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  7. Forward vs. Reverse Charge in GST

Difference Between Forward Charge and Reverse Charge in GST

Updated on: 22 Oct, 2024 04:11 PM

The Reverse Charge Mechanism (RCM) and Forward Charge Mechanism (FCM) are two distinct methods of tax collection for goods and services. Under RCM, the responsibility of paying the tax shifts to the recipient, who pays it directly to the government instead of the supplier. In contrast, FCM places the obligation on the supplier to collect and remit the tax to the government.

Contents

What is Reverse Charge Mechanism?

The Reverse Charge Mechanism (RCM) is a distinctive provision under India’s Goods and Services Tax (GST) law. Unlike the conventional system, in which the supplier is responsible for paying GST, RCM shifts the tax liability to the recipient of goods or services. This applies to certain categories as specified by the government. Businesses in sectors covered by RCM must be well-versed in its implications to ensure compliance, avoid penalties, and maintain accurate tax records.

What is Forward Charge Mechanism?

The Forward Charge Mechanism (FCM) places the responsibility on suppliers to collect tax from recipients and remit it to the government. Under this system, suppliers handle the tax payment, lifting the direct tax burden off the recipients. Often referred to as the normal charge or forward mechanism, it ensures the supplier is accountable for the tax due.

Differences Between Reverse and Forward Charge Mechanism in GST

Differences Between Reverse and Forward Charge Mechanism in GST:

Feature Reverse Charge Mechanism Forward Charge Mechanism
Applicability Typically for specific goods or services, often those involving inter-state trade or transactions with unregistered persons. Generally applicable to most goods and services.
Taxpayer Liability The recipient of the goods or services is liable to pay the GST. The supplier of the goods or services is liable to pay the GST.
Input Tax Credit (ITC) The recipient can claim ITC against the GST paid on the purchase. The supplier can claim ITC against the GST paid on the purchase of inputs used in the supply.
Invoice Issuance The supplier issues the invoice, but the recipient is responsible for paying the GST. The supplier issues the invoice and is responsible for paying the GST.
GST Registration Applicable when turnover surpasses the threshold limits of Rs. 40 lakh/Rs. 20 lakh (or Rs. 20 lakh/Rs. 10 lakh for services), as outlined here. Required for individuals under reverse charge, irrespective of turnover.
Time of Supply (Goods) For goods, the time of supply is determined by whichever occurs first:
  • The date the invoice is issued.
  • The last permissible date for invoice issuance which is either at the time of removal for goods involving movement or at the time of delivery for others.
  • The date the payment is received is based on the earlier date recorded in the recipient’s books or the date the payment is credited to their bank account.
 For goods, the time of supply is the earliest of the following:
  • The date the goods are received.
  • The day immediately after 30 days from the date of the supplier's invoice.
If the time of supply cannot be determined, it will be the date of entry in the recipient’s books of account.

Example of Forward Charge Mechanism in GST

In the forward charge mechanism, the seller of goods or services is liable to pay GST on the transaction value. This is the most common method of GST taxation.

Example:

Let's consider a retail store that sells electronic goods.

  • Transaction: A customer purchases a smartphone worth ₹20,000.
  • GST Rate: Assuming the GST rate on electronic goods is 18%.
  • Calculation:
    • GST Amount = (Transaction Value * GST Rate) / 100
    • GST Amount = (20,000 * 18) / 100 = ₹3,600

Example of Reverse Charge Mechanism in GST

In the reverse charge mechanism, the buyer of goods or services is liable to pay GST on the transaction value. This method is typically applicable in specific scenarios, such as an inter-state supply of goods by a composition taxpayer.

Example:

Let's consider a scenario where a composition taxpayer in Rajasthan supplies goods to a registered dealer in Gujarat.

  • Transaction: A composition taxpayer in Rajasthan supplies goods worth ₹10,000 to a GST-registered dealer in Gujarat.
  • GST Rate: Assuming the GST rate on the goods is 18%.
  • Calculation:
    • GST Amount = (Transaction Value * GST Rate) / 100
    • GST Amount = (10,000 * 18) / 100 = ₹1,800

Process:

  • Invoice Generation: The supplier in Rajasthan generates an invoice for ₹10,000.
  • GST Payment: The buyer (registered dealer in Gujarat) is liable to pay the GST amount (₹1,800) to the government.
  • ITC Claim: The buyer can claim ITC against the GST paid on this purchase if they have further supplies of goods or services.

Frequently Asked Questions

Q- When is the reverse charge mechanism applicable?

The reverse charge mechanism is applicable in specific cases such as:

  • Supply of goods or services by an unregistered supplier to a registered recipient.
  • Certain notified goods and services are where the government mandates a reverse charge.

Q- What are the benefits of the forward charge mechanism?

The Forward Charge Mechanism streamlines the tax process for recipients, as they only need to pay GST to the supplier. It places the responsibility on the supplier to remit the tax, easing the administrative load on the recipient.

Q- What are the benefits of the reverse charge mechanism?

The reverse charge mechanism is useful when collecting tax from the supplier, which is challenging, such as when the supplier is unregistered or based outside India. Shifting the tax liability to the recipient, who is typically more accessible, ensures better tax compliance and collection.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.