Reverse Charge Mechanism in GST

This is a part of a Complete Guide To GST Law In India wherein all aspects of GST are explained in simple terms. In this part, the entire law and procedure dealing with Reverse Charge Mechanism in GST is set out.

Introduction to Reverse Charge Mechanism in GST

Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the liability may be cast on the recipient under the reverse charge mechanism. Reverse Charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply.

There are two type of reverse charge scenarios provided in law. First is dependent on the nature of supply and/or nature of supplier. This scenario is covered by section 9 (3) of the CGST/SGST (UTGST) Act and section 5 (3) of the IGST Act. Second scenario is covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act where taxable supplies by any unregistered person to a registered person is covered.

As per the provisions of section 9(3) of CGST / SGST (UTGST) Act, 2017 / section 5(3)of IGST Act, 2017, the Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Similarly, section 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017 provides that the tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Accordingly, wherever a registered person procures supplies from an unregistered supplier, he need to pay GST on reverse charge basis. However, supplies where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the unregistered suppliers is less than five thousand rupees in a day are exempted. (Notification 8/2017-Central Tax (Rate) dated 28.06.2017).

However, vide notification no.38/2017-Central Tax (Rate) dated 13.10.2017, (corresponding IGST notification no.32/2017-Integrated Tax (Rate) dated 13.10.2017) all categories of registered persons are exempted from the provisions of reverse charge under 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017, till 31.03.2018. This exemption is available only till 31.03.2018.

The provisions of section 9(4) of the CGST Act, 2017, will not be applicable to supplies made to a TDS deductor in terms of notification no.9/2017-Central Tax (Rate) dated 28.06.2017. Thus, Government entities who are TDS Deductors under Section 51 of CGST Act, 2015, need not pay GST under reverse charge in case of procurements from unregistered suppliers.

Registration:

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

ITC:

A supplier cannot take ITC of GST paid on goods or services used to make supplies on which recipient is liable to pay tax.

Time of Supply

The Time of supply is the point when the supply is liable to GST. One of the factor relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, 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 –

a) date of receipt of goods; or

b) date of payment as per books of account or date of debit in bank account, whichever is earlier; or

c) 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 –

a) date of payment as per books of account or date of debit in bank account, whichever is earlier; or

b) the date immediately following sixty days from the date of issue of invoice or similar other document.

Where it is not possible to determine time of supply using above methods, time of supply would be date of entry in the books of account of the recipient.

Compliances in respect of supplies under reverse charge mechanism:

1. As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge.

2. Maintenance of accounts by registered persons: Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge

3. Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.

4. Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.

5. Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.

Supplies of goods under reverse charge mechanism:

S/Description ofSupplier ofRecipient of
No.supply of Goodsgoods Goods
1Cashewnuts, notAgriculturistAnyregis-
 shelled or peeled   tered person
      
2BidiwrapperAgriculturistAnyregis-
 leaves (tendu)   tered person
3Tobacco leavesAgriculturistAnyregis-
      tered person
4Silk yarn AnypersonAnyregis-
   who manufac-tered person
   tures silk yarn  
   from rawsilk  
   or silkworm  
   cocoonsfor  
   supplyofsilk  
   yarn    
4ARaw cottonAgriculturistAnyregis- 
      tered person. 
      
5Supply of lotteryState Govern-Lotterydis- 
   ment,Uniontributoror 
   Territoryorselling agent 
   any localau-    
   thority      
6Usedvehicles,CentralGov-Anyregis- 
 seized and confis-ernment, tered person 
 catedgoods,  oldState Govern-    
 andused  goods,    
 waste and scrapment,Union    
 territoryor a    
       
   local authority    

Supplies of services under reverse charge mechanism:

S/DescriptionSupplier ofRecipient of
No.of supply ofserviceservice
 Service  
1Any serviceAny personAny person 
 supplied by anylocated in alocated in 
 person whonon-taxablethe taxable 
 is located interritory other 
 territory 
 a non-taxablethan non- 
 territory to any taxable online 
 person other recipient. 
 than non-   
 taxable online   
 recipient.   
2GTA ServicesGoodsAny factory, 
  Transportsociety, co- 
  Agency (GTA)operative 
  who has notsociety, 
  paid integratedregistered 
  tax at the rateperson, body 
  of 12%corporate, 
   partnership 
   firm, casual 
   taxable person; 
   located in 
   the taxable 
   territory 
3Legal ServicesAn individualAny business
 by advocateadvocateentity located
  including ain the taxable
  senior advocateterritory
  or firm of 
  advocates 
4ServicesAn arbitralAny business
 supplied by antribunalentity located
 arbitral tribunal in the taxable
 to a business territory
 entity  
5ServicesAny personAny body
 provided by way corporate or
 of sponsorship partnership
 to any body firm located
 corporate or in the taxable
 partnership territory
 firm  
6ServicesCentralAny business
 supplied byGovernment,entity located
 the CentralStatein the taxable
 Government,Government,territory
 StateUnion territory 
 Government,or local 
 Union territoryauthority 
 or local  
 authority to a  
 business entity  
 excluding, –  
7ServicesA director of aThe company
 supplied by acompany or aor a body
 director of abody corporatecorporate
 company or a located in
 body corporate the taxable
 to the said territory
 company or the  
 body corporate  
8ServicesAn insuranceAny person
 supplied byagentcarrying on
 an insurance insurance
 agent to any business,
 person carrying located in
 on insurance the taxable
 business territory
9ServicesA recoveryA banking
 supplied by aagentcompany or
 recovery agent a financial
 to a banking institution or
 company or a non-banking
 a financial financial
 institution or company,
 a non-banking located in
 financial the taxable
 company territory
10ServicesA personImporter, as
 supplied by alocated indefined in
 person locatednon-taxableclause (26) of
 in non- taxableterritorysection 2 of
 territory the Customs
 by way of Act, 1962(52
 transportation of 1962),
 of goods by a located in
 vessel from a the taxable
 place outside territory
 India up to the  
 customs station  
 of clearance in  
 India  
11Supply ofAuthorPublisher,
 services by anor musicmusic
 author, musiccomposer,company,
 composer,photographproducer
 photographer,her, artist, oror the like,
 artist or thethe likelocated in
 like by way the taxable
 of transfer or territory
 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   
12Supply ofMembers ofReserve Bank 
 services by theOverseeingof 
 members ofCommitteeIndia. 
 Overseeing 
 constituted by  
 Committee to  
 the Reserve  
 Reserve Bank  
 Bank of India  
 of India  
    
  ******  

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