Key points of Reverse Charge Mechanism under GST Law
Key points of Reverse Charge Mechanism under GST Law: Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the liability may be cast on the recipient under the reverse charge mechanism. Reverse charge 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.
There are two type of reverse charge scenarios provided in law. 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. 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 is covered.
What is Reverse Charge Mechanism in GST ?
“Reverse Charge” means the liability to pay tax by the recipient of goods or services or both instead of the supplier of such goods or services or both under subsection (3) or sub-section (4) of section 9 of the Central Goods and Services Tax Act, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act.
In a normal course of business , Supplier has to pay tax on the Supply of goods or Service Provider has to pay on the services rendered .But in the reverse charge, recipient of goods or services or both is liable to pay GST.
In simple words, ‘Reverse Charge’ means the liability to pay tax is on the recipient of Goods or Services instead of the Supplier of goods or Service Provider. Reverse Charge applies to both Goods as well as Services.
According to Section 9(4)of CGST Act, 2017 or Sec 5(4) of IGST Act , 2017 : The 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.
List of Services applicable under the Reverse Charge Mechanism issued by CBEC ( refer below link )
key points of Reverse Charge Mechanism under GST Law
- a) Registration is compulsory for those who are required to pay Tax under the Reserve Charge Mechanism irrespective of threshold limit of turnover.
- b) Tax under reverse charge can be paid through cash only without taking set off benefit of ITC (Input Tax Credit). ITC can be used for payment of output tax only.
- c) Exemption for intra-State supplies of goods or services or both received by a registered person from any supplier, who is not registered (Notification No.8/ 2017-Central Tax Rate).
- d) But the said exemption will not be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceedsRs.5000/- in a day.
- e) Exemption of Rs.5000/- is for the entire single day and not for purchases of goods or services from each unregistered person.
- f) Reverse charge payment is entitled to avail credit of such tax paid under reverse charge on goods and services subject to the condition that the goods and services are used or will be used for business or furtherance of business.
- g) According to IGST Act, 2017 Inter-state supplies, even supplies of less than Rs. 5000 will attract tax on reverse charge if supplieris un-registered and recipient is registered.
- h) Many procedural requirements need to be complied for any reverse charge supply received by recipient.
- i) If the value of goods or services exceeds Rs.5000/- in single day then GST will be payable on entire amount
- j) Prefer purchase from Dealer registered under GST instead of unregistered dealer . Below example is self explanatory about the net impact of cost
|Registered Dealer Under GST||Unregistered Dealer Under GST|
|Value (similar Product)||10000||10500|
|CGST @ 9%||900|
|SGST @ 9%||900|
|CGST @ 9%||945|
|SGST @ 9%||945|
|Input Tax Credit||0||0|
|Landed Cost net of ITC||11800||12390|
|Increase in Cost Burden||590|
Time of Supply
The time of supply is the point when the supply is liable to GST. One of the factor relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, the 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: –
- (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 thirty days from the date of issue of invoice or similar other document.
In case of supply of services, time of supply is earliest of: –
- (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 or similar other document.
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.
Conclusion: Reverse Charge Mechanism is one of the important aspects in the GST. Organisation needs to give more focus on the resources available in the market and procurement planning. Further, robust planning and implementation of procurement of Goods and Services should be in such away that minimum/lowest procurement is from unregistered dealer.