Definition of Reverse Charge Under GST:
As per 2 (98) CGST Act, 2017; Reverse Charge means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9 of CGST Act, 2017, or under sub-section (3) or sub-section (4) of section 5 of IGST Act, 2017; so this implies that no other section other than above can create responsibility to pay tax on reverse charge basis.
Generally, in case of any transaction any person being supplier of the goods or service will be liable to deposit tax to the revenue, however as the term implies in case of reverse charge person who is consuming service or recipient of the service is liable to deposit tax to the government.
Mr. Raj supply Goods to Mr. Shyamal for Rs. 100/- and Rs. 12/- has been charged as GST, in case of forward charge – Mr. Raj will collect Rs. 12/- and will deposit to Government but in case of reverse charge Mr. Shyamal will be responsible to pay Rs. 12/- instead of Mr. Raj to Government.
Note: The scheme of partial reverse charge, previously prevailing under the service tax laws has been discontinued under GST; this means 100 % tax will be paid by recipient.
Relevant Notification that describes transactions on which tax will be paid on reverse charge basis
- Notification 04/2017-Central Tax (Rate), dt. 28-06-2017 – This notification provides for the goods covered in reverse charge.
- Notification no. 13/2017 Central Tax (Rate), dt. 28-06-2017 – This notification provides for the services covered in reverse charge.
- Further from time to time notification have been issued to amend above notification.
Some of the question that arises:
Question: What if supplier has collected the tax and pays to the government on behalf of assessee?
Answer: As per provision of GST, in case transaction is covered under RCM and the supplier pays tax under normal charge in that case still recipient will be liable to pay tax, and supplier who has already paid the same will be required to claim refund for the same.
Question: Whether the recipient who has paid the tax on reverse charge basis, is eligible to get credit of same?
Answer: Assessee will be eligible to get credit of the same subject to section 16 and section 17(5) of CGST Act, 2017 read with rule 42 and 43 of CGST, rules 2017.
Question: Whether is required to get registration under GST even if he is solely liable to pay tax on RCM basis?
Answer: Yes, he will be liable to get registration and will be required to discharge liability as if he has undertaken the said transaction in capacity of supplier.
Question: What if supplier is exclusively engaged in providing service which is covered under transaction on which tax is payable on RCM basis?
Answer: In such case assessee is exempted from obtaining registration along with on safer side he shall provide declaration relating to such that he is not required to get registration and he is claiming benefit as provided under section 23 of CGST Act, 2017.
Liability to pay tax on RCM basis in case of purchase from unregistered person.
Government has prescribed section 9(4) of the CGST Act, 2017; provides the provisions of reverse charge and the same is reproduced as follows-
The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.
Currently there are some transaction that has been notified under section 9(4) of CGST Act, 2017, and section 5(4) of IGST Act, 2017; Notification 07/2019-Central Tax (Rate), dt. 29-03-2019. This notification cover three service where if it has been procured from unregistered then in such case recipient who is registered will be required to pay tax.
Some of the question that arises:
Question: Currently which sectors is covered under section 9(4) of CGST Act, 2017
Answer: Currently Construction sector is mainly covered under section 9(4) of CGST Act, 2017 vide notification No. 07/2019-Central Tax (Rate).
- Registration requirement for person liable to pay tax on RCM basis
Section 24 CGST Act, 2017; talks about compulsory registration under GST irrespective of your threshold limit. As per Sec 24(1)(c) – Persons who are required to pay tax on reverse charge required to be compulsorily registered under GST. If we have a combine reading of section 24 along with Section 23 deals i.e. exemption provided in respect of registration. It provides that if person is exclusively dealing with exempt supply then he is not liable for GST registration.
Illustration: If turnover of the hospital is 10 Crores, and during the year hospital has imported certain services from outside India worth 5 Lakhs which requires payment of tax on RCM basis then in such case though assessee is covered under exemption still he will be required to obtain registration.
