The GST Reverse Charge – Understand What It Means

The liability to pay tax by a person receiving the goods and/or the services instead of the person supplying the goods and/or the services in respect of specified categories of supplies is called GST Reverse Charge. In India, this concept of reverse charge under the GST has been introduced, this is already present in service tax. GST Reverse charge may be applicable for services as well as goods. Presently, there is no reverse charge mechanism in supply of goods.

The need for GST reverse charge

The purpose of introducing reverse charge is to increase the tax compliance and the tax revenues. In the past, the government was unable to collect the service tax from various unorganized sectors such as goods, transport etc. Compliances and tax collections will be amplified through this mechanism.

For example:

A manpower supplier of Company XYZ has provided services to a Company ABC.
Bill charged= Rs. 1,00,000 and the tax liability (assumption) = Rs. 15,000 (Rs. 1,00,000*15%)
The service provider Company XYZ will send a bill of Rs. 1,00,000 mentioning that the receiver will bear the service tax
So, the Company ABC will pay Rs. 1,00,000 to Company XYZ and will deposit Rs. 15,000 to the Government.
The situations under which GST reverse charge can be applied:

• An unregistered dealer selling to a registered dealer

In such a scenario, the registered dealer is required to pay the GST on reverse charge basis for such a supply.

• Reverse charge under GST on services

The CBEC has notified a list of 12 services on which the tax shall be paid by the recipient on 100% reverse charge basis:

• Non-resident service provider
• Arbitral Tribunal
• Goods Transport Agencies
• Legal service by an Advocate/ Firm of Advocates
• Sponsorship Services
• Specified Services provided by the  Government or Local Authority to Business entity
• The services of a director to a company
• An insurance agent
• Recovery Agent of Bank/FI/ NBFC
• Permitting use of Copyright
• Transportation Services on Import
• Radio Taxi services to E-commerce aggregator (eg: Uber, Ola, etc.)
Provisions for Reverse Charge under GST

• Registration under Reverse Charge

On 19th June 2016 via Notification No. 5/2017, the Central government exempted such persons from obtaining registration who are engaged only in making supplies of taxable goods or services, the total tax which is liable to be paid on reverse charge basis by the recipient of such goods or services. This notification came into force on 22nd June 2016.

• Invoicing rules

It is mandatory for every person who is paying a tax on basis of reverse charge to mention this fact in the tax invoice that is being issued. Any registered person who is liable to pay tax under the reverse charge i.e., the buyer has to mandatorily issue an invoice in respect of the goods or the services received by him from the supplier who is not registered.

• Exemption from paying tax under GST

In general, any person supplying goods/services up to an aggregate turnover of Rs. 20 lakhs in a financial year is exempted from paying tax. But, the taxpayers paying tax on basis of reverse charge under the GST are not eligible for this threshold exemption.

• Composition Scheme under GST

In general, small taxpayers with an aggregate turnover of Rs. 50 lakhs in a financial year are eligible to pay tax under the composition scheme. But, taxpayers paying tax on basis of a reverse charge under the GST are not eligible for the composition scheme.

• Time of supply
Goods

In case of supplies of goods when the tax is payable under the Reverse Charge mechanism, time of supply should be earliest of the following dates:

• The date of  receipt of goods, or
• The date on which  payment is made, or
• The date immediately after 30 days from date of issue of invoice by the supplier (30 days for goods), or
• The date of debit in the books of accounts.

Services

In case of supplies of services when the tax is payable under the Reverse Charge mechanism, time of supply should be of earliest of the following dates:

• The date of  receipt of services, or
• The date on which payment is made, or
• The date immediately after 60 days from date of issue of the invoice by the supplier (60 days for services), or
• The date of debit in the books of accounts.

Note: If the supplier is located outside India then the time of supply shall be the earlier of the Date of the entry in the books of account of the receiver OR the Date of the payment
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