Reverse Charge under GST

Reverse Charge will be Applicable under GST

For Goods:

• In case of unregistered dealer is selling goods to the registered dealer, then the liability to pay tax shifts on the registered dealer i.e. the recipient of goods, where such supply is of taxable supplies. No reverse charge mechanism in case of exempted supplies

Tax will be paid by the registered dealer and all the provisions of the act will be applicable to him as if he is the supplier of the goods or services The concept behind this to to prevent tax evasion since it would be almost impossible to collect tax from the unregistered dealer. It would increase tax compliance and promotes transparency. Input credit will be allowed to the registered dealer of the tax paid by him under the reverse charge mechanism.

This extra compliance under the Act will force all the registered persons to purchase goods only from the registered dealers and this is what the new regime aims at.

• In case of service provided by E-commerce operator, liability to pay tax lies on recipient of services.If the assessee has no physical presence in the taxable area, then the representative of such e-commerce operator will be liable to pay tax. If there is no representative, then the assessee has to appoint one who will be liable to pay GST

For Services

CBEC has notified a list of services on which reverse charge mechanism will be applicable under GST

S. No.	Provider	Recipient
1	Goods transport agency	Casual Taxable person, body corporate, partnership firm, any society, factory, any person registered under CGST, SGST, IGST Act
2	Recovery Agent	Banking Company, NBFC or any financial institution
3	A director of a company or a body corporate	A company or a body corporate
4	An individual advocate or firm of advocates, An arbitral tribunal	Any business entity
5	An insurance agent	Any person carrying on insurance business

Points to be noted:

No partial reverse charge will be applicable under GST. 100% tax will be paid by the recipient if reverse charge mechanism applies.

• In case of B2B import of other services, tax shall be payable by recipient of services
• In case of B2B import of goods, tax shall be payable by recipient of goods

When does the Liability to Pay GST under Reverse Charge Mechanism Arise?

In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely:

• the date of the receipt of goods; or
• the date of payment as entered in the books of account of the recipient; or
• the date on which the payment is debited in his bank account, whichever is earlier; or
• the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier

However, where it is not possible to determine the time of supply as above, the time of supply shall be the date of entry in the books of account of the recipient of supply. For Eg.

• Date of Payment – 18th June 2017
• Date of Invoice – 1st July 2017
• Date of Entry in books by recipient – 19th June 2017
• Thus, Time of supply will be – 18th June 2017

If the supplier is located outside India, then the time of supply shall be the earliest of – ‘When the amount is paid i.e. the date of payment’

OR

‘When the recipient records the payment in his books of account’.

Manner of Payment of GST under Reverse Charge Mechanism

As per section 49(4) of CGST Act’2017, ITC can be used for payment of output tax only. Therefore tax under reverse charge can be paid through cash only without availing the benefit of ITC. The supplier must mention in his tax invoice whether tax is payable on reverse charge.

Input Tax Credit:

The service recipient can avail Input Tax credit on the tax amount that is paid under reverse charge on goods and services. The only condition is that the goods and services are used or will be used for business or furtherance of business.

If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim any credit of tax paid. Also , tax in this case will be paid at the normal applicable rates and not at the composition rates.

Registration Requirement under Reverse Charge Mechanism:

As per Section 24 of CGST Act’ 2017 , A person paying tax under the reverse charge mechanism has to compulsorily get registered even if the turnover is below threshold limit.

Applicability of GST Compensation Cess:

Although the rates for GST Compensation Cess has not been notified yet , it will be applicable on tax paid under reverse charge mechanism also. The purpose is to compensate States for loss of revenue on implementation of GST. This will be applicable for 5 years from the date GST gets implemented.

Conclusion: With the biggest tax reform ready to be implemented, Reverse charge mechanism is not a new concept as we are already dealing with this in the service tax. But imposing a 100% reverse charge is definitely a big change. There are both pros and cons for this reverse charge mechanism but then no accurate conclusion can be drawn currently as to how the society will be impacted with its imposition. On one hand it will definitely be burdensome for the small supply receivers, but on the other hand it will increase tax compliance for the country as a whole and would increase transparency.