2018-08-09 00:00:10Finance and Accounting: TaxesEnglishNormally, suppliers of goods and services are required to collect the GST from the receivers and deposit it with the tax authorities....https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2018/08/accountant-explains-reverse-charge-mechanism.jpghttps://quickbooks.intuit.com/in/resources/finance-and-accounting-taxes/what-is-the-reverse-charge-mechanism/What Is the Reverse Charge Mechanism?

What Is the Reverse Charge Mechanism?

3 min read

What Is Reverse Charge Mechanism?

Normally, suppliers of goods or services collect GST from the receivers and deposit it with the tax authorities.

But under the reverse charge mechanism, receivers of goods or services pay the tax instead of suppliers. Thus, if you are a recipient of goods or services under reverse charge, you must remit only the purchase payments to suppliers. As for GST, you as a recipient must deposit the tax directly with the tax authorities. This tax collection mechanism is aimed at reducing tax evasion, particularly from the unorganized sectors.

When Is Reverse Charge Applicable?

  • Supply From Unregistered Dealer To Registered Dealer- If you are a registered dealer who purchases goods/services from an unregistered dealer, you as a registered dealer must pay the GST. However, you  are exempt from paying GST if your purchases from the unregistered seller do not exceed Rs. 5,000.
  • Supply of Goods and Services Specified By CBEC- If you are purchasing goods/services which are specified by the CBEC under reverse charge, you as a recipient must pay GST. These include: (i) goods transport services, (ii) insurance agencies, (iii) recovery agencies, (iv) legal services, (v) transportation services for imported goods etc.
  • Services Provided By An E – Commerce Operator – In case you are an e-commerce operator supplying services, reverse charge will apply to you.  Hence, you as an e-commerce operator are responsible to pay the GST.
    For example,  in case of transport service provided by taxi aggregator OLA, OLA is liable to pay the GST. OLA will collect tax from passengers instead of the registered service providers. There are cases where an e-commerce operator does not have a physical presence in the taxable territory. In such a case, a person representing such e-commerce operator for any purpose will be liable to pay tax. If there is no such representative, the operator would  appoint a representative. He will be held liable to pay GST.

Time Of Supply Under Reverse Charge Mechanism

Tax for goods under the reverse charge mechanism should be paid on the earliest of the below dates:

  • The Date on which the goods and services are received
  • Date of payment as entered in the books of accounts of the recipient or the date on which the payment is debited in his account, whichever is earlier
  • Date after 30 days of issuing the invoice by the supplier

Where it is not possible to determine the time of supply, under the above mentioned cases,

– the time of supply shall be the date of entry in the books of accounts of the recipient of supply.

Tax for services under the reverse charge mechanism should be paid on the earliest of the below dates:

  • Date of payment as entered in the books of accounts of the recipient or the date on which the payment is debited in his account, whichever is earlier
  • Date after 60 days of issuing the invoice by the supplier

Where it is not possible to determine the time of supply, under the above mentioned cases,

– the time of supply shall be the date of entry in the books of accounts of the recipient of supply.

Can ITC Be Claimed Under Reverse Charge?

If you are a recipient and are liable to pay tax on reverse charge basis, you can claim the ITC for such tax paid. However, it can be claimed only if such goods /services are or will be used for your business.

A person who is required to pay tax under reverse charge has to compulsorily register under GST. Also, the threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for special category states except J & K) is not applicable to them.

Conclusion:

Thus, reverse charge mechanism requires registered recipients of goods and services to remit tax directly to the authorities if :

– transacting with unregistered dealers or

– purchasing specific goods and services listed by the CBEC.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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