Typically, as per the GST Law, the taxable person supplying goods and services is liable to pay GST. But, there are certain cases such as imports and other types of supplies where the recipient of goods and services is liable to pay GST instead of the supplier. In other words, the liability to pay GST shifts from the supplier to the recipient of goods and services. Further, the recipient must be a registered person as per section 2(94) of the CGST Act, 2017.
According to section 2(94) of the CGST Act, a registered person means a person who is registered under section 25 of the Act. This does not include the person having a unique identity number.
Therefore, this article talks about the:
- concept of reverse charge mechanism (RCM) under GST,
- applicability of RCM and
- provisions regarding time of supply and ITC under RCM
What is Reverse Charge Mechanism Under GST?
Reverse charge means the liability to pay GST is on the recipient instead of the supplier of goods and services. This is unlike the usual regulation under GST where the supplier of goods and services is obligated to pay GST for the supplies made.
Further, this means all the provisions of the Act would be applicable to such a recipient as if he is the person responsible for paying the tax with regards to supply of goods or services. In other words, in case the recipient is unable to pay the tax under reverse charge, the supplier holds no liability to pay such a tax.
Compulsory Registration For Persons Subject To Reverse Charge
There are certain category of persons required to register under GST compulsorily. Section 24 of the CGST Act, 2017 provides the list of such category of persons. As per this list, persons required to pay tax under reverse charge are also required to compulsorily register under GST.
In other words, the threshold limit for GST registration of Rs 40 Lakhs in case of goods and Rs 20 Lakhs in case of services shall not apply to such persons.
When Is Reverse Charge Applicable?
GST law provides the following scenarios of reverse charge mechanism under GST. These are as follows:
1. When GST Council Notifies Specific Goods and Services For Reverse Charge Levy
This scenario is covered under section 9(3) of the CGST Act, 2017. As per this section, the government on the suggestions made by the GST Council notifies categories of goods or services which would come under reverse charge mechanism. In other words, the recipient receiving specific category of goods or services would be liable to pay the GST instead of the supplier.
In case of supply of goods, there are in total eight category of goods subject to reverse charge mechanism as per section 9(3) of the CGST Act. Some of these include cashew nuts, tobacco leaves, silk yarn, raw cotton etc.
And in case of supply of services, there are nine categories of services as per section 9(3) of the CGST Act and two types of services as per IGST Act subject to reverse charge mechanism. Some of them include services supplied by an arbitral tribunal to a business entity, services provided by way of sponsorship to any corporate or partnership firm etc.
2. Supplies From An Unregistered Supplier To An Unregistered Recipient Under GST
As per section 9(4) of the CGST Act 2017, taxable supplies made by an unregistered supplier to a registered recipient under GST shall be subject to reverse charge mechanism. In other words, the registered person in such a case shall be liable to pay GST on reverse charge basis. That is, all the provisions of the GST Act shall be applicable to the registered recipient in a way that he is liable to pay GST in relation to the supply of goods or services received by him.
Therefore, each time a registered person buys supplies from an unregistered supplier, he is liable to pay GST on reverse charge basis. But, where the value of such supplies is less than Rs 5,000, the registered recipient under reverse charge mechanism is exempted to pay GST on such goods and services.
Furthermore, the provisions under section 9(4) of the CGST Act would not be applicable in cases where an unregistered supplier makes supplies to a TDS deductor. In other words, the government companies who deduct TDS as per section 51 of the CGST Act need not pay GST under reverse charge.
3. Supply of Services By E-Commerce Operator
As per section 9(5) of the CGST Act, 2017, services supplied by an e-commerce operator are also subject to the reverse charge mechanism. In other words, if an e-commerce operator supplies services, he shall be liable to collect and pay GST for the services thus supplied.
Therefore, the GST Act shall be applicable to the e-commerce operator as if he is the supplier who is liable to pay GST with regards to the supply of services.
However, in case the electronic commerce operator does not have a physical presence in the taxable territory, person representing such an e-commerce operator shall be liable to pay the tax.