- Self-invoicing under RCM–
Under reverse charge, the buyer or recipient of goods or services or both has to issue invoice or payment voucher on received of goods or services or both from the supplier as may be the case. As per section 31(3)(f) CGST Act, 2017.
|Document to be issued by recipient||Supplier is registered||Supplier is not registered|
|Tax Invoice||Not required||Required|
- In simple terms- If supplier is registered, no tax Invoice is required to be prepared by recipient but if supplier is unregistered then in that case Invoice required to be prepared by recipient.
- There is also an relaxation which has been given, which says for the issuance of a consolidated tax invoice (i.e. for every month), to be issued at the end of the month for supplies received from an unregistered person and the assessee is liable to pay tax on RCM basis as per section 9(4).
- Time of supply of goods under Reverse Charge –
It is important to know that what will be time of supply in case where tax is payable on reverse charge basis,
Time of supply in case of Goods will be earliest of
(a) Date of receipt of goods,
(b) Date of payment or
(c) 30 days from the Date of issue of invoice by the supplier.
If for any reason, one of these three dates cannot be determined then the time of supply will be the date of recording the supply in the books of the recipient. Reverse charge in case of goods may arise either under Section 9(3) or Section 9(4) of the CGST Act.
Let us understand with an example- Mr. Ram, an agriculturist supplies raw cotton (under reverse charge) to Mr. Yash who manufactures cotton shirts. The date wise turnout of events is given below:
- 01.04.2019- Mr. Yash approaches Mr. Ram and places an order for 2 tonnes of cotton
- 10.04.2019- Mr. Yash receives the goods
- 15.04.2019- Mr. Ram issues an invoice
- 20.04.2019- Mr. Yash makes a payment by cheque and accordingly records it in his books of accounts.
- 25.04.2019- The payment gets debited from Mr. Yash bank account.
In the given case Time of supply will be date of receipt of goods- i.e. 10.04.2019, here the date of payment as recorded in the books of Mr. Yash i.e. 20.04.2019 or the date when the payment gets debited in the books of the recipient i.e. 25.04.2019 whichever is earlier is considered, and date of payment will be 20.02.2019, Further the date immediately following thirty days from the date of issue of invoice will be 16.05.2019 being earlier of all the time of supply will be 10.04.2019
Time of Supply of Services under Reverse charge:
Where tax is payable on reverse charge basis, the time of supply is will be the earlier of
- Date of payment or
- 60 days from the date of issue of invoice by the supplier.
If for any reason, one or all of these two dates cannot be determined then the time of supply will be the date of recording the supply in the books of the recipient.
Example- Mr. X provides legal services as an advocate to Mr. Y assuming that other conditions are fulfilled and the said transaction falls under reverse charge basis.
- 10.04.2019 – The services are provided to Mr. Y
- 12.04.2019 – Mr. X issues an invoice to Mr. Y
- 10.07.2019 – The payment is made by Mr. Y through a cheque and recorded in his books of accounts
- 15.07.2019 – The payment gets debited from Mr. Y’s bank account
In the given case Time of Supply will be earlier of 10.07.2019 or 12.06.2019, Therefor time of supply will be 12.06.2019.
- Reverse Charge Mechanism Under Sec 9 (5) for Specified Services
Under section 9(5) of CGST Act & under section 5 (5) of IGST Act prescribes specified services were GST is payable on the basis of RCM by Electronic Commerce Operator-The Government is empowered to notify categories of services wherein the person responsible for payment of taxes would nether be the supplier nor the recipient of supply, but the e-commerce operator through which the supply is effected.
It is important to note that, in case of such supplies, the e-commerce operator is neither the supplier nor does it receive the services. The e-commerce operator is merely the person who person who owns, operates or manages digital or electronic facility or platform for e-commerce purposes. List of those services has been specified vide Notification No. 17/2017-Central Tax (Rate) which are as follows-
- Services by way of transportation of passengers by a radio-taxi, motor cab, maxi cab and motor cycle, etc.)
- Service by way of accommodation in hotels, inns, guest houses, clubs, campsites; except where supplier is liable to register as per section 22(1)
- Services by way of housekeeping, such as plumbing, carpeting etc.
E-commerce operator is not liable to pay tax on reverse charge basis but liability to pay tax is been placed on e-commerce operator “as if” the e-commerce operator was the person which was originally liable to discharge his liability.