REVERSE CHARGE IN GST
The reverse charge in GST applies to supplies of both goods and services. “Reverse charge” means the liability to pay tax by the person receiving goods and/or services instead of the person supplying the goods and/or services in respect of such categories of supplies as the Central or a State Government may, on the recommendation of the GST Council. GST council specify reverse charge mechanism in clause 2(85) of Model GST Law, 2016.
Those who are covered under Reverse Charge provisions have to see the following three aspects.
- Exemption limit of Rs.20 Lakh is not available.
- Registration is must from zero point and they have to file all the connected returns.
- Pay the required taxes on time and comply with all the rules and regulations of GST law.
The provisions regarding reverse charge are as follows:
APPLICABILITY OF REVERSE CHARGE
As per Sec 9(4) of CGST 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 & registered persons). 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:
- There should be a supply of goods or services
- The supply should be in respect of taxable goods/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
Supply of certain goods or services notified by CBEC (Central Board of Indirect Taxes).
GOODS NOTIFIED UNDER REVERSE CHARGE
Goods like Cashew nuts (not shelled / peeled), bidi wrapper leaves, tobacco leaves, supply of lottery, silk / yarn etc. are taxable under reverse charge mechanism i.e., recipient is liable to pay tax.
SERVICE NOTIFIED UNDER REVERSE CHARGE
The following categories of services are notified under reverse charge mechanism. The recipient of services is liable to pay GST in case of following services.
- Supply of Services by Goods Transport Agency (GTA) in respect of transportation of goods by road to any factory, society, co-operative society, body corporate, any person registered under GST, partnership firm, casual taxable person.
- Supply of services by an individual advocate including a senior advocate to any business entity located in the taxable territory.
- Services provided by way of Sponsorship to a body corporate or partnership firm.
- Services supplied by the central/State government or local authority to a business entity excluding renting of immovable property, services by the department of post, services in relation to aircraft or vessel, transport of goods or passengers.
- Supply of services by a director of a company/ body corporate to the said company/body corporate.
- Services supplied by an insurance agent to any person carrying on Insurance Business.
- Services supplied by a recovery agent to a banking company or financial institution or NBFC i.e. Non-Banking Financial Companies.
- Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use of copyright relating to original literary, dramatic, musical or artistic works to publisher, company, producer or the like.
TAX PAYABLE BY THE E-COMMERCE OPERATOR ON NOTIFIED SERVICES
- Electronic Commerce Operators (ECO) displays products as well as services which are supplied by some other person to the consumer on their electronic portal.
- The consumers buy such goods / services through these portals.
- The actual supplier supplies the selected product / service to the consumer on the selection.
- The consideration for the product / service is collected by the ECO from the consumer and passed on to actual supplier after the deduction of ECO commission.
TIME OF SUPPLY FOR GOODS UNDER REVERSE CHARGE
As per Section 12(3) of the CGST Act, 2017 in case of supplies of goods in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely :-
(a) Date of receipt of goods; or
(b) Date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(c) The date immediately following 30 days from the date of issue of invoice or any other document, or similar other document thereof by the supplier.
Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.
TIME OF SUPPLY FOR SERVICES UNDER REVERSE CHARGE
As per Section 13(3) of the CGST Act, 2017 in case of supplies for Services in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely :-
(a) The date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(b) The date immediately following 60 days from the date of issue of invoice or any other documents, similar other document thereof by the supplier.
Provided, where it is not possible to determine time of supply by using above methods under clause (a) and clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply.
INPUT TAX CREDIT UNDER RCM
A supplier cannot take Input Tax Credit of GST paid on goods or services used to make supplies on which the recipient is liable to pay tax under reverse charge.
The recipient can avail Input Tax Credit of GST amount that is paid under reverse charge on receipt of goods or services by him.
GST paid on goods or services under reverse charge mechanism is available as ITC to the registered person provided that such goods or services are used or will be used for business or furtherance of business.
The ITC is availed by recipient cannot be used towards payment of output tax on goods or services, the payment of tax under reverse charge only on cash.
COMPLIANCES IN RESPECT OF SUPPLIES UNDER REVERSE CHARGE MECHANISM
(1) 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.
(2) 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.
(3) 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.
(4) Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in column 4B of GSTR-1.
(5) Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.
PROFIT & LOSS ITEMS WHICH MIGHT ATTRACT GST UNDER RCM
Following is an example of some expenses which can attract GST under Reverse Charge Mechanism:
- Commission payments
- Printing and stationery
- Repairs and Maintenance
- Office Maintenance
- Vehicle maintenance
- Computer maintenance
- Legal Fees
- Consultancy Fees
- Professional Fees
- Audit Fees
- Freight and transportation expenses.
- Gift expenses
- Business promotion expenses
For these items, RCM will not apply for the simple reason that GST is not applicable on these:
- Salary and wages
- Car fuel (Diesel/petrol)
- Government Fees (such as MCA fees, land registration fees etc.)
A registered person hires an auto rickshaw for commuting from one place to another.
This section will not apply as the transportation of passenger by auto rickshaw is exempted from GST.
A registered person stays in a budget hotel whose tariff is Rs. 800 per day. Since the room tariff is less than ₹1,000 it is exempted from GST. The question of RCM does not arise.
EFFECT OF RCM ON BUSINESS HOUSES
This will increase working capital, compliances, classification disputes etc. for registered businesses. Registered businesses may prefer to deal with other registered dealers only to ease business processes and reduce complications.
This could hamper the business of unregistered dealers. In order to maintain market share, they might be required to voluntarily register or at least assist their registered customers in GST compliance (such as identify HSN Codes, applicable GST rates etc.)
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