Reverse Charge Mechanism Major Change Under GST: In simple terms GST is a destination based consumption tax meaning thereby that GST will be levied on goods/services in the State in which it is consumed. Reverse Charge Mechanism (RCM) as introduced in GST will totally change the way business is done. it is introduced to increase tax compliance and tax revenues and to make organised economy which will ultimately help in nation building. Hence it is important to understand the provisions of RCM not only for professionals but also for the business, traders and others who are required to comply with RCM provisions under GST.’
GST a biggest indirect tax reform of India will change the manner of doing business. After implementation of GST various indirect taxes will be subsumed under GST:-
- Central Excise Duty.
- Duties of Excise (Medicinal and Toilet Preparations ).
- Additional Duties of Excise (Goods of Special Importance).
- Additional Duties of Customs.
- Special Additional Duty of Customs.
- Service Tax.
- Central Surcharges and Cesses so far as they relate to supply of goods and services.
- State VAT.
- Central Sales Tax.
- Luxury Tax.
- Entry tax.
- Entertainment and Amusement Tax (except when levied by the local bodies).
- Taxes on Advertisements.
- Purchase Tax.
- Taxes on lotteries, betting and gambling.
- State Surcharges and cesses so far as they relate to supply of goods and services.
Reverse Charge Mechanism Major Change Under GST
Reverse Charge Mechanism (RCM)
GST will be collected by the supplier of goods/services from the person/entity to whom the taxable supply of Goods or Services made and deposit to Government account. This is the General Rule of Business. But if the liability of tax deposit lies with the recipient of goods/services then this mechanism is called “REVERSE CHARGE MECHANISM”. All of us are already familiar with this mechanism under Service Tax. Services covered under reverse charge in old regime are:
- (1) Services by an insurance agent to any person carrying on insurance business.
- (2) Services by a recovery agent to a banking company or a financial institution or a non-banking financial company.
- (3) Services by a goods transport agency in respect of transportation of goods by road.
- (4) Services by way of sponsorship and.
- (5) others.
Now under GST regime Reverse Charge will be applicable to both Goods and Services.
As per Section 9(3) of IGST, 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.
The major change is that reverse charge mechanism applies to goods also. The goods and services on which reverse charge mechanism applies will be notified by the GST Council. Till date no Goods are notified but 12 services are notified in GST Council meeting on 19.05.2017 on which reverse Charge applies.
Services under Reverse Charge as Approved by GST Council are:-
It is very much clear that there is no concept of partial reverse charge under GST law which is present in Service Tax Law
REVERSE CHARGE – UNREGISTERED TO REGISTERED
Now the most important provision of reverse charge under GST is Section 9(4).It says that the GST 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.
It implies that any registered person if he receives any taxable goods or services from an unregistered person then the recipient will be liable to pay tax on such goods/services to Govt account.This section will hurt many dealers and service providers as this will increase there compliance burden and also block their working capital.
Let us understand this provision with the help of an example:- A GST registered Company takes services of an unregistered Computer engineer for repair of office Laptop then a registered company has to pay GST on the services received from an unregistered computer engineer as a recipient and deposit to Government Account.
This provision is going to be a crucial provision as many registered service provider and dealers purchase goods or takes services from unregistered suppliers/service providers. So their compliance burden will be increased.
REVERSE CHARGE FOR E COMMERCE OPERATOR FOR SERVICES
Section 9(5) of IGST Act, 2017 provides that the Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying tax in relation to the supply of such services:
Provided that where an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax:
Provided further that where an electronic commerce operator does not have a physical presence in the taxable territory and also he does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax.
Let us understand with example – xyz.com provides services of helpers. xyz.com is liable to pay GST and collect it from the customers instead of the registered service providers.
The exception of reverse charge is that if exempted or non taxable goods/ services received from an unregistered supplier then registered person shall not be required to pay tax under reverse charge and if the transactions are between unregistered persons meaning thereby if both the supplier and recipient are unregistered then no need for tax
REGISTRATION REQUIREMENT UNDER REVERSE CHARGE
The person who is required to pay GST under section 9(3) are mandatorily required to get registered as per section 24(iii) of the CGST Act, 2017.
Section 9(4) of IGST Act 2017 for reverse charge applies to only registered persons..
E-Commerce Operator/representative/appointed person shall be required to register as per section 24(iii) of the CGST Act, 2017.
So all persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold limits.
TIME OF SUPPLY UNDER REVERSE CHARGE
Time of Supply of goods in case of tax payable under reverse charge
- a) Date of receipt of goods; or
- b) Date on which payment is made; or
- c) The date immediately following 30 days from the date of issue of invoice by the supplier
Time of Supply of service in case of tax payable under reverse charge
The time of supply will be the earlier of the following dates:
- a) Date on which payment is made; or
- b) The date immediately following sixty days from the date of issue of invoice by the supplier.
INPUT TAX CREDIT ON 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 person who purchases goods or service recipient (i.e. who pays reverse tax) can avail input tax credit.
EXCEPTION TO REVERSE CHARGE
The exception of reverse charge is that if exempted or non taxable goods/services received from an unregistered supplier then registered person shall not be required to pay tax under reverse charge and if the transactions are between unregistered persons meaning thereby if both the supplier and recipient are unregistered then no need for tax.
CHALLENGES FOR PROFESSIONALS UNDER REVERSE CHARGE
As of now one understands very well the concept of reverse charge under GST. The main provision which will affect majority of the persons is the provision of Section 9(4) of IGST Act, 2017 in which registered person has to pay tax for the purchases/ input services from an unregistered person.
We hereby talk mainly about professionals who are in practice and provide consultancy and other services. If they currently have not registered under service tax because of threshold limit and shall also not take registration under GST then if they provide any services to any registered company, LLP etc. then that Company/LLP has to pay GST under the provision of section 9(4) of IGST Act, 2017 and in turn increases the compliance burden of the Company/LLP.
Let us understand with the help of an example: Suppose a consultancy firm currently unregistered under GST provides consultancy on Company matters to M/s ABC Pvt Ltd and raise bill of Rs 10000/-, then M/s ABC Pvt Ltd has to pay GST on the bill of the consultancy firm of Rs 10000/- and deposit tax to Government. After depositing tax M/s ABC Pvt Ltd can claim input of GST paid under reverse charge. In this way, although there is no monetary/financial loss to M/s ABC Pvt Ltd for taking services from unregistered person but the compliance burden increases. So M/s ABC Pvt Ltd may either ask the consultancy firm to get registration or prefer some other registered professional for such services.
So the new professionals who currently start their practice and are not registered under GST might have to face such situations. And if they register under GST then they have to make proper and full compliance of every provision of GST which took their time and costs which otherwise they can devote to develop their practice or business.
OPPORTUNITIES FOR PROFESSIONALS UNDER REVERSE CHARGE
As Government has made reverse charge provisions of GST in the way that many of the service providers, dealers have to register under GST in spite of the threshold Limits of Rs 20 Lacs for normal States and Rs 10 Lacs for specified States so the number of registered persons under GST will increase and consequently, require professional help for registration, returns, accounting, refunds, assessment, consultancy etc.
So GST will be of great importance for professionals to provide value added services to their clients and help them to do proper compliance and help in Nation building too.
In my view, all the professionals should get registered themselves under GST to avoid any discrimination between registered and nonregistered professionals and to maintain the input credit cycle. Further by taking registration professionals can claim input credit tax on their input services, inputs and capital goods used for business or furtherance of business.