What is Reverse Charge Mechanism?
Typically, the supplier is responsible for paying tax on the supply of goods or services. However, under the reverse charge mechanism, this responsibility shifts to the recipient, meaning the recipient is liable for the tax instead of the supplier.
The purpose of using the reverse charge mechanism is to:
- Expand the tax base by including unorganized sectors.
- Exempt specific suppliers from the tax burden.
- Ensure the taxation of imported services, as the supplier is located outside India.
Only certain types of business entities are subject to the reverse charge mechanism, based on specific conditions outlined in the GST law.
When is Reverse Charge Mechanism Applicable?
Section 9(3), 9(4), and 9(5) of the Central GST (CGST) and State GST Acts, along with Sections 5(3), 5(4), and 5(5) of the Integrated GST (IGST) Act, govern the reverse charge mechanism (RCM) for intra-state and inter-state transactions. Let's break down the different reverse charge scenarios:
A. Supply of Certain Goods and Services Specified by the CBIC
Under Section 9(3) of the CGST Act, the CBIC has issued a list of specific goods and services that are subject to reverse charge. The recipient of these goods or services is responsible for paying GST instead of the supplier.
B. Supply from an Unregistered Dealer to a Registered Dealer
Section 9(4) of the CGST Act applies when a registered dealer purchases goods or services from an unregistered dealer. In this case, the buyer must pay GST under the reverse charge mechanism and issue a self-invoice.
- For intra-state purchases, the buyer pays CGST and SGST.
- For inter-state purchases, IGST is payable.
In the real estate sector, promoters must source at least 80% of their inward supplies from registered suppliers. If this threshold is not met, the promoter must pay GST at 18% on reverse charge for the shortfall. For cement purchased from unregistered suppliers, GST is charged at 28%, regardless of the 80% threshold. Additionally, for transfer of development rights (TDR) or floor space index (FSI) supplied on or after 1st April 2019, promoters must pay GST on a reverse charge basis. Even if the landowner is not in the land business, such transfers are treated as a supply of service, and the promoter is liable to pay 18% GST on outward TDR transfers to other developers.
C. Supply of Services Through an E-Commerce Operator
Section 9(5) of the CGST Act states that when certain services are provided through an e-commerce operator, the operator is responsible for paying GST under reverse charge. This includes services such as:
- Passenger transportation via radio-taxi, motor cab, maxi cab, and motorcycles (e.g., Ola, Uber).
- Accommodation services provided via e-commerce platforms (e.g., Oyo, MakeMyTrip), except where the service provider is liable for registration due to exceeding the threshold turnover.
- Housekeeping services (e.g., plumbing, carpentry) provided via platforms like Urban Company, where the platform collects GST from customers on behalf of the service provider unless the provider exceeds the threshold limit.
If the e-commerce operator has no physical presence in the taxable territory, a representative must be appointed to handle GST liability. If no representative is available, the operator must appoint one to ensure compliance with tax obligations.
What is the Time of Supply Under Reverse Charge Mechanism?
A. Time of supply in case of goods
In case of reverse charge, the time of supply for goods shall be the earliest of the following dates:
- the date of receipt of goods
- the date immediately after 30 days from the date of issue of an invoice by the supplier
If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.
Illustration:
- Date of receipt of goods 15th May 2021
- Date of invoice 1st June 2021
- Date of entry in books of receiver 18th May 2021
The time of supply of service, in this case, will be 15th May 2021.
B. Time of supply in case of services
In case of reverse charge, the time of supply shall be the earliest of the following dates:
- The date of payment
- The date immediately after 60 days from the date of issue of invoice by the unregistered supplier
- The date of issue of invoice by the recipient
If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.
Illustration:
- Date of payment 15th July 2021
- Date immediately after 60 days from the date of issue of the invoice (Suppose the date of the invoice is 15th May 2021, then 60 days from this date will be 14th July 2021)
- Date of entry in books of receiver 18th July 2021
- Date of issue of invoice by the recipient 24th July 2024
The time of supply of service, in this case, will be 14th July 2021
What are the Registration Rules Under RCM?
Section 24 of the CGST Act, 2017 mandates that individuals liable to pay GST under the reverse charge mechanism must compulsorily register under GST. The usual threshold limits of ₹20 lakh or ₹40 lakh, which exempt small businesses from registration, do not apply to these individuals. Therefore, anyone required to pay tax under reverse charge must register for GST, regardless of their turnover.
Who has to Pay GST Under Reverse Charge Mechanism?
The recipient of goods or services is responsible for paying GST under the reverse charge mechanism (RCM). However, the supplier must indicate in the tax invoice whether the tax is payable under RCM. Here are some important points to remember regarding GST payments under RCM:
- The recipient can claim an Input Tax Credit (ITC) on the tax paid under RCM only if the goods or services are used for business purposes or in furtherance of business.
- Composition dealers must pay tax at the normal rates, not at the composition rates when discharging their liability under RCM. They are also ineligible to claim ITC on the tax paid.
- The GST compensation cess may apply to the tax payable or paid under RCM.
Keeping these points in mind will help ensure compliance with GST regulations when dealing with reverse charge transactions.
A supplier cannot claim an Input Tax Credit (ITC) for GST paid under the reverse charge mechanism (RCM). The recipient, however, can avail of ITC on the GST amount paid under RCM upon receipt of goods or services, provided those goods or services are used or will be used for business purposes.
The relevant financial year for calculating the time limit to claim ITC under Section 16(4) of the CGST Act will be the financial year in which the self-invoice was issued.
If the recipient issues the invoice after the time of supply and pays the tax accordingly, they will incur interest on the delayed payment. Additionally, if there is a delay in issuing the invoice, the recipient may face penalties under Section 122 of the CGST Act.
It is important to note that the recipient cannot use ITC to pay the output GST on goods or services under reverse charge; this tax must be paid in cash.
What is Self Invoicing?
Self-invoicing is required when purchasing goods or services from an unregistered supplier under the reverse charge mechanism. Since the supplier cannot issue a GST-compliant invoice, the recipient must self-invoice to fulfill their tax obligations on the supplier's behalf.
Additionally, Section 31(3)(g) of the CGST Act states that a recipient liable to pay tax under Sections 9(3) or 9(4) must issue a payment voucher at the time of making payment to the supplier. This ensures proper documentation of the transaction and compliance with GST regulations.
While it is important to understand Reverse Charge Mechanism and other GST-related concepts, understanding GST can be complex and daunting. If you are someone who finds taxes complicated too or need help with GST-related services, you can consider seeking professional help. Get in touch with Tax2win’s tax experts, who can help you with GST registration and GST filing services. Hire an expert now!
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