The levy and collection of GST are governed by Sec. 9 of The Central Goods and Services Tax Act, 2017, and Sec. 5 of the Integrated Goods And Services Tax Act, 2017. These sections pronounce reverse charge mechanism and forward charge mechanism as the only two ways to collect and pay the GST to the authorities. Reverse Charge revolves around the liability to pay tax on the recipient of supply of goods or services rather than supplier of such goods or services in respect of notified categories of supply.
Did You Know? Under reverse charge mechanism, the tax is collected and paid by the Receipt as otherwise paid by the supplier in any other case.
What is Reverse Charge Mechanism?
The unregistered supplier will make the supply as usual, just like any other receipt of goods or services. However, if the receipt of goods and services is registered under the GST (also called taxable person), they will be required to self Invoice the goods or services and pay the taxes to the authorities. An important point to note here is that the reverse charge does not apply to the supplies between the two unregistered persons.
Outcome of Reverse Charge Mechanism
A reverse charge is not beneficial to the recipient of the goods and services (the taxable person). It does not ease compliance; a tax burden is shifted onto the recipient.
Here are a few outcomes of the reverse charge mechanism under the GST laws -
- The registered person must issue a tax invoice since the supplier will be unregistered. The recipient will be required to self-invoice the goods and services they received.
- The receipt is restricted to using the tax paid to offset liability. Instead, It forms part of the cost of goods and services procured.
- It is the responsibility of the taxable person (the recipient) to identify the goods and services one has procured to which tax is required to be levied under the Reverse Charge, which puts a compliance burden in the hands of the recipient.
- Like any other supply, Reverse Charge does not apply to the exempt supply.
Also Read: Know About GST Audit Checklist FY 2022-23
Services notified under the Reverse
The reverse charge mechanism refers to collecting tax from an unregistered supplier making a supply to a taxable person under the GST.
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Electronic Commerce Operator
Electronic Commerce Operator means any person who owns, operates, or manages a digital or electronic facility or platform for electronic commerce. OLA, UBER, Urban Clap, and OYO are all examples of electronic commerce operators. The following are the parties involved -
- Commerce Operator - The person who manages and operates an electronic commerce like OYO
- Supplier - The person is selling goods or services on electronic Commerce, like a Hotel in the case of OYO, a Cab in the case of OLA, or UBER.
- Recipient - The person is paying and using the service offered on electronic Commerce, like the rider in the case of OLA or UBER.
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Person liable to collect tax
The electronic commerce operator will be required to collect the tax from the customers on the platform and pay the tax under the reverse charge.
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Exemption
Where the supplier is a registered person, he can collect and pay the taxes under the Forward Charge
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Goods Transport Agency
Where a goods transport agency does not pay tax under forward charge and makes a supply to a registered person under the GST, the recipient will be required to pay the tax under reverse charge to the authorities.
Exemption: Where the service is provided to a government department, local authorities, or a government agency, GST will not be required to be paid.
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Services of an Attorney
Where any service is rendered by an advocate by way of legal service to a body corporate registered under the GST, the body corporate will be required to pay GST under reverse charge to the authorities.
Also Read: How to Cancel, Revoke, and Re-Register under GST?
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Services of Arbitral Tribunal
Where a service is supplied by an arbitral tribunal to a registered business, the tax is required to be collated and paid by the registered business to the authorities.
Supplier - An arbitral tribunal
Recipient - any business entity locked in the taxable territory of India.
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Sponsorship Service
Services provided by way of sponsorship to a body corporate or a partnership firm.
Supplier - Any person
Recipient - A body corporate or a partnership firm
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Services of Government
Services supplied by the Central government, local or state government, or any business entity shall be the subject matter of the reverse charge. The business entity must pay the tax on the service it receives.
Exemption: Following services are excluded from the entry -
- Services of Post by way of speed post.
- Transport of goods and passengers as requested by the government.
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Floor Space Index
Services given by any individual in exchange for the transfer of development rights or Floor Space Index (FSI), including increased FSI, in order for a builder to build a project.
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Lease
Long-term land lease (30 years or more) granted to any party in exchange for an upfront payment (sometimes referred to as a premium, salami, cost, price, development charges, or by any other name) and/or regular rent in exchange for the promoter's building of a project will be the subject matter of the reverse charge.
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Director Seating Fees
Services supplied by a director to a corporate body or a company and receive fees in return for the service rendered. The said service will be subject to reverse charge, and the body corporate must pay the tax on the amount paid to the director.
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Insurance Agent
Services supplied by an insurance agent to an insurer to bring the business and the fees paid in return will be subject matter to reverse charge, and the insurance company is required to pay the taxes on the amount paid to the agent.
Also Read: GST Return Filing - Know Latest Updates in the Due Dates for GST Return
Conclusion
Under the RCM, the recipient must self-invoice the supply and pay taxes that cannot be utilized to reduce the tax liability. Nevertheless, the government has eased compliance by introducing a composition levy for small businesses registered under GST. Under composition levy, taxes are paid on a percentage basis of the total turnover, and various returns of GST are returned to a quarterly return followed by an annual return when the financial year-end.
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