GST: Reverse Charge Mechanism

GST simplifies indirect taxes in India by subsuming multiple taxes and Cesses levied by Centre and State into one single tax (GST) on goods and services across India. From now on, no tax other than GST will be levied on manufacture, sale, entry or purchase of the goods. The concept of Reverse Charge Mechanism in GST was introduced in former Service Tax laws. Generally, tax is payable by the person who provides services but under Reverse Charge Mechanism the liability to pay tax has shifted to recipient of services. There wasn’t a single, centralized tax that applied to both goods and services. GST was consequently introduced. All of the significant indirect taxes were combined into one under the GST. It has significantly lowered the tax payers’ compliance burden and made it simpler for the government to administer taxes.

What is Reverse Charge Mechanism

Reverse Charge Mechanism is the process of payment of GST by the receiver instead of the supplier. In this case, the liability of tax payment is transferred to the recipient/receiver instead of the supplier. The purpose of shifting the burden of GST payments to the recipient is to tax the import of services, exempt some groups of suppliers, and broaden the taxation of other unorganised sectors (since the supplier is based outside India).

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When is Reverse Charge Applicable

There are two types of reverse charge scenarios provided in law. The first is dependent on the nature of supply and/or nature of supplier. This scenario is covered by section 9 (3) of the CGST/SGST (UTGST) Act and section 5 (3) of the IGST Act. The second scenario is covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act where taxable supplies by any unregistered person to a registered person are covered. As per the provisions of section 9(3) of CGST / SGST (UTGST) Act, 2017 / section 5(3) of IGST Act, 2017, the Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Accordingly, wherever a registered person procures supplies from an unregistered supplier, he needs to pay GST on a reverse charge basis. However, supplies, where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the unregistered suppliers is less than five thousand rupees in a day, are exempted.

Registration is Mandate for Reverse Charge Mechanism:

A person who is required to pay tax under reverse charge has to compulsorily register under GST and the threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for special category states except J & K) is not applicable to them.

ITC:

A supplier cannot take ITC of GST paid on goods or services used to make supplies on which recipient is liable to pay tax.

Time of Supply:

The Time of supply is the point when the supply is liable to GST. One of the factors relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, recipient is liable to pay GST. Thus, time of supply for supplies under reverse charge is different from the supplies which are under forward charge. In case of supply of goods, time of supply is earliest of –

Date of receipt of goods
Date of payment as per books of account or date of debit in bank account, whichever is earlier
The date immediately following thirty days from the date of issue of invoice or similar another document.

In case of supply of services, time of supply is earliest of –

Date of payment as per books of account or date of debit in bank account, whichever is earlier
The date immediately following sixty days from the date of issue of invoice or similar another document. Where it is not possible to determine the time of supply using the above methods, the time of supply would be the date of entry in the books of account of the recipient.

Compliances in respect of supplies under reverse charge mechanism:

As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge.
Maintenance of accounts by registered persons: Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge
Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.
Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.
Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.

Statutory provision of reverse charge mechanism in GST:

Section 2(98) of the CGST Act, 2017 has defined the term “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 plain reading of the cited definition of reverse charge under GST laws, it is clearly stated that reverse charge is not only confined to services rather the scope of reverse charge is extended to goods also.

Un-Registered Dealer:

“The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person, shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

In intra-state purchases, CGST and SGST have to be paid under the reverse charge mechanism (RCM) by the purchaser. Also, in the case of inter-state purchases, the buyer has to pay the IGST. The government notifies the list of goods or services on which this provision gets attracted from time to time. In the real estate sector, the government notified that the promoter should buy inward supplies to the extent of 80% from registered suppliers only. Suppose the purchases from registered dealers’ shortfall is 80%, then the promoter should GST at 18% on the reverse charge to the extent short of 80% of inward supplies. However, if the promoter purchases cement from an unregistered supplier, he must pay a tax of 28%. This calculation is to be done irrespective of the 80% calculation.

The promoter is liable to pay GST on a reverse charge basis on TDR or floor space index (FSI) supplied on or after 1st April 2019. Even if a landowner is not engaged in a regular business of land-related activities, the transfer of development rights by such an individual to the promoter is liable to GST as it is considered a supply of service under section 7 of the CGST Act. Also, in case of outward supply of TDR by one developer to another, GST is applicable at 18% on reverse charge.

GST Registration :

As per Section 24 of the CGST Act, 2017, a person who is required to pay tax under reverse charge has to compulsorily register under GST irrespective of the threshold limit of registration and threshold limit of ` 20 lakhs/` 40 lakhs (` 10 lakhs for special category states) but special category States threshold exemption is increased to ` 20 lakhs, as per CGST (Amendment) Act, 2018 is not applicable to the Reverse Charge Mechanism.

Invoicing Rules:

Under reverse charge, the buyer or recipient of goods or services or both has to issue an invoice or payment voucher on received of goods or services or both from the supplier as may be the case.

In terms of sub-section (3) of Section 31(3)(f) of the CGST Act, 2017 and read with clause (f) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of Section 9 of the CGST Act, shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both; and as per clause (g) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of Section 9 shall issue a payment voucher at the time of making payment to the supplier. The second proviso to Rule 46 provides that where an invoice is required to be issued under Section 31(3)(f) of the CGST Act, a registered person may issue a consolidated invoice at the end of a month for supplies covered under Section 9(4), the aggregate value of such supplies exceeds rupees five thousand in a day from any or all the supplies.