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In reverse charge mechanism, the recipient of the goods or services is liable to pay GST in place of the supplier.
Under this article we will cover the following:
We hope that this article will be able to solve all your queries regarding the reverse charge mechanism under GST.
Table of Contents
Usually, GST is paid by the supplier on the supply of goods or services while in case of reverse charge mechanism, the recipient is liable to pay GST instead of the supplier. If we talk about the reverse charge applicability then it is also applicable on goods or services provided by the unregistered dealer to a registered dealer as per section 9(4). It implies that directly buyer will pay the GST rather than a supplier.
According to Sec 9(4) of CGST Act, under the reverse charge mechanism registered taxpayer is liable to pay tax as registered person purchases goods or services from an unregistered dealer. The entire provisions of the Act will apply as the recipient of the goods or services is liable to pay tax.
The provision of the reverse charge will be applicable in the case below conditions are fulfilled:
The provisions of reverse charge will be attracted if purchases exceed Rs. 5000 from unregistered dealers in a single day. To verify whether the reverse charge is applicable, the limit has to be evaluated on daily basis.
Now let’s try to understand with an example:
The registered taxpayer has to analyze the profit and loss accounts on daily basis in order to evaluate whether the transactions fall under the reverse charge mechanism (RCM).
Under GST, when supply is made by unregistered dealers reverse charge mechanism will be applicable.
Here are some of the examples when the reverse charge will be applicable in case of buying from unregistered dealers:
The following must be carefully examined which are entered in your profit and loss account, for the purpose of evaluation of transaction under Reverse Charge Mechanism (RCM) under section 9 (4);
Excluding the following:
If the recipient has paid GST on the purchase of goods or services availed from an unregistered person under reverse charge mechanism then the recipient is eligible for Input Tax Credit.
However, prior to the claiming of Input Tax Credit certain conditions must be considered under reverse charge mechanism RCM:
According to section 17(5), credit cannot be availed on blocked credits although the tax is paid on the basis of the reverse charge mechanism. For Instance: motor vehicles, Foods & beverages, Works contract, etc.
We can guide you the process of paying tax under reverse charge mechanism:
In case of such goods or services which are exempted from tax, the provisions of the reverse charge mechanism will not be applicable as per section 9 (4).
If the total purchases from unregistered dealer exceed Rs. 5000 then the next question arises that how to pay tax under reverse charge mechanism. Under the reverse charge mechanism, GST cannot be collected from the supplier or service provider.
Therefore business entities always prefer to deal with registered dealers as it helps in ease of doing business and it eliminates complications. Unregistered dealers might register themselves voluntarily in order to maintain market share and sustain competition.
The time of supply shall be the earliest of the following dates in case of a reverse charge on goods:
In case time of supply cannot be determined then the date of accounting entry made in the books of accounts of the recipient will be considered.
Let’s understand taking an example:
The time of supply shall be the earliest of the following dates in case of a reverse charge on services:
Under reverse charge, all taxpayers who are required to pay tax have to apply for GST registration irrespective of the applicability of threshold limit of Rs 20 Lakhs.
Yes, the input tax credit will be allowed in respect of the tax paid under reverse charge mechanism in case goods or services will be used for business. The input tax credit can be availed by the recipient.
An input service distributor is not eligible to undergo purchases which are liable to Reverse Charge. However, if the input service distributor wants to procure such supplies and take the reverse charge then he has to register as a Normal Taxpayer.
As we can see there is a drastic change in the tax compliances after GST implementation. It has become challenging for every business to focus on their core activities while trying to be GST compliant. Our team of expert professionals can help you in meeting GST compliances such as GST registration, GST return and handling GST notices.
In case you still have queries then you can post a query on our website. We assure that your query will be solved in the best possible way.
Read our article:Provisions Relating to Aggregate Turnover Under GST
Soniya is a dedicated legal professional with a flair for reading & writing to keep herself updated with the latest economical developments. She has worked on projects related to IPR & Corporate laws which have given her diversity in work and a chance to blend her subject knowledge with its real-time implementation, thus enhancing her skills.
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