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A Complete Guide to Reverse Charge Mechanism under GST

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A Complete Guide to Reverse Charge Mechanism under GST

Goods and Service Tax Collection in India went up by 15.6% from a year ago to hit INR 1.06 trillion in March. GST Council has been working diligently towards a fairer taxation system and reduce tax evasion. One such crucial measure taken by the council is Reverse Charge Mechanism.

Reverse Charge Mechanism

GST is normally charged by Supplier of Goods/Services. Supplier is liable to collect tax from the recipient and pay the total tax amount to the Government. But in some cases, the Recipient of Goods/Services is liable to pay GST instead of Supplier. This is in essence Reverse Charge.

  1. When is RCM under GST applicable?

Under GST, there are three types of reverse charge scenarios, which are:

i. Nature of Supply/Nature of Supplier

The reverse charge mechanism is applicable upon the nature of the given goods/services as notified by CBIC which will be covered under RCM. This scenario is covered by section 9 (3) of the CGST/SGST (UTGST) Act and section 5 (3) of the IGST Act. 

List of Goods Notified for RCM under section 9(3) of CGST Act, 2017

S No

Particulars of supply of Goods

Supplier of Goods

Recipient of Goods

1

Cashew nuts, not shelled or peeled

Agriculturist

Any registered person

2

Bidi wrapper leaves (tendu)

Agriculturist

Any registered person

3

Tobacco leaves

Agriculturist

Any registered person

4

Silk yarn

Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn

Any registered person

5

Raw cotton

Agriculturist

Any registered person.

6

Supply of lottery

State Government, Union Territory or any local authority

Lottery distributor or selling agent

7

Used vehicles, seized and confiscated goods, old and used goods, waste and scrap

Central Government, State Government, Union territory or a local authority

Any registered person

 List of the Services Notified for RCM under section 9(3) of CGST Act, 2017

S No

Description of supply of Service

Supplier of service

Recipient of service

1

Any service supplied by any person who is located in a non-taxable territory to any person other than nontaxable online  recipient.

Any person located in a non-taxable territory

Any person located in the taxable territory other than nontaxable online recipient.

2

GTA Services

Goods Transport Agency (GTA) who has not paid integrated tax at the rate of 12%

Any factory, society, cooperative society, registered person, body corporate, partnership firm, casual taxable person; located in the taxable territory

3

Legal Services by advocate

An individual advocate including a senior advocate or firm of advocates

Any business entity located in the taxable territory

4

Services supplied by an arbitral tribunal to a business entity

An arbitral Tribunal

Any business entity located in the taxable territory

5

Services provided by way of sponsorship to any body corporate or partnership firm

Any person

Any body corporate or partnership firm located in the taxable territory

6

Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, – (1) renting of immovable property, and (2) services specified below- (i)services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority;

Central Government, State Government, Union territory or local authority

Any business entity located in the taxable territory

(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port oran airport (iii) transport of goods or passengers.

6A

Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under theCentral Goods and Services Tax Act, 2017 (12 of 2017).

Central Government, State Government, Union territory or

Any person registered under the

** Added with effect from 25.01.2018

local authority

Central Goods and Services 

 

 

Tax Act, 2017 read with clause (v) of section 20 of

 

 

Integrated Goods and Services Tax Act, 2017.

7

Services supplied by a director of a company or a body corporate to the said company or the body corporate

A director of a company or a body corporate

The company or a body corporate located in the taxable territory

8

Services supplied by an insurance agent to any person carrying on insurance business

An insurance Agent

Any person carrying on insurance business, located in the taxable territory

9

Services supplied by a recovery agent to a banking company or a financial institution or a non banking financial company

A recovery Agent

A banking company or a financial institution or a non banking financial  company, located in the taxable territory

10

Services supplied by a person located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India

A person located in non-taxable territory

Importer, as defined in clause (26) of section 2 of the Customs Act, 1962 (52 of 1962), located in the taxable territory

11

Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1) (a) of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like

Author or music composer, photograph her, artist, or the like

Publisher, music company, producer or the like, located in the taxable territory

12

Supply of services by the members of Overseeing Committee to Reserve Bank of India

Members of Overseeing Committee constituted by the Reserve Bank of India

Reserve Bank of India.


ii. Taxable Supplies from Unregistered Person to Registered Person
 
As per section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act, if a registered person purchases goods/services from an unregistered dealer (URD) then the registered taxpayer is liable to pay GST on reverse charge basis( only for certain goods/services). All the provisions of the Act will apply to such recipient as if he were the person liable for paying the tax in relation to the supply of goods or services.

