Normally, GST on goods and services is payable by the taxable person (i.e. person registered or liable to be registered under GST). However the Government have, on the recommendation of the council, by notification specified categories of supply of goods or services or both, the tax on which shall be paid on the reverse charge basis (by recipient) and all the provision of GST as applicable to the supplier shall apply to such recipient as if he is the supplier of goods and/or service.
What is Reverse Charge Mechanism?
“Reverse charge” means the liability to pay tax by the person receiving goods or services or both instead of supplier of such goods and/or services under section 9(3) or 9(4) of CGST act or Section 5(3) or 5(4) of IGST Act.
Where is Reverse Charge Applicable?
There are two provisions under which GST is payable on the Reverse Charge:-
Reverse charge under gst notification:
Supply of goods where GST is payable under Reverse Charge is mentioned in Notification No. 4/2017-CT (Rate) and 4/2017-IT (Rate) both dated 28.06.2017 effective from 01.07.2017. This List includes items like Cashew nuts, Bidi wrapper leaves (tendu), Tobacco leaves, Silk Yarn, Supply of Lottery, Used vehicles, seized and confiscated goods, old and used goods, waste and scrap to Government or local authority, Raw Cotton, Priority Sector Lending Certificate.
Supply of Services where GST is payable under Reverse Charge is mentioned in Notification No. 13/2017-CT (Rate) and 10/2017- IT (Rates) both dated 28.06.2017.This list is mentioned at the end of the article.
Reverse charge where supplies is from unregistered person:-
If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier.
However, an exemption was granted by Central Government vide Notification No. 08/2017 – Central Tax (Rate) dated 28-06-2017 to those registered dealers whose aggregate value of such supplies of goods or services or both received from any or all the suppliers, who is or are not registered, not exceeding five thousand rupees in a day.[This provision not relevant from 13.10.2017]
As the Central Government is yet to notify, on the recommendation of the council, class of registered person and specified categories of goods or services or both, the applicability of provisions cannot be ascertained as on date.
Time of Supply under Reverse Charge:-
Time of Supply is the point to determine when the supply is liable to GST.
In case of Supply of Goods:-
The time of supply shall be the earliest of the following dates:
- The date of receipt of goods
- The date of payment
- The date immediately after 30 days from the date of issue of an 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.
Date of Payment: – The date of payment in the above situation refers to the date on which the payment is recorded in the books of account of entity that receives the service (recipient of service) or the date on which the payment is debited from the entity’s bank account, whichever is earlier.
In case of Supply of Service:-
The time of supply shall be the earliest of the following dates:-
- The date of payment
- The date immediately after 60 days from the date of issue of invoice by the supplier
Compliance in respect of Supplies under GST Reverse Charge Mechanism:-
- Person who are liable to pay tax under Reverse Charge are required to get registered, irrespective of the threshold limit specified- Section 24 of CGST Act. However, persons who are exempt from registration under section 23 of CGST Act are not required to get registration under Section 24. Section 23 of CGST Act provides for exemption from registration to those who are exclusively engaged in the supply of goods or services or both which are not liable to tax or are fully exempt.
- 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 under gst. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge under gst.
- Self-invoicing is to be done when you have purchased from an unregistered supplier and such purchase of goods or services falls under reverse charge. This is due to the fact that your supplier cannot issue a GST-compliant invoice to you, and thus you become liable to pay taxes on their behalf. Hence, self-invoicing, in this case, becomes necessary.
- 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, only after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.
- Only a registered person is liable to pay tax under GST. Thus a person who is not required to get registered under GST is not required to pay GST under Reverse charge.
The loophole in GST Refund Application
List of Services as notified till 01.10.2019 under RCM is mentioned as below:-
GTA Services:- (From 01.07.2017)
Supply of Goods by GTA in respect of transpiration of goods by road to Factory/Society/Co-operative society/Firm, AOP, Body corporate, Casual taxable person if such recipients are located in a taxable territory.
If GTA is registered under GST and issue invoice along with GST, No tax shall be payable by the recipient of such service.
Person who is paying freight is liable for the payment of GST.
[Not Applicable – Services provided by GTA to establishment of CG/SG/UT/LA/person registered under GST for the purpose of deducting TDS.]
Legal Services:- (From 01.07.2017)
Service supplied by an individual advocate including senior advocate by way of representational service before any court, Tribunal, or authority.
Services supplied by Individual or firm of advocate to another firm of advocate or to Business entity by way of legal services.
Arbitral Services:- (From 01.07.2017)
Services supplied by an arbitral Tribunal to a business entity.
Sponsorship Services:- (From 01.07.2017)
Service provided by way of Sponsorship Service to anybody corporate or partnership firm located in a taxable territory.
Government Services:- (From 01.07.2017)
Services supplied by the CG/SG/UT/LA to a business entity (located in taxable territory) except the following:-
- Renting of immovable property service, and
- Services by the Department of posts by way of speed post, life insurance, and express parcel post and agency services provided to a person other than CG/SG/UT/LA.
- Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
- Transport of goods or passengers.
Services by the Government:- (From 25.01.2018)
Services supplied by the CG/SG/UT/LA by way of renting of immovable property to a person registered under the CGST Act, 2017
Transfer of Development Rights or FSI:- (From 01.04.2019)
Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter.
Lease of land:- ( From 01.04.2019)
Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount (premium) and/or periodic rent for construction of a project by a promoter.
Services by the Director:– (From 01.07.2017)
Services supplied by a director of company/body corporate to the said company or a body corporate
Insurance Agent Service:- (From 01.07.2017)
Services provided by an insurance agent to person carrying on insurance business.
Recovery Agent Service:- (From 01.07.2017)
Services provided by a recovery agent to a banking company or a financial institution or NBFC.
Copyright Service:- (From 01.07.2017 to 30.09.2019)
Supply of Services by an author, music or the like by way of transfer or permitting the use or enjoyment of a copyright to Publisher, Music company, producer or the like.
Copyright Service:- (From 01.10.2019)
Supply of services by a music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright to Music company, producer or the like
Copyright Service by Author:- (From 1.10.2019)
Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright to publisher.
Provided that nothing contained in this shall apply where, –
- The author has taken registration under the GST Act, 2017 and where he exercises the option to pay central tax on the service specified in accordance with Section 9 (1) GST Act, 2017 along with declaration that he shall not withdraw the said option within a period of 1 year from the date of exercising such option
- The author makes a declaration, as prescribed in Annexure II on the invoice issued by him in Form GST Inv-I to the publisher.
Reserve Bank Services:- (From 13.10.2017)
Supply of services by the members of Overseeing Committee to RBI.
Services by DSAs:- (From 27-7-2018).
Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate partnership or LLP to bank or NBFCs
Business Facilitator:- (From 01.01.2019)
Services provided by Business Facilitator (BF) to a banking company
Business Correspondent:- (From 01.01.2019)
Services provided by an agent of Business Correspondent (BC) to Business Correspondent (BC)
Security Services:- (From 01.01.2019)
Services provided by any person other than body corporate to a registered person by way of supply of security personnel but Not applicable to establishment of CG/SG/LA/UT, government agencies, Registered person paying tax under composition scheme.
Lending of Securities:- (From 01.10.2019)
Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of SEBI, as amended.
Renting of Motor Car:- (From 01.10.2010).
Services provided by way of renting of a motor vehicle provided to a body corporate