written by khatabook | June 25, 2021

All About Reverse Charge Under GST

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.

Sl. No.

Exempt items

1

Unpeeled/unshelled cashew nuts.

2

Tendu/ Bidi leaves 

3

Leaves of Tobacco 

4

Silk yarn

4A

Unprocessed/raw cotton

5

Lottery services

6

Scrap/ used vehicles, used/old goods, confiscated/seized goods, metal waste etc.

Also Read: Types of GST Returns: Forms, Due Dates & Penalties

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. 

Example:

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

Example: 

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. 

Also Read: GST Invoice Excel Create GST Compliant Invoices on your PC

Steps for Self-invoicing

These are the general steps to create a self invoice on your software:

  1. Click on ‘ New Purchase Invoice’.
  2. Click on ‘Invoice Serial Number’ and then enter the bill’s serial number. 
  3. Click on ‘Invoice Date’ and enter the time of supply date as explained above.
  4. Under ‘Reference Number’, enter the order number or any details you have.
  5. 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.
  6. 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.
  7. Enter the purchase details of services/goods.
  8. Choose ‘Reverse Charge’ from the ‘Advance Settings’ drop-down box.
  9. 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.

  • Rent
  • Advertisements
  • Stationary and Printing
  • Commissions
  • 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.

  • Electricity
  • Wages and salary
  • Petrol/Diesel expenses 
  • Interest paid
  • Government fees like land registration, MCA etc.

Also Read: A Step-by-Step Guide to GST Registration Procedure in India

Conclusion: 

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.

FAQs

1. How does GST treat RCM?

The GST Act specifies that 

  1. S 9(3) or S 9(4) services/goods must have a registered taxpayer under GST.
  2. The RCM and GST applicable should be submitted on/before the 20th of the next month to the government.

2. How does one calculate RCM?

Let us understand by an example. A registered trader uses services worth Rs 10,000/- of a Goods Transport Agency.  The trader is then liable to pay reverse charge GST of Rs 1800/- or 18% of Rs. 10,000 under the reverse charge liability due under the GST.

3Is Reverse Charge refundable?

Yes, the taxpayer can claim the tax under the reverse charge mechanism as an input tax credit.

4. Who is liable for GST payment?

Normally the supplier of services/goods is liable for GST. But, in cases like notified supplies, imports etc., a reverse charge liability is charged on the recipient of the services/goods.

5. Can one issue invoices without a GSTIN?

Registered companies with GSTIN can use the e-invoice to file their services/goods supplied for both sales and purchases. Unregistered individuals can send a pro forma invoice to registered taxpayers who become liable to pay tax under the RCM.

6. What if one does not pay the RCM?

RCM cannot be availed as an ITC every time. Hence a registered taxpayer cannot claim that there is no revenue loss by not paying the RCM tax, which they would anyway avail as an input tax credit.

7. What is transport RCM?

The GTA had RCM even under the older Service Tax Act. Liability of RCM and GST in GTA falls on the recipients generally, as the transportation of services/goods relies on the unorganized sector. 

8. Is rent under RCM in GST?

The rent invoice is inclusive of GST @18%, and hence you do not have a liability to pay GST on rent under RCM. The landlord is, however, liable to tax as the supplier of such services/goods.

9. Does the GSTR-1 have RCM?

The registered supplier must report all sales invoice-wise when subject to reverse charges in the GSTR-1 under table 4B for Outward RCM taxable supplies. The ITC on purchases by the recipient can then be claimed as a reverse charge in the subsequent tax period ONLY.

10. Who is an unregistered GST person?

A registered taxpayer under the GST Act person will have a GSTIN. An unregistered person is not registered under GST and hence, has no GSTIN number.

11. What is GST IFF?

The IFF or Invoice Furnishing Facility exists in the quarterly returns of the registered taxpayer’s GSTR-1. You can opt to upload B2B or Business-to-business monthly invoices under the QRMP scheme. The quarter’s last month invoices are to be furnished only in the GSTR-1 form.

12. What is an RCM?

The supplier collects the tax and payment from the recipient normally. In RCM, the payment is made to the supplier and the tax is remitted to the government directly.

13. Is it mandatory to provide the GSTR-1 HSN wise summary?

The GST Act mandates the HSN wise summary in GSTR-1 and 2, except where the HSN summary is unavailable. In this case, the description of services/goods is to be mandatorily provided.

14. Can invoice be raised by unregistered dealers?

The GST Act mandates that any registered taxpayer of GST buying services/goods from a URD (Unregistered Dealer) has to provide a tax invoice and payment voucher. The invoice type depends on the registration category of the supplier.

15. How to issue an invoice without GSTIN?

If you are an unregistered dealer or URD and the customer asks for a tax invoice, you should issue an invoice marked showing that no GST is included in the price. Either show the GST amount as ‘zero’ or write “ No GST charged in this invoice’ on the invoice.

16. What happens when an unregistered receiver of services/goods has to pay GST under the Reverse Charge Mechanism?

All taxpayers are required to register under the GST Act if they are obligated to pay reverse charge tax. The 20 lakh threshold limit does not apply to such taxpayers.

17. Does Reverse Charge allow Input Tax Credit?

The recipient of services/goods under reverse charge can avail input tax credit of the reverse charge tax paid when the services/goods so purchased are/will be used in their business.

18. What happens when an ISD- Input Service Distributor receives services/goods liable to tax on the Reverse Charge basis?

An ISD will need to register as a normal taxpayer to make purchases of taxable services/goods. Under a Reverse Charge basis, the ISD cannot make such supply procurement and take input credit.

19. How to claim ITC under RCM using Tally? 

A supplier cannot take ITC- Input Tax Credit of the GST paid on services/goods if used to make supplies where the recipient is liable for RCM tax. But, a recipient of such services/goods can avail ITC for the amounts paid under the reverse charge mechanism.

Here’s how to raise the claim ITC and know GST on reverse charge tax liability using Tally. 

  1. Enter the Tally gateway and click on ‘Display’ selecting ‘Statutory Reports’ and then the GST tab and the GSTR-3B tab under it.
  2. Click ‘Enter’ on the tab for Reverse Charge of Inward Supplies. 
  3. Raise the amount of the tax liability here and Click J: Stat Adjustment.
  4. Credit and Debit the tax ledgers and hit the ‘Save’ button.
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