REVERSE CHARGE MECHANISM UNDER GST
The Goods and Services Tax Act, 2017 came into force in India with
effect from 1.7.2017.
In the earlier tax regime, a dealer who purchases any goods which are
liable for taxation from a registered dealer (without sufferance of tax) or
from any other person and consumes or uses such goods in or for the manufacture
of other goods for sale or otherwise or disposes of such goods in any manner
other than by way of sale in the state or despatches or carries them to a place
outside the State except as a direct result of sale or purchase in the course
of inter-State trade or commerce or in the course of export out of the
territory of India or installs and uses such goods in the factory for the
manufacture of any goods shall pay tax on the turnover relating to the purchase
at the rates specified in the schedules.
The dealers effected purchases as shown above and disclosed the same as
purchases from unregistered dealers and paid purchase tax at the rates
mentioned in the schedules in the earlier tax laws. It is easy to understand that purchase tax paid on purchases effected
from unregistered person or purchases effected without sufferance of tax at
earlier stage is called Reverse Charge Mechanism under the Goods and Services Tax
Act, 2017 which is applicable for services also.
In the GST regime, purchases and sales were defined as inward supply and
outward supply. In the GST regime unregistered supplier means supplier of goods
or supplier of services or supplier of both.
GST is a destination based tax on consumption of goods or services or
both.
In India, the concept of reverse charge under GST is
being introduced which already present in service tax.
Reverse charge under GST may be applicable for both
services as well as goods.
The goods or services received from the unregistered suppliers and the
tax payable thereon were defined as Reverse Charge Mechanism under the Goods
and Services Tax Act, 2017. Reverse
charge mechanism will apply both for goods and services.
Under the Goods and Services Tax Act, 2017 if the goods were not suffered
tax at earlier stage Reverse charge Mechanism will be applicable.
Reverse charge means the liability to pay tax is by
person receiving goods and/or services instead of the person supplying the
goods and/or services in respect of specified categories of supplies.
All
persons who are required to pay tax under reverse charge have to register for
GST irrespective of the threshold under Section 24 of the CGST Act 2017.
Reverse Charge under GST:
As per
Section 2 (98) of CGST Act 2017:
- the liability to
pay tax by the recipient of supply of goods or services or both
- instead of the
supplier of such goods or services
Under
Reverse charge liability to pay tax is on the recipient of goods/services
instead of the supplier. Reverse charge may be applicable for both services as
well as goods.
Reverse Charge Mechanism is applicable in all cases of supply from
Unregistered Dealer to Registered Dealer under Section 9(4)
and
Reverse Charge Mechanism is applicable in all cases of supply of
specified goods and Services which are notified by the Government under Section
9(3),
Reverse Charge Mechanism is applicable only for
supply of goods or services or both within the State by unregistered
persons.
Without GSTIN a supplier of goods or services cannot
supply goods or services to another person located outside the state. The provisions of Reverse Charge will not be
applicable to inter-State supplies received, as the inter-State supplies cannot
be made by unregistered suppliers.
Similarly suppliers who opted to pay tax under compounded scheme cannot
supply goods or services to the recipients outside the state.
Reverse Charge Mechanism will not be applicable
between two regular taxable persons registered under the Goods and Services Tax
Act, 2017 and the same will apply for the purchases effected from the
Compounding Scheme opted suppliers
If a regular taxable person effect purchases of
goods or services from a compounding scheme taxable person Reverse Charge
Mechanism will be applicable.
Similarly if a Composition Scheme registered person
effects purchases of goods or services from unregistered persons, Reverse
Charge Mechanism will be applicable
Reverse Charge provisions would not be applicable if
the aggregate value of supplies of goods or services or both received by a
taxable person from unregistered supplier does not exceed Rs. 5000.00 in a day.
