REVERSE CHARGE- UNDER GST (Goods and Services Tax)

CONCEPT

In General parlance, Supplier/Seller (Who provide services or who sell the goods etc.) is required to pay taxes because this is who earn profits, so required to pay tax. BUT under GST there is a provision under which, a recipient is liable to pay tax, called Reverse charge. Under Reverse charge, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed which is why it is called reverse charge. Earlier to GST there is a concept of reverse charge on certain services but goods were exempt from this scheme. Now it is applicable on goods and services both.

THE LAW

Section 2 (98)

‘reverse charge’ means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act;

Section 9 (3)

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.

Section 9 (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.

WHY THIS CONCEPT COME INTO PICTURE?

In India before this concept Government was unable to collect taxes from various unrecognised sectors and there were huge revenue losses to Government. There was no mechanism to catch then and put them into taxable regime. But after this concept people from unrecognised sector will forcibly put into taxable regime and Compliances and tax collections will therefore be increased. 

 

WHEN REVERSE CHARGE WILL APPLICABLE?

SITUATION 1

When unregistered dealer make Supply of goods or services to a registered dealer

If a dealer who is not registered under GST, makes a Taxable Supply of goods or services
to a registered dealer than reverse charge mechanism will apply and registered recipient of goods/services will pay tax instead of the supplier. Therefore all provisions of GST will apply on the recipient (i.e., the buyer).

 

SITUATION 2

Services through an e-commerce operator

If an e-commerce operator supplies services then reverse charge mechanism will apply on the e-commerce operator and he will be liable to pay GST.

 If the assessee has no physical presence in the taxable area, then the representative of such e-commerce operator will be liable to pay tax.

 If there is no representative, then the assessee has to appoint one who will be liable to pay GST.

SITUATION 3

List of supplies as recommended by GST Council and notified by Central or State government that will fall under reverse charge

Followings services has been notified by GST Council as a reverse charge

S. No Services Services Provider           Service Recipient

 (liable to pay 100% GST)\

 

1 Services provided by an insurance agent to any person carrying on insurance business

 

An insurance agent Any person carrying on insurance business.
2 Services by a recovery agent to a banking company or a financial institution or a NBFC.

 

A recovery agent A banking company or a financial institution or a NBFC
3 Services by a mutual fund agent or distributor, to a mutual fund or asset management company

 

mutual fund agent or distributor mutual fund or asset management company
4 Services by a goods transport agency in respect of transportation  of goods by road Goods Transport Agency (GTA) (a)              any factory registered under or governed by the Factories Act, 1948;

 

(b)any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India;

 

 (c) any co-operative society established by or under any law; (d)any person registered under CGST/SGST/UTGST Act;

 

 (e) any body corporate established, by or under any law; or

 

(f) any partnership firm whether registered or not under any law including association of persons.

 

 (g) Casual taxable person

 

5 Import of services Services by any person who is located in a non-taxable territory and received by any person located in the taxable territory A person located in non-taxable territory to a person Importer as defined under clause (26) of section 2 of the Customs Act, 1962.
6 Taxable services provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non-assessee online recipient (OIDAR)

 

Any person who is located in a non-taxable territory Any person located in the taxable territory other than non-assessee online recipient (Business Recipient)
7 Services by individual advocate or a firm of advocates by way of legal services An individual advocate or firm of advocates Any business entity.
8 Services provided or agreed to be provided by an arbitral tribunal

 

An arbitral tribunal Any business entity.
9 Sponsorship services Any person Anybody corporate or partnership firm
10 Services by Government or local authority by way of support services excluding,- (1) renting of immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994

 

Government or local authority Any business entity.
11 Services 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 A company or a body corporate
12 Radio taxi or Passenger Transport Services provided through electronic commerce operator

 

Taxi driver or Rent a cab operator Any person

WHETHER 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 service recipient (i.e., who pays reverse tax) can avail input tax credit.

REGISTRATION
all persons who are required to pay tax under reverse charge have to to compulsorily obtain registration irrespective of their turnover. i.e even if his turnover does not exceed 20 lakh still he is liable to register. The registration is to be obtained in Form GST-REG-1 

Exemption:-

Case:- In case supply from unregistered person to registered person

 

What is exemption:- The Government vide Notification No.8/2017 provides a exemption if total value of supplies of goods or services or both received from any or all the unregistered persons does not exceed Rs. 5,000 in a day, than no need to pay GST under reverse charge mechanism.

Criteria:-

1.      Exemption is available only for intra-state supplies

 

2.       If the value exceeds Rs. 5000 per day then the GST will be payable on the entire value. 

 

TIME OF SUPPLY FOR GOODS UNDER REVERSE CHARGE

  • the date of receipt of goods OR
  • the date of payment OR
  • the date immediately after 30days from the date of issue of invoice by the supplier

Whichever is earlier

  • If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.

 

       For clause (b)- the date of payment shall be earlier of-

  1. The date on which the recipient entered the payment in his books 
          OR 
                                 2. The date on which the payment is debited from his bank account

TIME OF SUPPLY FOR SERVICES UNDER REVERSE CHARGE

Time of supply shall e earliest of the following dates—

                                (a) The date of payment      OR

                                (b) The date immediately after 60 days from the date of issue of invoice by                                     the supplier (30 days for goods)

  • If it is not possible to determine the time of supply under (a) or (b), the time of supply shall be the date of entry in the books of account of the receiver of service.

          

                          For clause (a)- the date of payment shall be earlier of-

  1. The date on which the recipient entered the payment in his books 
               OR 
                                 2. The date on which the payment is debited from his bank account

TAX INVOICE

The supplier must mention in his tax invoice whether the tax is payable on reverse charge

IMPORT OF SERVICES

  • In case of import of services recipient himself will prepare invoice as per the invoicing provisions and rules which will be reflected in table 4C of GSTR-2 by the recipient.
  • In this table GSTIN will be of the recipient himself.

What is a Problem

 

  • If you doing a business and you received services or goods from your suppliers who are not registered under GST (supposed they are small dealer and their turnover are less than 20lacs), in that case you will have to pay the GST on their behalf, file rerun on their behalf and conclude all GST paper work on their behalf . This will increase your paper-work and can cause cash-flow issues as well.
  • If your business fall under the supply of goods/services notified under reverse charge mechanism than you should compulsory obtain registration irrespective of your turnover and once you get registered, you need to follow GST procedure and file all required GST Returns.

Example

ABC Private Limited provides reverse charge category services to XYZ Private Limited and issue invoice of Rs. 10000/- and mention in invoice that GST will be bear by the receiver on reverse charge basis and assume GST rate is 18% on services provided ABC Private Limited)

NOW

XYZ Private Limited will pay Rs. 1,00,000/- to ABC Private Limited and will deposit Rs. 1800 to the Government as GST.

 Author : CS Anand Raghuwanshi, Partner at Anand Nimesh & Associates, Company Secretaries.

Mr. Anand is a Practicing Company Secretary, based on Delhi and practicing in the area of Corporate Law Compliance & Advisory.

In case you are confused about GST or have any query as a business owner, feel free to consult the GST Professional Mr. Anand Kumar Singh. You can get comprehensive assistance on GST Registration and GST Return Filing. You can also write us  at ancorporate2@gmail.com  and call us on 9868782243/ 011-42730004 or visit our website at www.anandnimesh.com

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