This provision will apply if the below conditions are met:

  • Supply of taxable goods or services
  • Supply must be by an unregistered person.
  • Supply must be to a registered person
  • Supply must be an intra-state supply as compulsory registration is required for inter-state sales
iii. RCM on Services through an e-commerce operator

An e-commerce operator that provides a platform to buyers and sellers of services is liable to pay GST on behalf of his suppliers.

For example, Ola provides services of transportation of Passenger through Radio Taxis. Then Ola has to pay GST on behalf of actual service provider i.e. Driver.

If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator shall appoint a representative who will be held liable to pay GST.

2. Registration for RCM

For a person required to pay GST under reverse charge mechanism, it is mandatory for him to be registered under GST and is exempted from the threshold limit of Rs. 40 lakh (Rs. 10 lakh for special category states except for J & K) is not applicable to them.

3. Time of Supply for RCM

      i. For Supply of Goods
            In case of reverse charge applicable on the supply of goods, the time of supply shall be the earliest of the following dates:
            a. Date of receipt of goods.
            b. The 30th day from the date of issuance of an invoice by the supplier.

      ii. For Supply of Services
           In case of reverse charge applicable on the supply of services, the time of supply shall be the earliest of the following dates:
            a. Date of payment
            b. 60th day from the date of issuance of the invoice by the supplier

*If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

For instance, the ‘Date of Receipt’ for the purchased goods is 01/02/2019, ‘Issue of invoice’ is on 21/02/2019 and ‘date of entry’ in the book is 02/02/2019. In this case, the Time of supply is 01/02/2019.

4. Payment of Tax

Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. The reverse charge liability cannot be discharged by using input tax credit.

Advance paid for reverse charge supplies is also liable to procure GST. The person making advance payment has to pay tax on a reverse charge basis.

5. ITC

Under the reverse charge mechanism, the recipient of goods cannot claim ITC as the supplier has not paid any tax for their sales. Input Tax Credit is available only on the receipt of supplies for which tax has been paid and the supplied goods/services were consumed for business purpose.

6. Self-Invoicing

If a person is not registered under GST, he cannot issue GST compliant invoices. Thus, in such scenarios, the recipient is required to prepare the invoice himself for the purchase made as well as the taxes paid.

7. What if an Input Service Distributor receives supplies liable to Reverse Charge?

The ISD mechanism is only to facilitate distribution of credit of taxes paid,. Hence an ISD cannot make purchases liable to Reverse Charge. If the ISD wants to procure such supplies and take the Reverse Charge paid as credit, the ISD should register as a Normal Taxpayer.

8. What if the receiver of goods and/or services who is required to pay tax under RCM himself an Unregistered Dealer?

All taxpayers required to pay tax under reverse charge have to register for GST and the threshold of Rs 40 Lakhs/10Lakhs is not applicable to them.

Provision Applicable from 01.02.2019:

The Central Goods and Service Tax (Amendment) Act, 2018 has been put to effect from February 1, 2019, through ‘notification no 02/2019 - Central Tax dated 29th January 2019’. However, with the introduction of the new provisions, the scope of section 9 (4) of the CGST Act, 2017 has been restricted, as given below

  • Prior to the CGST Act, 2018, purchases up to Rs. 5,000 per day from an unregistered supplier were free from any GST. On the other hand, for purchases exceeding Rs. 5000/ day, the purchaser was required to pay the reverse charge. This requirement has been cancelled from 1st Feb 2019 onwards.
  • Under CGST Act, 2018, only the specified categories of goods and/or services purchased by a person registered under a specified category, from the unregistered person shall be liable to pay the tax on a reverse charge basis.

The Government is yet to announce the aforementioned categories of goods/service and registered person for whom the provisions are applicable.

IRIS Business is a leading GST Suvidha Provider (GSP) providing an easy and efficient solution for GST (IRIS Sapphire) and E-way bill (IRIS Topaz) compliance. To have your GST queries solved and to know more about our solution, please contact us at support@irisgst.com

About Ashwini Gorhe

Ashwini

Ashwini Gorhe, a Chartered Accountant, is associated with IRIS as a Financial Analyst. She has around 6 years of experience in compliance space which includes XBRL reporting, GST and Data analysis. She is actively involved in the IRIS Sapphire (GST filing solution) and IRIS Topaz (E-way bill solution) product development. Before GST, she was handling US compliance analyzing US financial statements and reviewing XBRL filings for US and India market.

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