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.

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