The Central Government has specified that the persons who are only
engaged in making supplies of taxable goods or services or both, the total tax
on which is liable to be paid on reverse charge basis by the recipient of such
goods or services or both under sub-section (3) of section 9 of the said Act as
the category of persons exempted from obtaining registration under the GST Act,
2017.
The tax payable under Reverse Charge Mechanism should be paid by
E-payment or other modes separately without adjustment from the available Input
Tax Credit. The tax payable under
Reverse Charge Mechanism should be paid fully for each month separately and no
partial payment allowed.
Reverse Charge
Mechanism will not be applicable for the following categories
·
Allowance
to employees
·
Bad
Debts
·
Bank
interest
·
Bonus
paid to employees
·
Conveyance
Expenses by non A/c Auto Fare
·
Conveyance
Expenses by non A/c Bus Fare
·
Conveyance
Expenses by non A/c Taxi Fare
·
Conveyance
Expenses by non A/c Train Fare
·
Corporation
tax
·
Depreciation
·
Diesel
Expenses
·
Discounts
shown in bill
·
Donations
·
Electricity
Charges
·
Exempted
Goods
·
Exempted
Services
·
Fines
·
Free
Gifts to Customers / Free Gifts: Gold Coin to Customers
·
Gifts
to Staff upto Rs. 50000.00 by an Employer
·
Godown
Rent for Agricultural Produce
·
Incentive
to Employees
·
Interest
on Service Tax
·
Interest
on TDS
·
Interest
on Vehicle Loan
· Intra-State
supplies of goods or services or both received by a registered person from any
supplier, who is not registered, from the whole of the central tax leviable
there on where the aggregate value of such supplies of goods or services or
both received by a registered person from any or all the suppliers, who is or
are not registered
·
Kerosene
·
Labour
Welfare Contributions
·
Licence
Renewal fees for Boilers
·
Licence
Renewal fees for Factories
·
Licence
renewal fees for Local Bodies
·
License
renewal fees for Pollution control
·
Loading
and Unloading expenses for agricultural products
·
Local
conveyance
·
Municipal
tax
·
News
Papers and Magazines
· Old and
used empty bottles buying and selling by a registered taxable person under
margin scheme
·
Other Deposits
·
Other
interest
·
Penalties
·
Petrol
expenses
·
Profession
tax
· Purchases
of taxable goods / services upto Rs.5000.00 per day from unregistered suppliers
·
Registration
Fees
·
Remuneration
·
Rent Deposits
·
Residential
House / Flat Rents
·
Salary
paid to Employees
·
Sale of
old gold jewellery by an individual to a jeweller
· Second
hand goods buying and selling by a registered taxable person under margin
scheme
·
Staff
Medical Claim Contribution
·
Wages
paid to Employees
·
Warranty
Labour charges
·
Water
charges
Reverse Charge
Mechanism will be applicable for the following categories including 15 services
· Advance
payments made to unregistered suppliers for supply of goods or services or both
·
Advertisement
expenses through banners
·
Advertisement
expenses through posters
·
Advertisement
in magazine
·
Advertisement
in media
·
Annual Maintenance
Charges (AMC)
·
Bank Charges
·
Broker Fees
and Charges
·
Call Centre
Expenses
·
Club
and Membership Fees
· Composition
Scheme opted persons are not eligible for input tax credit and hence the tax
payable if any on the reverse charge mechanism must be paid at normal rates separately
in addition to the composition levy.
·
Consumables
·
Conveyance
Expenses by all vehicles with A/c
· Conveyance
Expenses by Radio Taxi which operates through radio signals i.e. when a
customer calls up the helpline number of the radio taxi, the operator communicates
with driver via radio signals to locate the nearest taxi and the taxi reaches
the customer at the specific place.
