Reverse Charge means the liability to pay the tax by person receiving goods and/or services instead of the person supplying the goods and/or services in respect of specified categories of supplies. In India, the concept of reverse charge under GST is being introduced which is already present in service tax. Reverse charge under GST may be applicable for both services as well as goods. Currently, there is no reverse charge mechanism in supply of goods.


Purpose of Reverse Charge Mechanism under GST

The purpose of reverse charge is to increase tax compliance and tax revenues. Earlier, the government was unable to collect service tax from various unorganized sectors like goods, transport etc. Compliances and tax collections will be increased through this mechanism.

Example

A manpower supplier of Company ABC has provided services to a Company XYZ.

Bill charged= Rs. 1,00,000 and Tax liability (assumption) = Rs. 15,000 (Rs. 1,00,000*15%)

Service provider Company ABC will send a bill of Rs. 1,00,000 mentioning that the service tax will be bear by the receiver.

So, Company XYZ will pay Rs. 1,00,000 to Company ABC and will deposit Rs. 15,000 to the Government.

Comparison

Reverse Charge mechanism under GST

When does Reverse Charge apply

Unregistered dealer selling to a registered dealer

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

Reverse charge under GST on services

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

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

Provisions for Reverse Charge under GST

Registration under Reverse Charge

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

Invoicing rules

  • Every person who is paying tax on the basis of reverse charge has to mention this fact in his tax invoice that is being issued.
  • A registered person who is receiving goods and services from a supplier who is not registered shall mandatorily issue an invoice in respect of goods or services received by him.

Exemption from paying tax under GST

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

Composition Scheme under GST

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

Time of supply

In case of Goods and Services

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

  • Date of the receipt of goods, or
  • Date of payment, or
  • In case of goods:
    • Date immediately after 30 days from the date of issue of the invoice by the supplier (30 days for goods), or
  • In case of services:
    • Date immediately after 60 days from the date of issue of the invoice by the supplier (60 days for services)
  • Date of debit in the books of accounts.

Note

When the supplier is located outside India then, time of supply shall be the earlier of the Date of the entry in the books of account of the receiver or Date of the payment

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