Also, if such an e-commerce operator does not have a representative in the taxable territory, he would be required to appoint a person who would be liable to pay GST for the services supplied.
Time of Supply of Goods Under Reverse Charge Mechanism
Under “reverse charge mechanism”, the time of supply of goods is the earliest of:
- Date of receipt of goods
- 30 days from the date of invoice
- Date of payment
Now the date of payment would be considered the earlier of:
- Date of debit in the bank account as depicted in the bank statement
- Or date of recording the payment in the books of accounts by the recipient
Gauri is an unregistered trader. She supplies goods to a registered recipient on Feb 1st, 2018. Goods supplied were received by Gaurav at his factory on February 28th, 2018. The invoice for the supply made was issued on February 15th, 2018. However, the payment was made on March 5th, 2018.
This is the case of reverse charge mechanism since the supplier, that is Gauri, is unregistered. Hence, the time of supply would be the earliest of:
- Date of receipt of goods: In this case, February 28th, 2018 is the date of receipt of goods.
- 30 days from the date of invoice: March 16th, 2018 is 30 days from the date of invoice
- Date of payment: March 5th, 2018 is the actual date of payment.
Hence the time of supply of goods would be February 28th, 2018.
Time of Supply of Services Under Reverse Charge Mechanism
Under reverse charge mechanism, the time of supply of services shall be the earliest of:
- 60 days from the date of issue of invoice
- Date of payment
Now, the date of payment shall be taken as the earlier of :
- Date of debit in the bank account as shown in the bank statement
- Or date of recording the payment in the books of accounts by the recipient
Kapoor & Co.is an unregistered supplier that offers Accounting services to Sharma Ltd and issues an invoice on September 7, 2018. Since the quality of the services offered was not upto the marked, the payment got delayed and hence it was made on December 16, 2018. The payment was made through cheque and the same was recorded in the books of accounts of the recipient.
Now, the time of supply in the above case shall be the earlier of:
- 60 days from the date of issue of invoice (September 7, 2018)
- Date of payment (December 14, 2018)
That is September 7, 2018 would be the time of supply of services.
ITC Under Reverse Charge Mechanism
The supplier of goods and services cannot claim an input tax credit for the goods and services supplied to the recipient under reverse charge. Since the recipient is liable to pay GST for goods and services received under reverse charge mechanism, he can claim an input tax credit for such supplies. However, such supplies must be used as inputs in business.
Provisions with Regards to Supplies under Reverse Charge Mechanism
There is certain compliance with regards to supplies under Reverse Charge Mechanism. This is as follows:
- Section 31 of CGST act 2017 provides that each tax invoice payable must specify if the tax with regards to the supply so mentioned in the invoice is payable under reverse charge. Further, both the receipt voucher and the refund voucher also need to specify whether the tax payable for such supplies are on reverse charge basis.
- Every registered person is required to maintain accounts and records of supplies taxable under reverse charge mechanism.
- Tax payable under reverse charge is paid only by debiting the electronic cash ledger. That is to say, the input tax credit cannot be used to set off the tax liability under reverse charge. But the recipient after discharging the tax liability under reverse charge can claim an input tax credit for the tax paid if he is eligible to claim the same.
- Details with regards to invoice issued in respect of the supplies made under reverse charge are required to be mentioned separately in Table 4B of GSTR-1.
- Advance payment made in respect of supplies under reverse charge is also liable for GST. In other words, such a person making advance payment for supplies under reverse charge is required to pay GST on reverse charge basis.
What is Self Invoicing Under Reverse Charge Mechanism?
Section 31 of the CGST Act, 2017 provides that a registered recipient subject to reverse charge mechanism is required to issue an invoice. Such an invoice is in respect of goods and services received by the recipient from the supplier. Further, such a supplier is not registered under GST on the date of receipt of goods and services.
Also, the registered person liable to pay GST under reverse charge mechanism is also required to issue a payment voucher at the time of issuing payment to the supplier of such goods and services.
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.