice 15st March 2018

Date of entry in books of receiver 18th May 2018

The Time of supply of service, in this case, will be 15th March 2018

Exemption from Reverse Charge Mechanism :

In case of intra-state supply of goods and services, government has exempted goods and services received by unregistered dealers under section 9(4), provided that the aggregate of such goods or services or both received in a day, from one or more suppliers must not exceed?5000. Hence,

• This exemption is applied only when the goods and services are from unregistered dealer.
• Only in case of Intra-State supply.
• In case the supplies of goods or services or both exceed?5000, the exemption will not be available. GST is payable on the whole amount.

For Example: A registered company called ABC Ltd. has spent?9,500 on purchases from an unregistered person. In this case, should it pay GST via Reverse Charge Mechanism on the whole amount or the amount exceeding the threshold limit? Once the limit of?5,000 in a day is crossed, the GST is payable on the entire amount of?9,500 via reverse charge mechanism and not the excess amount of?4,500.

Difference between Forward and Reverse Charge :

PARTICULARSFORWARD CHARGEREVERSE CHARGE

Meaning

Direct charge or forward charge is a mechanism where the supplier of goods/ services is liable to pay tax.

Reverse charge is mechanism where the receiver of the service will be liable to pay GST to the government.

Registration

Registration is required once a supplier meets the threshold limit.

All the people required to pay tax under reverse charge have to register themselves for GST irrespective of threshold.

Tax Liability

The tax liability is on the supplier of the goods or services or both.

The tax liability is on the receiver of the goods or services or both.

Supplier

A supplier can only be a registered supplier. An unregistered supplier cannot collect tax.

A supplier can also be a registered supplier in case of supply of notified goods or services.

Recipient

A recipient can be a registered or an unregistered person.

A recipient should be registered in RCM in case of section 9(3) of CGST Act and section 5(3) of IGST Act.

Frequently Asked Questions (FAQs) :· What is Self Invoicing?

When a registered dealer purchases goods/ services from an unregistered supplier, self- invoicing is required to be done by him. It is done on the behalf of the unregistered dealer.

• How is Payment of tax done under Reverse Charge Mechanism?

Under reverse charge mechanism, Payment of Tax shall be paid through Electronic Cash Ledger. Reverse Charge liability cannot be paid through Input Tax Credit.

• 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.

• Are taxpayers under Reverse Charge Scheme eligible for Composition scheme?

No, taxpayers paying tax on the basis of reverse charge under GST are not eligible for composition scheme.