What is the Reverse GST charge? A complete guide

Goods and Services Tax ( GST ) is a comprehensive, multi-stage, destination-based tax and is an indirect tax on the supply of goods and services. It has absorbed almost all the indirect taxes, except a few state taxes. GST is levied at every stage of the manufacturing process, though it is refunded to all parties. The final collection is from the end-consumer. Unlike previous taxes, it is collected from the point of consumption, and not from the point of origin. Five different tax slabs have been created for collecting GST-0%, 5%, 12%, 18% and 28%.

Reverse Charge Mechanism (RCM)

It is the process of payment of GST by the receiver instead of the supplier in the case of certain notified supplies, so the liability of tax payment is transferred to the recipient/receiver instead of the supplier. In a notification under the GST acts and amendments, the government has imposed the Reverse GST from 1st February 2019.

When is Reverse Charge Applicable?

1. Supply from an Unregistered supplier to a Registered dealer- If an unregistered vendor supplies goods to a person who is registered under GST, then Reverse Charge would apply. So, instead of the supplier, the GST will have to be paid directly by the receiver to the Government. The supply of goods should be intra-state and the value exceeds Rs 5000 in a day.

In the case of inter-state supply of goods, by an unregistered supplier to a registered supplier, GST has to be paid on reverse charge.

Under Reverse Charge, the dealer who has to pay GST has to do self-invoicing for the purchase made. The buyer has to pay IGST for inter-state purchases. CGST and SGST have to be paid by the purchaser under RCM for intra-state purchases.

If the Registered dealer is the supplier of the goods or services, then all the provisions of the act will apply to him, and he has to pay the tax. The concept behind this is to prevent tax evasion since it would be almost impossible to collect tax from an Unregistered Dealer.

1. Services rendered by an e-commerce operator-Reverse charge will apply to an e-commerce operator if he supplies services. He will be liable to pay GST and will collect it from the customers.
2. Supply of certain goods and services specified by the Central Board of Excise and Customs (CBEC).-CBEC has issued a list of goods and services on which Reverse Charge is applicable.
3. Imports.

RCM reverses the scenario as the person who is receiving the goods and services, need to pay the taxes. The supplier issues a payment voucher to the recipient. As per section 2(94) of the CGST Act, 2017, the recipient must be a registered person.

As per section 2(98) of the CGST Act, 2017, “reverse charge” means the liability to pay tax by the recipient of the supply of goods and services instead of the supplier of the same.

Time of Supply under Reverse Charge

1. In the case of supply of goods, the time of supply needs to be the earliest of the following dates:

• The date of receipt of goods
• 30 days after the supplier issues an invoice, the date immediately following that will be considered.

In cases when the actual time of supply cannot be determined, the date of entry in the accounts book of the recipient will be considered.

Example:

a.) Date of receipt of goods- 15th September 2019.

b.) Date of invoice-1st October 2019.

c.) Date of entry in books of receiver-18th September 2019.

The Time of Supply in this case will be 15th September 2019.

2. In case of supply of services, the Time of Supply shall be the earliest of the following dates:

• The date of the payment.
• Or the date immediately after 60 days from the supplier’s invoice date.

The date of entry in the accounts book of the recipient will be taken as the Time of Supply if it is not possible to determine otherwise.

Example:

1. Date of payment: 15th October 2019.
2. Consider the date immediately after 60 days from the date of issue of an invoice. ( Suppose the date of the invoice is 15th August 2019, then 60 days from this date will be 14th October 2019 ).
3. Date of entry in books of the receiver: 18th October 2019.

The Time of Supply of Service, in this case, will be 14th October 2019.

RCM Provisions under GSTR Forms - GSTR1-GSTR2

It is an old system carried forward from the VAT days and here the receiver pays the taxes, so the supplier cannot claim the input tax credit.

In the case of importers of goods, taxes need to be paid under the Reverse Charge Mechanism to the Government on the import. This is in addition to the import duties.

GSTR1 is a monthly or quarterly return that is filed by every dealer and summarises all sales (outward supplies) of a taxpayer. It mentions the details of the charges pertaining to the inward supply of goods or services. Form GSTR2 mentions the details of the inward supply.

Irrespective of the turnover, a person who is liable to pay tax under the Reverse Charge Mechanism, needs to be registered under GST.

If the supplier certifies that the input tax credit will be used only for the growth of the business, only then he will get the credit under reverse charge.

The list of services included under the Reverse Charge Mechanism are:

• Goods transport agencies.
• Recovery Agents.
• Director of a Company or Corporate body.
• An advocate firm or an advocate
• Insurance Agents.

Current Situation in the Reverse Charge Mechanism

Presently, the Reverse Charge Mechanism is applicable in service tax for services like insurance, recruitment agencies, transport services, etc. There is no concept of partial Reverse Charge, and here it differs from service charge. The recipient has to pay the full tax on the supply.

Earlier, it was difficult to collect service tax from the numerous unorganised sectors, for instance goods transportation. Now services have come under GST, and tax collections have increased through the Reverse Charge Mechanism.

Also read:
GST Certificate: Benefits, Importance & Steps to Download
GST Return: Who should file? Due Dates and Other Important Dates
Impact of GST on different sectors