GST

All about the Reverse Charge Mechanism under GST

Usually, the tax burden is borne by the supplier of the goods or services. Under the Reverse Charge Mechanism, the receiver of goods or services bears the burden of payment of Goods and Services Tax (GST), not the supplier. The purpose of shifting the GST burden to the receiver is to widen the scope of levy of tax on various unorganised sectors to exempt certain classes of suppliers and tax the import of services. Under the Reverse Charge Mechanism, the receiver of goods or services becomes liable to pay tax. So, the changeability gets reversed. Only specific types of business entities are subject to the reverse charge mechanism.

When is the Reverse Charge Mechanism Applicable?

The reverse charge mechanism scenario is covered under section 9(3), 9(4) and 9(5) of the CGST and SGST Act and under section 5(3), 5(4) and 5(5) of the Integrated GST Act. Let’s understand different scenarios of the reverse charge mechanism.

A. Supply of goods and services prescribed by the CBIC

The CBIC has, while utilising the powers conferred under section 9(3) of the CGST Act, notified a list of goods and services on which the reverse charge mechanism shall apply.

B. Supply to a registered dealer from an unregistered dealer

As per section 9 (4), the reverse charge mechanism would apply if an unregistered person supplies goods to a person registered under GST. As per the reverse charge mechanism, GST will be paid directly by the recipient of the goods instead of the supplier. It means the GST will be paid directly by the receiver instead of the supplier. The registered buyer who pays GST under the reverse charge mechanism has to do self-invoicing for the purchases made.

In intra-state purchases, the purchaser must pay the CGST and SGST under the reverse charge mechanism. Further, in inter-state purchases, the buyer must pay the IGST. From time to time, the government notifies the list of goods or services to which the provision applies.

The government has issued that the promoter should purchase inward supplies to only 80% from registered suppliers in the real estate sector. If the purchases from the registered dealers fall short by 80%, then the promoter should pay GST at a rate of 18% to the extent short of 80% of inward supplies. If the promoter buys cement from a non-registered supplier, he must pay a tax of 28%. This has to be calculated regardless of the 80% calculation. 

The promoter has to pay GST based on the reverse charge mechanism on Transferable Development Rights (TDR) or floor space index (FSI) supplied on or after April 1^st, 2019. If a landowner is not in a regular business of land-related activities, such an individual’s transfer of development rights to the promoter has to bear the burden of GST as it will be treated as a supply of service under section 7 of the CGST Act. Further, in the event of an outward supply of Transferable Development Rights (TDR) by one developer to another, GST is applicable at the rate of 18% on a reverse charge basis.

C. Supply of services via e-commerce operator

Every business can use e-commerce operators as an aggregator to sell products or provide services. As per Section 9(5) of the CGST Act, if a service provider uses an e-commerce operator to deliver specified services, then the reverse charge mechanism will apply to the e-commerce operator, and he will be liable to pay ¹. It covers services such as:

1. Passenger transportation services by radio taxi, maxi cab, motor cab and motorcycle. E.g., Ola and Uber.
2. Accommodation services such as hotels, inns, guest houses, clubs, campsites and other commercial places meant for residential or lodging purposes, other than where the person supplying the services through an e-commerce operator has to pay for registration due to turnover exceeding the threshold limit. E.g., Oyo and MakeMyTrip.
3. For housekeeping services like plumbing and carpentering other than where the person is delivering services via e-commerce, operators have to pay for registration due to turnover beyond the threshold limit. For e.g., Urban companies provide services of plumbers, electricians, teachers, beauticians, etc. Urban company has to bear the burden of paying GST. It collects the taxes from the customers instead of the registered service providers.

Suppose the e-commerce operator has no physical presence in the taxable territory. In that case, the person representing the e-commerce operator will bear the liability to pay tax for any purpose. If no representative is appointed, the operator must appoint a representative. The representative will be held liable to pay GST.

Time of Supply under RCM

A. Time of supply of goods

Under the Reverse Charge Mechanism, the time of supply of goods shall be the earlier of the following dates:

1. The date of receipt of goods
2. The date of payment
3. The day immediately after 30 days from the date of issue of an invoice by the supplier.

In case of difficulty in determining the time of supply, the date of entry in the recipient’s books of account will be considered the time of supply.

B. Time of supply of services

Under the reverse charge mechanism, the time of supply shall be the earlier of the following dates:

1. The date of payment
2. The date immediately after 60 days from the date of issue of invoice by the supplier

If it is impossible to determine the time of supply, then the date of entry in the books of account of the recipient shall be considered as the time of supply.

Registration under the Reverse Charge Mechanism

As per Section 24 of the CGST Act 2017, a person liable to pay GST under the reverse charge mechanism must compulsorily obtain registration under GST. The threshold limit of INR 20 lakh, or INR 40 lakh, as the case may be, will not apply to them.

Who Pays GST under Reverse Charge Mechanism?

The recipient of goods or services shall have to pay GST under the reverse charge mechanism (RCM). Further, the invoice should expressly mention that the tax is payable under the basis. The following points should be kept in mind while making GST payments under the reverse charge mechanism:

1. The recipient of goods or services can get ITC on the tax amount paid under the RCM only if such goods or services are used for business or in furtherance of business.
2. The composition dealer should pay tax at the standard rates, not the composition rates, while discharging liability under the reverse charge mechanism. In addition to this, they are also not eligible to claim any ITC of tax paid.

The GST compensation cess can apply to the tax payable or paid under the RCM basis.

Input Tax Credit (ITC) under Reverse Charge Mechanism

A supplier cannot take the GST paid under the reverse charge mechanism as (ITC). The recipient can get ITC on the GST amount paid under the reverse charge mechanism on receiving goods or services. Such goods or services should be used or will be used for business purposes only. The recipient cannot use the ITC to pay output GGST on goods or services under the reverse charge mechanism, and it should be paid in cash only.

What is Self-Invoicing?

Self-invoicing is done when goods or services are availed from an unregistered person, and the purchase of goods and services falls under the reverse charge mechanism. It is because the supplier cannot issue a GST-compliant invoice to the recipient, and the recipient bears liability to pay taxes on their behalf. Therefore, self-invoicing becomes necessary. Further, section 31 (3) (g) prescribes that a recipient who is liable to pay taxes under sections 9(3) and 9 (4) will have to issue a payment voucher while making payment to the supplier.

Conclusion

The general rule is that the supplier of goods or services is liable to pay GST. Still, in some instances, such as imports and other notified supplies, the burden to pay tax may shift on the recipient under the reverse charge mechanism.

FAQs

1. https://www.gst.gov.in/