GST: Reverse Charge Mechanism

The reverse charge mechanism in GST, refers to a scenario where the recipient of services pays the tax, instead of the supplier. We examine how this has been implemented in the GST regime. The purpose of this charge is to increase tax compliance and tax revenues. The concept of reverse charge mechanism is already present in service tax. In GST regime, reverse charge will be applicable for certain services and goods both.

      A.)  Reasons for Reverse Charge

 • Safeguarding the interest of revenue to the Government.

 • Collection of GST on all supplies even supplied by unregistered person.

 • Administrative Convenience to the department.

   

     B.) Old scenario of Reverse Charge

At present, similar provisions of Reverse Charge are available in Service Tax for the services like Insurance agent, Services of a director to a company, Manpower supply, GTA etc. Currently there is no reverse charge mechanisms in supply of goods.

C.) New Scenario: Reverse Charge under GST

Reverse charge means the liability to pay tax is by the recipient of goods/services both instead of the supplier.

    D.) Situations where reverse charge will apply

 In following three situations reverse charge mechanism will apply;

1. Unregistered dealer selling to a registered dealer

In such a case, the registered dealer has to pay GST on the supply.

Exemption: There is also a small exemption granted,

       - Of Rs 5,000 per day

       - for total consolidated purchases made during a particular day of goods and services

       - from one or all unregistered vendors in the day.

Exemption is not available if any single person receives bunch of bills total value of those bills is more than 5000/- per day, even if the bills are received from different persons.

2. Services through an e-commerce operator:

If an e-commerce operator supplies services then reverse charge will apply on the e-commerce operator. He will be liable to pay GST.

If the e-commerce operator does not have does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.

3. List of Services/Goods notified by CBEC:

CBEC has issued a list of services on which reverse charge is applicable and a list of goods on which reverse charge is applicable.

Please read this article for the complete list of goods & services: Reverse charge on specified Goods & Services

E.)  Registration for GST is mandatory for;

All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold limit if Rs 20 lakhs (Rs 10 lakhs for North eastern and hill states)]

F.)  Input tax credit on tax paid under reverse charge:

Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The service recipient who pays tax under reverse charge can avail input tax credit.

G.) Tax Invoice

The supplier must mention in his tax invoice whether the tax is payable on reverse charge.