The introduction of GST in India was indeed a remarkable step taken by the country’s government to manage the tax collection on the supply of goods and services and from all sectors effectively. Several reforms were made to make sure tax was paid righteously to the government and one such practice mechanism called Reverse charge under GST was made more transparent.
However, in a country which had large sections of unorganised sectors doing business and cases of tax evasion and manipulation, imposing changes on the long going practices was not an easy task. Here’s all about Reverse charge under GST that you need to know about.
Reverse charge: explained
Though, the concept is not brought up recently under GST but has been modified to quite an extent. The reverse charge under GST in a mechanism to manage the tax coverage and establish synchronization and compliance even among the unorganised sectors along with fully and partially organised sectors as well.
As per a general understanding, tax is to be paid by a supplier on the goods and services offered or supplied. But in reverse charge, it becomes the responsibility of the receiver or buyer of these supplied goods and services to pay the taxes. However, this is applicable to specified cases of imports and notified supplies only.
Reverse charge applicable scenarios
As mentioned that the liability of the tax payment lies on the receiver of services, it is made applicable in the following two cases:
The nature of supply or supplier:
This is explained under section 9 (3) of the CGST/ SGST (UTGST) Act and section 5 (3) of the IGST Act. The most common scenario falling under this classification is selling services through an e-commerce platform.
When an e-commerce platform supplies services to customers, then it is the responsibility of the e-commerce service provider to pay the tax. For example, consider start-ups like Dunzo and UrbanClap. They provide kinds of services to the customers and collect the GST from the customers only rather than the on-ground service providers registered with them. These on-ground service providers or services offered are like for plumbing, beauticians and others.
Taxable supplies rendered by an unregistered supplier to the registered buyer:
This is explained under section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act. This involves all such suppliers who have not successfully registered under the GST but are supplying goods and services to registered buyers under GST.
So, the applicable tax is to be paid by the receiver by completing self-invoicing for the services and goods purchased. In case when purchases are made at the inter-state level, the buyer is liable to pay the IGST. The CGST and SGST are to be paid by the buyer for inter-state purchases under RCM.
From a registered dealer to an unregistered one: Under this category, the following services make the reverse charge under GST applicable:
- 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
- Sponsorship services
- 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 introduced reverse charge under GST?
Though there were laws abiding by which tax was to be paid by the seller for the goods and services offered but due to several reasons like partial knowledge, illiteracy or being residents of non-taxable areas made it tough for the government to receive the correct tax.
There were also cases reported in which people refrained from paying taxes or didn’t know even if they had to do being part of the unstructured business and still providing services. Hence, the reverse charge under GST was introduced.
In this, common causes of failure of paying tax the liability were transferred to the receiving end. This was aimed to make the administration better.
This imposition was also backed up by the Finance Act of 1994 under section 68(2) where the government holds the authority to 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 under Reverse charge
Since the tax is to be paid by the receiver the time of supply from the supplier plays a crucial 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 taken into consideration 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.
So, for any of the first two dates mentioned, whichever is the earliest is assumed as the time of supply. However, if the time of supply still cannot be determined then the date of entry in the records of the receiver is used.
Let’s take an example: On 1st April certain goods were received by the buyer. On 7th April the buyer’s record was updated for the same goods and on 30th April the invoice was generated. So, the time of supply will be on the 1st of April.
As per the time of supply of services:
The time of supply in case of services is calculated through the following dates:
- The payment date
- The date after 60 days when the invoice is submitted by the supplier
So, among the two dates mentioned, whichever is the earliest is considered as the time of supply. However, if the time of supply still cannot be determined then the date of entry in the records or books of account of the receiver is used.
Let’s take an example: The invoice was generated on 15th April. The payment for services was made on 1st May and payment has been recorded in books of account on 5th May. Now, 15th June makes it 60 days from the date of issue of the invoice.
Self-invoicing in Reverse charge
Self-invoicing is an aspect of reverse charge under GST where the burden of generating an invoice lies on 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, he or she is not in the position to provide a GST compliant invoice for the goods and services supplied.
So, the receiver is obliged 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 supply recipient has been charged with for the good or services or both supplied which are further going to be used for business. It also comprises the tax that is to be paid on a reverse charge basis and does not take into consideration the amount of tax paid for composition levy.
The benefits of the Input tax credit can be enjoyed by any registered individual under GST for either supply of goods or services or both to him or her. Additionally, these goods or services or both should be a part of his or her further business.
Any of the following documents can be used to take input credit tax:
- Bill on entry
- Debit note
- Tax invoice issued
- A document obtained from Input service distributor for credit distribution
- Invoice prepared through self-invoicing.
Let’s make an aspect of Input direct tax for the reverse charge under GST by an example. A supplier ‘S’ sold goods worth INR 1000 to a receiver ‘R’ on credit on 1st March. Let the GST for the category/slab of goods be such that 10% GST is applicable. So, calculated GST is INR 10. Hence, the invoice value for ‘S’ is INR 1010.
Now, ‘R’ delays the payment of the invoice but when he files the GST return for March, he claims the input tax credit of INR 10.
If ‘R’ fails to pay the invoice amount after 80 days from the date of good supplied, then the benefit of INR 10 is reversed and will get added to output tax liability.
The input tax credit can either before September of the following financial year or when finalizing the annual returns, whichever date is the earliest.
What makes an exclusion from the reverse charge?
There are several scenarios which have been exempted 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 do not attract the reverse charge mechanism.
However, do note that exemption is not applicable if a single person (receiver of supplied goods or services) receives bills whose sum total exceeds the permissible limit of INR 5000 per day. The count of unregistered suppliers is not taken into account for this exemption.
Points to remember for Reverse charge under GST
- Despite the information shared so far, there are certain key points which need to be paid attention to:For goods and services mentioned under section 9(3) and 9(4), the receiver has to obtain the GST registration.
- The GST for every month should be cleared by the 20th of the subsequent month.
- When self-invoicing is being done under reverse charge, it has to take into consideration all the consolidated services which have been purchased even on a daily basis.
- It is mandatory for the receiver of supplied goods and services 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 even on the advance payments made.
The reverse charge under GST was one of the measures to make the administration better and make sure the taxes are paid in transparency. The objective is to levy tax even on the unorganised sectors and provide exemptions to the ones who really need it.