What is Reverse Charge under GST?
The introduction of GST in India was a remarkable step by the country’s government to manage the tax collection on the supply of goods and services from all sectors effectively. Several improvements were made to make sure tax was paid righteously to the government and one of them was Reverse charge under GST became more transparent.
However, in a country with large sections of unorganised sectors doing business and cases of tax evasion and manipulation, inflicting changes was not an easy task.
Though, this concept is not new but it has been modified to quite an extent. The reverse charge under GST manages the tax coverage and establishes synchronisation and compliance even among the unorganised sectors along with fully and partially organised sectors.
The tax is to be paid by a supplier on the goods and services provided. But in reverse charge, it becomes the responsibility of the receiver or buyer to pay the taxes. However, this is applicable to specified imports and notified supplies only. Reverse charge is applicable in the following scenarios
The nature of supply or supplier
Explained in section 9 (3) of the CGST/ SGST (UTGST) Act and section 5 (3) of the IGST Act. The most common situation under this is selling services through an e-commerce platform. When an e-commerce platform supplies services to customers, it becomes the responsibility of the e-commerce provider to pay the tax. For example, consider start-ups like Dunzo and UrbanClap.
Taxable supplies provided by an unregistered supplier to a registered buyer
Explained under section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act. This involves all suppliers who are not successfully registered under the GST but supply goods and services to registered buyers under GST. So, the receiver has to pay the tax is to be paid by completing self-invoicing for the services and goods. If the purchases are made at the inter-state level, the buyer has to pay the IGST. The CGST and SGST have to be paid by the buyer for inter-state purchases under RCM.
From a registered dealer to an unregistered one
Under this category, reverse charge under GST is applicable under the following situations:
Services provided by Insurance agents
Services provided by goods and transport agencies
Services provided by advocates or advocacy firms
Services provided by permitting the use of copyright
Services provided by a director to a company
Non-resident service provider
Services provided by recovery agents / FIs / NBFCs
Services provided by radio taxis
Service provided by an arbitral tribunal
Services provided by transportation on import
Specific services provided by the government or local authority to a business entity
Apart from the categories mentioned, the reverse charge under GST is also issued on a list of goods and services like services offered by a transport agency, on the supply of goods like silk yarn, raw cotton, tobacco leaves and many others.
What started reverse charge under GST?
There were already laws under which tax was to be paid by the seller for the goods and services offered but due to numerous reasons like partial knowledge, illiteracy or residing in non-taxable areas made it tough for the government to receive the right tax. There were also times when people refrained from paying taxes or didn’t know they had to do being part of the unstructured business and still providing services. Hence, the reverse charge under GST was introduced. In case of failure of paying tax, the liability was transferred to the receiving end. This was done to make the administration better.
This was also backed up by the Finance Act of 1994 under section 68(2) where the government can ask the not only the supplier to pay the taxes but can collect taxes from any person notified by the government as long falling under the constitutional boundaries.
Importance of Time supply
Since the tax is to be paid by the receiver the time of supply from the supplier plays a significant role in classified goods and services provided separately.
As per the time of supply of goods:
For the goods being provided by a supplier not registered under GST, the following dates are important to figure out the time of supply under reverse charge.
The date of receipt of goods
The date after 30 days when the invoice is submitted by the supplier
There was the date of payment that was considered initially and was impactful only until 15th November 2017.
For any of the first two dates mentioned, whichever is the earliest is considered the time of supply. However, if the time of supply cannot be determined then the date of entry in the records of the receiver is used.
As per the time of supply of services:
The time of supply in case of services is calculated by:
The payment date
The date after 60 days when the invoice is submitted by the supplier
Among the two dates mentioned, whichever is the earliest is considered as the time of supply. However, if the time of supply cannot be determined then the date of entry in the records or books of account of the receiver is used.
Self-invoicing in Reverse charge
Self-invoicing is an aspect of reverse charge under GST where the generating an invoice is done by the receiver provided two conditions are met.
First, the supplier should be unregistered under GST providing supplies to a registered receiver or buyer.
Secondly, the goods and services offered by the supplier fall into the list of reverse charge as well.
Since the supplier is not registered, they cannot provide a GST compliant invoice for the goods and services supplied, hence, the receiver has to pay taxes on their behalf to the government as per reverse charge under GST. Hence, self-invoicing becomes important for the buyer.
Input Tax Credit
This is the GST that the registered receiver has been charged with for the good or services or both supplied which are going to be used for business. It also includes the tax that is to be paid on a reverse charge basis and does not take into consideration the tax paid for composition levy.
Any registered individual under GST can avail the benefits of the Input tax credit for either supply of goods or services or both to him or her. These goods or services or both should be a part of their business. Any of the following documents can be used to take input credit tax:
Bill on entry
Tax invoice issued
A document obtained from Input service distributor for credit distribution
Invoice prepared through self-invoicing.
Exclusion from the reverse charge
There are various situations which have been excused from the Reverse charge under GST for unregistered suppliers and corresponding miscellaneous transactions. One of the most important one being the aggregate value of goods or supplies or both supplied. If this aggregated value of goods and services from an unregistered supplier to a registered receiver does not exceed INR 5000 per day, then such transactions are not qualified for the reverse charge mechanism. However, the exemption is not qualified if a single person (receiver) receives bills whose sum total exceeds the permissible limit of INR 5000 per day. The number of unregistered suppliers is not considered for this exemption.
Points to remember
There are certain key points under section 9(3) and 9(4), the receiver has to obtain the GST registration.
The GST for each month should be cleared by the 20th of the following month.
When self-invoicing under reverse charge, one must consider all the consolidated services that have been purchased even on a daily basis.
It is mandatory for the receiver to present a payment voucher to the supplier at the time of payment.
The input tax credit is not used to pay the reverse charge under GST to the government.
Reverse charge is applicable on advance payments too.