·
Conveyance
Expenses by Train in A/c coach
·
Conveyance
Expenses by Train in First Class
·
Customer
schemes by MSIL
·
E-commerce
Operators
·
Extended
warranty cancellation charges
·
Food Expenses
·
Free
Service Camp Expenses
·
Freight
charges for goods at the goods GST Rates
· Gifts
by employer of value above Rs.50000.00 will be treated as outward supply and
liable to GST
·
Gold
ornaments sold by an unregistered supplier to a registered supplier
· Goods
Transport Services by Goods Transport Agency (GTA) to any factory, society,
co-operative society, registered person, body, corporate, partnership firm,
casual taxable person located in the taxable territory
·
House
keeping charges
·
Legal
Services by advocates by an individual advocate, including a senior advocate or
a firm of advocates to any business entity located in the taxable territory
·
Non-resident
Service provider
·
Once
the expenses exceeds Rs.5000.00 per day, GST is payable on the entire expenses
under Reverse Charge Mechanism.
·
Packing
charges for goods at the goods GST Rates
· Purchases
of taxable goods / services above Rs.5000.00 per day from unregistered
suppliers on the entire purchase and there is no exemption for the first
Rs.5000.00
·
Refreshment
Expenses
· Registered
dealers have to pay GST on Reverse charge mechanism on the purchases effected
from the compounded scheme dealers.
· Registered
dealers have to pay GST on Reverse charge mechanism on the purchases effected
from the unregistered dealers.
· Rent
paid for premises used for commercial purpose by the commercial user to
unregistered person
· Reverse
Charge Mechanism will be applicable where the aggregate value of such supplies
of goods or service or both received by a registered person from any or all the
suppliers, who is or are not registered, exceeds five thousand rupees in a day.
·
Services
of a Director to a company
·
Services
provided by way of sponsorship to any body corporate or partnership firm by any
person to any body corporate or partnership firm located in the taxable
territory
·
Services
supplied by a director of a company or a body corporate to the said company or
the body corporate by a director of a company or a body corporate to the
company or a body corporate located in the taxable territory
· Services
supplied by a recovery agent to a banking company or a financial institution or
a non-banking financial company by a recovery agent to a banking company or a
financial institution or a non banking financial company, located in the
taxable territory
· Services
supplied by an arbitral tribunal to a business entity by an arbitral tribunal
to any business entity located in the taxable territory
· Services
supplied by an insurance agent to any person carrying on insurance business by
an Insurance Agent to any person carrying on insurance business, located in the
taxable territory
· Services
supplied by the Central Government, State Government, Union Territory or local
authority to a business entity excluding (1) renting of immovable property and
(2) services specified (i) services by the Department of Posts by way of Speed
post, express parcel post, life insurance and agency services provided to a
person other than Central Government, Stat Government or Union territory or
local authority (ii) services in relation to an aircraft or a vessel inside or
outside the precincts of a port or an airport (iii) transport of goods
passengers by Central Government, State Government, Union Territory or local
authority to any business entity located in the taxable territory.
·
Supplies
received from Un-registered persons
·
Supply
of Bidi wrapper leaves (tendu) by Agriculturist to any registered person
·
Supply
of Cashew nuts, not shelled or peeled by Agriculturist to any registered person
·
Supply
of Goods or Services in relation to Exports and Deemed Exports (RCM will be
applicable under IGST)
·
Supply
of Goods or Services to a taxpayer located in non-taxable territory i.e.
supplies made to Special Economic Zone Units or Special Economic Zone
Developers (RCM will be applicable under IGST).
· Supply
of lottery by State Government, Union Territory or local authority to Lottery
Distributor of Lottery selling Agent
· Supply
of services by an author, music composer, photographer, artist or the like by
way of transfer or permitting the use or enjoyment of a copyright covered under
section 13(1)(a) of the Copyright Act, 1957 relating to original literary,
dramatic, musical or artistic works to a publisher, music company, producer or
the like by an Author or music composer, photograph her, artist, or the like to
publisher, music company, producer or the like, located in the taxable
territory
· Supply
of Silk yarn by any person who manufactures silk yarn from raw silk or silk
work cocoons for supply of silk yarn to any registered person
·
Supply
of Tobacco leaves by Agriculturist to any registered person Supply
· The
aggregate value of such supplies of goods or service or both received by a
registered person from any or all the suppliers, who is or are not registered,
exceeds five thousand rupees in a day i.e. if the expenses in a day exceeds
Rs.5000.00 the taxpayer has to pay GST under Reverse Charge Mechanism.
