Basis Concept of Reverse Charge Mechanism in GST

Basis Concept of Reverse Charge Mechanism in GST

Hello Readers!  In this article, we will understand the Basis Concept of Reverse Charge Mechanise in GST. As we aware that generally supplier is liable to collect and deposit the tax to Government. However, under the Reverse Charge Mechanism Recipient of supply of Goods or Services is liable to pay tax.

Reverse Charge Definition :-

As per Section 2(98) of CGST Act, reverse charge means the liability to pay tax by the recipient of supply of goods or services or both instead of supplier of such goods or services or both.

Who is Recipient :-

Recipient: – Recipient is define under Section 2(93). As per definition, Recipient of supply of goods or services or both mean: –

  1. If consideration is payable for Supply of Goods or Services then the person who is liable to pay that consideration

  2. If Consideration is not payable for Supply of Goods then the person to whom the goods are delivered or made available or to whom possession or use of goods is given.

  3. If consideration is not payable for Supply of Services then the person to whom the service is rendered.

And any reference to a person to whom a supply is made shall be construed as recipient of the supply and shall include an agent acting as such on behalf of recipient.

Registration for Service Recipient :-

Although, there is a threshold limit of Rs 20 Lakhs (Rs 10 Lakhs for special category states) for registration in respect of normal tax payers but under the reverse charges, there is no such limit. The person who is liable to pay tax under reverse charge should get registration under GST irrespective of the aggregate limit.

Registration for Service Provider : –

According to notification No 5/2017 – Central Tax, A person is exempted from obtaining registration under the act if he is only engaged in providing supplier of taxable goods or services or both, the tax on which is liable to be paid under reverse charge basis by recipient of such goods or services under section 9(3).

How to determine Time of Supply for Goods and Services under reverse Charge :-

How to determine whether a transaction is cover under reverse charge or Not: –

Before levy of tax under reverse charge, recipient of supply should ensure levy of tax on the supply. If supply is not charge to tax then recipient of supply is not required to pay tax under reverse charge.  

Reverse Charge applicability : –

A. Specify Goods or Services

According to Section 9(3) of CGST Act and Section 5(3) of IGST Act, Government by notification specify categories of supply of goods or supply of services or both, the tax on which shall be paid on reverse charges basis by the recipient of such goods or services or both.

B. Supply from an unregistered person to register person

According to Section 9(4) of CGST Act, if a registered person purchases taxable goods or Services from unregistered person then the tax on such supply shall be paid by registered person on reversed charges basis.

The above provision is applicable to intra state taxable supplies only since as per section 24, registration is mandatory in case of interstate taxable supply without any turnover limit.

This provision will not apply in case of Supply made by unregistered person to another unregistered person. For Example, if an advocate who is not liable to be registered engages a supplier of paper who is unregistered then this provision will not apply.

Exemption to Section 9(4) of CGST :-

(i). The Government has grant exemption from reverse charge provisions under sec 9(4) in respect of sale of old jewellery by individual to a jeweller. However, if an unregistered supplier of Gold ornaments sells it to registered supplier then the tax under RCM will apply.

Press Release by Ministry of Finance on GST 13-07-2017

(ii). The Government has grant exemption from reverse charge provisions under sec 9(4) in respect local purchase of second hand goods from unregistered person to registered person, provided the registered persons charges GST on further sale.

Notification No. 10/2017 – Central Tax (Rate) Dated 28th June 2017.

(iii). The Government has also grant exemption from reverse charge provisions under sec 9(4) in respect of aggregate value of supplies of goods or services or both of up to five thousand in a day, received by a registered person from any of suppliers who is or are not registered.

The above exemption shall not be applicable where the aggregate value of such supplies received by registered person from any or all the suppliers who is or are not registered, exceeds Five thousand rupees in a day.

Notification No. 8/2007 – Central Tax (Rate) Dated 28th June 2017.

Service through E commerce operator :-

According to Section 9(5) of CGST Act and Section 5(5) of IGST Act, Government by notification specify categories of supply of goods or services or both, the tax on which shall be paid by electronic commerce operator if such supplied made through it. Thus, we can say that service provide through E Commerce operator will attract provision of reverse charges and E commerce operator will be liable to pay GST.

The Government has notified following services the tax on intra state supplies shall be paid by the electronic commerce operator.

(i) Service by way of transportation of passengers by a ratio taxi, motor cab, maxi cab and motor cycle,

(ii) Service by way of providing accommodation in hotels, inns, guest house, clubs, camp sites or other commercial places meant for residential or lodging purposes. This shall not apply, where the person supplying such services through electronic commerce operator is liable for registration under sub section (1) of section 22 of the CGST Act.

Notification No. 17/2017 – Central Tax (Rate) Dated 28th June 2017.

Also See, “E Commerce and GST Provision in India.

Input Tax Credit on Reverse Charges :-

Tax paid under reverse charge on Goods or service will be available for input tax credit if such goods or services are used for business purpose or intended to be used in course or furtherance of business.

Also See, “GST Input Tax Credit – Eligibility, Conditions, Apportionment and non-availability.

Must Know fact about reverse charge mechanism :

Reverse Charge mechanism shall not be applicable in case of supply of exempt goods or services.

If the composite dealer falls under reverse charge mechanism then dealer is liable to pay tax at normal rate applicable to such supply instead of rate applicable for composition scheme.

Composite dealer is not able to claim credit of tax paid under reverse charge.

Receipt of advance payments are also subject to reverse charge.

Receiver has to pay 100% tax on receipt of Goods or Services since there is no concept of partial reverse charge under GST.

Once the liability to pay GST is placed on the recipient then in the event of default by the recipient the liability does not recover from the supplier.

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