Reverse Charge Mechanism Under GST

reverse charge under gst

GST has a different tax credit process than Service tax / VAT. However, the Finance Ministry has taken a soft call on the applicability of reverse charge under the GST Act, and it has been extended until 31-03-2018.

What is the Goods and service tax system?

In the general course of business, the supplier of goods or services or both is required to remit the tax to the government by the due as prescribed by the GST act. 2017. After obtaining the GST Registration, the one-time payment of applicable taxes is mandatory.  However, there are certain cases where the liability to pay taxes lies on the recipient of goods and services. Here, the tax is under the Reverse Charge Mechanism. as per the GST Council[1] has postponed the applicability of reverse charge under GST till 31-March-2018.

When is Reverse Charges applicable?

The government has simplified the GST Registration process however, the GST Reverse charge mechanism has been introduced to avoid the possible tax benefits from the unregistered supplier.

There are two different scenarios under which Goods and Service Tax is required to be paid under the Reverse Charge Mechanism.

Scenario 1 –  is covered under Section 9 (3) of the CGST/ SGST (GST) Act and Section 5 (3) of the GST Act.  Under this scenario on the recommendation of the Council, the Government notifies a section of Goods or services or both on which tax will be required to be paid under reverse charge mechanism by the recipient of such notified goods or services.

Scenario 2 – is covered under section 9 (4) of the CGST/SGST (GST) Act and section 5 (4) of the GST Act. It covers the situations where taxable goods or services are supplied by unregistered suppliers to the recipients who are registered under Goods and Service Tax law.

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Read our article:GST Registration Requirements (Goods and Services)

Why is payment of Reverse Charge under GST required?

We have discussed the scenarios provided under the law when the reverse charge is applicable. Now, to gain a better understanding of the reason why the recipient of goods or service or both is required to pay tax we have summarized the reasons for the same.

  1. Supplier belongs to a non-taxable territory:

    If the supplier is based in a non-taxable territory, then it does not automatically exclude any goods or services from the ambit of taxes. As GST is a destination-based tax, the GST on goods and services supplied from non-taxable territory is to be paid to the state they are supplied to. And the burden falls on the receiver of such goods or services to pay GST on a reverse charge basis.

  2. To cover Un-organized sector:

    There are many unorganized sectors that contribute a lot in the form of output. But due to the involvement of many people in that sector, their aggregate turnover individually does not exceed the prescribed threshold limit for GST Registration. In such cases, to ensure that the government does not lose the tax revenue, GST is collected on a reverse charge basis.

  3. The supplier has not applied for GST Registration –

    The simplest explanation of the collection of GST under the reverse charge mechanism is that the supplier of goods or services or both is not registered under GST. When such unregistered person supplies to any registered person, then the registered receiver of goods or services or both will be required to pay GST under reverse charge mechanism.

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Compliances when the tax is paid as Reverse Charge

There are certain compliances which are to be followed when GST is paid under Reverse Charge Mechanism:

  1. Maintenance of proper accounts: Every registered taxpayer who is required to make payment of GST under this mechanism is required to maintain separate records of all transactions attracting tax payment under reverse charge.
  2. For every transaction attracting GST payment on a reverse charge basis, it should be clearly mentioned on the respective Invoice, invoice voucher, return voucher, etc. GST Payment process has been simplified and tax can be paid online.
  3. Tax liability under reverse charge cannot be balanced against input tax credit. The electronic credit ledger is required to be debited for the amount of reverse charge. However, the credit of the same amount can be availed.
  4. At the time of filing GSTR-01, one is required to furnish reverse charge information in Table 4B.

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