·
Training
Expenses
HOW
TO ACCOUNT FOR THE REVERSE CHARGE MECHANISM TRANSACTIONS
As per Section 32 (3) of the CGST Act, 2017 the registered person who is
liable to pay tax under sub-section (3) and (4) of Section 9 shall issue an
invoice in respect of goods or services or both received by him from the
supplier who is not registered on the date of receipt of goods or services or
both and a registered person who is liable to pay tax under sub-section (3) and
(4) of Section 9 shall issue a payment voucher at the time of making payment to
the supplier.
(In simple language purchases from unregistered persons have to be made
through bought invoices and payment to be made through payment vouchers)
As per Notification No.8/2017 dated June 28, 2017, on
the recommendations of the Council, exempted Intra-State supplies of goods or
services or both received by a registered person from any supplier, who is not
registered, from the whole of the central tax leviable thereon under
sub-section (4) of Section 9 of the CGST Act, 2017.
Provided that the said exemption shall not be
applicable where the aggregate value of such supplies of goods or services or
both received by a registered person from any or all the suppliers, who is or
are not registered, exceeds Rs.5000 in a day.
Time of Supply under rcm
The time of supply is the point when the supply is liable to GST.
One of the factors relevant for determining time of supply is the person
who is liable to pay tax. In reverse charge, the recipient is liable to pay
GST.
Thus, time of supply for supplies under reverse charge is different from
the supplies which are under forward charge. In case of supply of goods, time
of supply is earliest of: -
·
date of
receipt of goods; or
·
date of
payment as per books of account or
·
date of
debit in bank account, whichever is earlier; or
·
the date
immediately following thirty days from the date of issue of invoice or similar
other document.
In case of
supply of services, time of supply is earliest of: -
·
date of
payment as per books of account or date of debit in bank account, whichever is
earlier; or
· the date immediately following sixty days
from the date of issue of invoice or similar other document.
Provided that if any of the above clauses is not determinable, the time
of supply shall be the date of entry in the books of accounts of the recipient
of supply.
The recipient of the supply is required to issue a Tax Invoice for goods
or services received from unregistered person as per Section 31(2) (f) of the Central
Goods and Services Tax Act. 2017.
The recipient is required to issue a payment voucher at the time of
making payment to the unregistered supplier according to Section 31(2) (g) of
the Central Goods and Services Tax Act. 2017.
input tax credit
adjustment
According to Section 2(62) of the CGST Act, 2017, input tax includes
·
the tax
payable under the provisions of sub-section (3) and (4) of Section 9 of the
CGST Act;
·
the tax
payable under the provisions of sub-section (3) and (4) of Section 5 of the
Integrated Goods and Services Tax Act;
·
the tax
payable under the provisions of sub-section (3) and (4) of Section 9 of the
State Goods and Services Tax Act; or
·
the tax
payable under the provisions of sub-section (3) and sub-section (4) of Section
7 of the Union Territory Goods and Services Tax Act
A registered person will be able to take the credit of tax paid under
reverse charge subject to condition that the payment for the supplies received
by the recipient under reverse charge made within 60 days from the date of
issue of RCM invoice.
TO VIEW THE RELEVANT NOTIFICATION PLEASE CLICK THE LINK GIVEN BELOW:
http://www.cbec.gov.in/resources//htdocs-cbec/gst/Exemption-from-reverse-charge-upto-Rs5000-per-day-CGST.pdf
http://pib.nic.in/newsite/PrintRelease.aspx?relid=167405
http://www.cbec.gov.in/resources//htdocs-cbec/gst/tweet-faq.pdf
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