General Reverse Charge under GST – A Detailed analysis on RCM
General Reverse Charge under GST: With the introduction of GST, a new provision is introduced which is not there is any of the earlier tax laws. As per the new law, in case one registered person receives any goods or services or both, which is taxable, from the unregistered person, registered person shall be required to pay tax and all the other liabilities like issue of invoice, filing return, assessment of the same shall be the responsibility of the recipient/registered person. GST that is levied on the subject of taxation is generally payable by the supplier but in specified cases, the recipient is required to discharge the liability.
General Reverse Charge under GST
While section 9(3) applies only to those supplies listed in the notification, there is yet another provision which borrows the mechanism of reverse charge in section 9(4) and mkwhich states as:
(4) 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.
The implication is that in every instance where the supplier is unregistered, the ‘registered recipient’ will be liable to pay tax. So, the three-step process that was identified earlier stands modified somewhat.
- First Step – (Click here to Check)
- Second Step – no requirement for notification but, the recipient must be ‘registered’
- Third Step – (Click here to Check)
Here, it does not matter ‘why’ the supplier is unregistered – he may enjoy threshold benefit or may be avoiding registration or may be excluded from registration by section 23 – whatever is the reason, the fact that ‘supplier is unregistered’ is sufficient to place the burden on the recipient. Please note that this provision will fail to operate if both supplier and recipient are unregistered. This provision will apply only if the recipient is registered and the supplier is unregistered. For example, if an advocate who is not liable to be registered engages a supplier of paper who is unregistered, this provision will not operate.
Please note that it is not required that the supplier must charge GST on his supplies. The requirement is merely for the supplier to be unregistered. A supplier who has opted for composition would not charge GST on his supply but is nevertheless registered and does not attract this provision. Registered persons are welcome to receive supplies from composition tax payers and not be anxious about section 9(4).
Apart from the above, the apprehension is that every registered person needs to look out for inward supplies from unregistered persons. One might go to the extent of stating that ‘every debit’ in the books of a registered person must appear on GSTR-1 of one or other supplier. And if it does not, then such inward supplies must be treated through the registered persons’ GSTR-2. This is an interesting general rule but has exceptions, namely:
- Supply must be a taxable qua the unregistered supplier – this is a case where the inward supply (so called for ease of reference) is not a ‘taxable supply’ in the hands of the person supplying (who is found to be unregistered). For example, press release (unnumbered) dated 13 July, 2017 states that gold ornaments ‘traded in’ by a consumer (sold to jeweler) does not attract section 9(4) in the hands of the registered jeweler for the reason that this is not a ‘taxable supply’. This conclusion comes from a careful application of the ‘first step’ stated above. But, the question that arises is, can the registered person (jeweller) assume authority to reach into the affairs of the consumer (who brings the old ornaments) to examine and reach a correct conclusion on this fundamental question of fact – Is it taxable under one of the limbs of section 7(1)?. Surely, the press release cannot grant carte blanche exclusion to jewellers or sanctioned such powers even though the apparent facts may lead (at best) to a suspicion that it may not be taxable. And how does the jeweler defend the exercise of this judgement in each case. Only time will tell but the press release has not only brought glee to this trade but all others who appear to have extended it to their own facts by analogy
- Supplies that are excluded by sch III such as payments to employees and duly subjected to income-tax as salary. Here too, another press release (unnumbered) and dated 10 July 2017 has been issued offering clarity and causing some ambiguity that perquisites that are subject to income-tax are excluded from GST if they comprise of contractual obligations of employer to pay the employee. Surely, this does not put to rest all concerns. The concerns that remain are policy-driven payouts that are not subjected to income-tax. While this press release may be attractive to shove ‘all payments by employer to employee’ as excluded from GST, the unintended by product would be that such an interpretation affords opportunity to ‘pass through’ employee all inward supplies from unregistered suppliers. The last word has not yet been spoken on this one but meticulous application of the above principle is key and a cautious person would claim available credit and pay output tax rather than forego credit bravely resisting tax on these “not-within-salary” payments.
- Expenses accounting towards depreciation and amortization as they do not represent supply much less taxable supply
- Supplies such as interest on loans and other inward supplies that are specifically exempted
Reverse charge is not a routing provision of administration but GST has crafted it into a powerful tool for inclusive growth and compliance management. All though section 9(4) appears to have received much attention, due attention must be extended to section 9(3) and even section 9(5) which are effective machinery provisions for administration of this new tax reform. Instead of apprehensions, sound application of the steps laid down may be applied to reach and balanced approach to the areas where this manner of discharging tax is required to be followed.
Previous Article – Specific Reverse Charge
- Compulsory payment of GST under Reverse Charge
- Notification for Reverse charge on gold ornaments
- Key points of Reverse Charge Mechanism
- Reverse Charge under GST
- List of Goods and Services under Reverse Charge
- GST Reverse Charge
- Reverse Levy on Supplies from Unregistered Persons
- Lateral Charge on Ecommerce