Reverse Charge is important as certain services and goods attract this charge. Suppose a registered person buys services or goods from an unregistered dealer. Then the registered taxpayer has to pay GST on a reverse charge basis. It is as if the registered dealer is liable for the GST.
What is Reverse Charge in GST?
Usually, a goods supplier has to pay tax or GST on services and goods supplied. But, the reverse charge under GST makes the receiver of supplies liable to pay the GST.
Reverse Charge Applicability
The reverse charge mechanism under GST applies in these three scenarios:
- A registered dealer who buys from an unregistered supplier. The receiver has to self-invoice and pay the tax to the government as a reverse charge.
- E-Commerce operators who supply services like plumbing, electrician, carpenter etc., should pay tax.
- Certain services and goods under the CBEC list are also liable for reverse charges.
Note, from 1st Feb 2019, reverse charge applies on purchases from unregistered suppliers. Earlier purchases up to Rs 5,000 per day were exempt.
Here’s the list of ‘exempt-from-reverse charge mechanism under GST’ items’ in the CEBC list.
Unpeeled/unshelled cashew nuts
Tendu/ Bidi leaves
Leaves of Tobacco
Scrap/ used vehicles, used/old goods, confiscated/seized goods, metal waste etc.
Time of Supply for Reverse Charge in GST
We calculate the time of supply for the reverse charge mechanism as follows:
A. For Goods
The supply time of goods is the earliest of
- Date of goods receipt.
- Date of payment.*
- Thirty days from the invoice date of the supplier.
Suppose it is not possible to pinpoint the time of supply. Then the entry date in the recipient’s books of account is the date of supply for the reverse charge.
*No longer applies.
A business received goods on 14th May 2018. The date of the invoice is 2nd June 2018, and the date of entry in the receiver’s books is 19th May 2018. The time of supply for RCM under GST will be 14th May 2018 as it is the earliest date of the 3 dates mentioned above.
B. For Services
For RCM under GST, the supply time of services is the earliest of
- Date of payment
- Sixty days from the invoice issue date of the supplier.
Suppose it is hard to find details of the supply of services. Then the time of supply the reverse charge in GST is the entry date in the recipient’s books of account
Consider the date of payment as 15th July 2018, 60 days from the invoice issue date (15th May 2018) is 14th July 2018. The date of entry in the receiver’s books is 18th July 2018. In this case, the time of supply is 14th July 2018 as it is the earliest date of the 3 dates mentioned.
Self Invoicing Explained
Suppose you buy services/goods from an unregistered supplier. Then you have to prepare a self-invoice for such purchases with RCM applicability. You need to do this as there is no GST-complaint invoice issued to you. Here’s how to do the self-invoicing for GST RCM on GST software to track your GST compliance.
Steps for Self-invoicing
These are the general steps to create a self invoice on your software:
- Click on ‘ New Purchase Invoice’.
- Click on ‘Invoice Serial Number’ and then enter the bill’s serial number.
- Click on ‘Invoice Date’ and enter the time of supply date as explained above.
- Under ‘Reference Number’, enter the order number or any details you have.
- Click on ‘Due Date’ and enter the payment date by when you have to pay the supplier. This field is not compulsory. But, it is helpful for you.
- Click on ‘Vendor Name’ and enter the name of the supplier. This name should NOT be your name, even though you are self-invoicing using a reverse charge. You can also add a new vendor if required.
- Enter the purchase details of services/goods.
- Choose ‘Reverse Charge’ from the ‘Advance Settings’ drop-down box.
- Save your invoice.
Profit & Loss items that may attract RCM under GST
Keep track of your P&L accounts for these items that attract RCM in GST and the GST tax.
- Stationary and Printing
- Maintenance and repairs
- Computer and vehicle maintenance
- Legal, professional, audit and consultancy fees
- Transportation/freight expenses
- Business promotion and gift expenses.
Exceptions to RCM
Some expenses are exempt from RCM under GST and listed below.
- Wages and salary
- Petrol/Diesel expenses
- Interest paid
- Government fees like land registration, MCA etc.
The above article has dealt with the RCM mechanism and self-invoicing. Many businesses have begun to prefer registering under the GST laws as the RCM mechanism works well to avoid disputes between businesses and their invoices used. Learn more about GST and the Reverse Charge Mechanism and how to navigate through the difficult areas of GST with the Khatabook app.