In simple terms, a reverse charge is a system in which the goods’ receiver is liable to pay the tax instead of the supplier.
Explain Reverse Charge Mechanism
Till now we have known that the supplier of the goods pays the taxes. But, in the case of a reverse charge mechanism, the receiver pays the taxes. The structure gets reversed.
The ultimate purpose of transferring the onus of paying taxes to the recipient is, to broaden the scope of taxation for several disorganized entities, to exempt some specific sections of suppliers, and lastly to make the import services taxed as the suppliers are from outside of India.
Currently, only some specific categories of business entities are subject to the reverse charge mechanism. Keep reading to know more about the topic.
When does this Reverse Charge Mechanism Gets Applied?
According to Sections 9(3), 9(4), and 9(5) of the CSGT and SGST Acts, the reverse charge scenario is an active practice for all intrastate transactions. While sections 5(3), 5(4), and 5(5) of the Integrated GST Act control the reverse charge scenario for all inter-state transactions. Let us discuss more on the above-mentioned scenarios.
Supplying of some specified goods and services mentioned by the CBIC
According to the rules mentioned in section 9(3) of the CGST Act, a list of goods and services mentioned by the CBIC needs to pursue the reverse charge mechanism.
Transaction between a registered and an unregistered dealer
Section 9(4) of the CGST Act notifies that if an unregistered dealer supplies goods to a registered person, this reverse charge mechanism will be applied. This means that the GST must be paid directly by the receiver in place of the supplier. Moreover, the buyer who will be paying GST under reverse charge also needs to do self-invoicing for the purchases.
The buyer is required to pay CGST and SGST under the reverse charge mechanism (RCM) when making intra-state purchases. Additionally, the buyer is responsible for paying the IGST when making interstate purchases. The government periodically announces the list of goods or services that are subject to this provision.
In the real estate industry, the government advised that the promoter should only purchase supplies from registered suppliers for up to 80% of their inbound purchases. If the amount of inward supplies is less than 80% of the purchases from registered dealers, the promoter must apply GST at 18% on the reverse charge. The promoter must pay tax at a rate of 28% if he buys cement from an unregistered supplier, though. It is necessary to perform this calculation regardless of the 80% calculation.
On TDR or floor space index (FSI) supplied on or after April 1, 2019, the promoter is responsible for paying GST on a reverse charge basis. Even if a landowner does not regularly conduct land-related business activities, the transfer of development rights by such a person to the promoter is subject to GST because section 7 of the CGST Act classifies it as a service supplier. Additionally, GST is applicable at 18% on reverse charges in cases where TDR is supplied externally by one developer to another.
Service provision via an online retailer
E-commerce operators can be used by all kinds of businesses as an aggregator to sell goods or offer services. The reverse charge will apply to the e-commerce operator and he will be responsible for paying GST, according to Section 9(5) of the CGST Act, if a service provider uses an e-commerce operator to provide certain services. The services covered in this section include:
- providing lodging services in hotels, inns, guest houses, clubs, campgrounds, or other commercial locations designed for residential or lodging purposes, unless the person providing the service via an electronic commerce operator is required to register because their annual revenue exceeds the registration threshold. Take Oyo and MakeMyTrip as examples.
- Housekeeping services, such as plumbing and carpentry, unless the person providing such services through electronic commerce operators is required to register because their annual revenue exceeds the registration threshold. For instance, Urban Company offers the services of teachers, beauticians, plumbers, and electricians. Instead of the registered service providers in this instance, Urban Company is responsible for paying GST and collecting it from the customers.
Consider another scenario in which the online retailer does not have a physical presence in the taxable region. A person representing such an operator of electronic commerce will then be responsible for paying tax for any reason. If there isn’t a representative, the operator will choose one and hold them accountable for paying GST.
Elaborate the time of supply under the Reverse Charge Mechanism.
Time of supply for goods
The earliest of the following dates shall be used as the time of supply for goods in a reverse charge scenario:
- The dates of the goods’ receipt and payment
- The day that comes after 30 days have passed since the supplier’s invoice release date
The date of entry in the recipient’s books of accounts shall serve as the time of supply if the time of supply cannot be ascertained.
*According to Notification No. 66/2017 – Central Tax, which was published on November 15, 2017, this point is no longer relevant.
- Dates of receipt of goods (15 May 2021)
- Invoice (1 June 2021)
- Entry into the receiver’s books (18 May 2021)
In this case, the service’s start date will be May 15, 2021.
Time of Supply for Services
The earliest of the following dates shall be used as the time of supply in the event of a reverse charge:
- Payment Date
- the day immediately following the 60th day from the supplier’s invoice release date
The date of entry in the recipient’s accounting records will serve as the time of supply if it is impossible to pinpoint it.
- Payment date 15th July 2021.
- Date that is immediately following the invoice’s 60-day mark (for example, if the invoice was issued on May 15, 2021, 60 days from that date would fall on July 14, 2021).
- 18 July 2021 is the date of entry into the receiver’s books.
In this instance, the service will be provided on July 14, 2021.
What are the rules for registering under Reverse Charge Mechanism?
A person who falls under the reverse charge mechanism is required to pay GST, according to Section 24 of the CGST Act, 2017. They are exempt from the threshold limits of Rs. 20 lakhs or Rs. 40 lakhs, as applicable.
Determining the GST Payer under Reverse Charge Mechanism
According to the Reverse Charge Mechanism, the GST must be paid by the recipient. However, to stay compliant with the GST regulations, the recipient needs to mention in the invoice, if any reverse charge tax is due for payment or not.
When paying GST under RCM, the following considerations must be made:
- Only if the recipient of goods or services uses those goods or services for business or the advancement of business can they claim an ITC on the tax amount paid under RCM.
- During liability discharge under RCM, it is mentioned that a composition dealer must pay its tax at the standard rates and not at the composition rates. They further are also ineligible to make any claims for input tax credits for the taxes paid.
- The tax due or paid by the RCM may be subject to the GST refund cess.
Explain Input Tax Credit under Reverse Charge Mechanism
A supplier is not permitted to claim an ITC for GST paid via the RCM. When receiving goods or services, only those that are being used or will be used for business purposes are eligible for ITCs on the GST amount paid under RCM.
As per the law, the receiver must pay only in cash and is not allowed to use the ITC to pay the output GST.
Explain Self Invoicing
When purchasing goods or services from an unregistered supplier, which is considered a reverse charge, self-invoicing is required. As your supplier will not be able to send you a GST-compliant invoice, this puts the responsibility on you in paying the taxes on their behalf. Due to this reason, self-invoicing is required.
By section 31(3)(g), a recipient who is required to pay tax under sections 9(3) or 9(4) must issue a payment voucher when paying the supplier.