(RCM) Reverse Charge Under GST, Reverse Charge Mechanism Under GST 

Before we should understand what is Reverse Charge Mechanism Under GST we should understand what is Reverse Charge Mechanism

Under normal supplies, where supplier collects the tax from the recipient and deposits the same after adjusting his output tax liability with input tax credits, but under the reverse charge mechanism liability to pay tax on a particular supply is on the recipient of supply.

This concept of Reverse charge, is common to many countries where it is applicable on imports of services and intangible properties. Normally, the supplier pays the tax on supply. In certain cases, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed and because of that it is called reverse charge.

The purpose of this charge is to increase tax compliance and tax revenues. Earlier, the government was unable to collect service tax from various unorganized sectors like goods transport. Compliances and tax collections will therefore be increased through reverse charge mechanism.

The concept of reverse charge mechanism was also present in service tax. In GST regime, reverse charge is applicable for both services as well as goods.

In the normal course of business, the person supplying goods or services is required to deposit GST. But by virtue of Sec 9(4) & 9(5) of the CGST Act, 2017 and in terms of Sec 5(3) & 5(4) of the IGST Act, 2017, the liability to deposit GST has been vested on recipient of goods & services.

(RCM) Reverse Charge Under GST, Reverse Charge Mechanism Under GST:

As per Section 2 (98 ) of 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

Under Reverse charge liability to pay tax is on the recipient of goods/ services instead of the supplier. Reverse charge may be applicable for both services as well as goods.

GST REGISTRATION UNDER RCM

All persons who are required to pay tax under reverse charge have to register for GST, irrespective of the threshold

[Threshold:- Turnover in a financial year exceeds Rs 20 lakhs (Rs 10 lakhs for North Eastern and hill states)]

Time of supply for goods under reverse charge:

In case of reverse charge, the time of supply shall be the earliest of the following dates

(a) the date of receipt of goods OR

(b) the date of payment OR

(c) the date immediately after 31st day (in case of goods, and 61st day in case of services) from the date of issue of invoice by supplier

If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.

For clause (b)- the date of payment shall be earlier of-

1. The date on which the recipient entered the payment in his books

OR

2. The date on which the payment is debited from his bank account

Example:

1. Date of receipt of goods 10th May 2018

2. Date of payment 15th July 2018

3. Date of invoice 1st July 2018

4. Date of entry in books of receiver 18th May 2018

Time of supply of goods 10th May 2018

If for some reason time of supply could not be determined supply under (1), (2) or (3) then it would be 18th May 2018 i.e., date of entry

Time of supply for services under reverse charge:

In case of reverse charge, the time of supply shall be the earliest of the following dates

(a) The date of payment

OR

(b) The date immediately after SIXTY days from the date of issue of invoice by the supplier (30 days for goods)
If it is not possible to determine the time of supply under (a) or (b), the time of supply shall be the date of entry in the books of account of the receiver of service.

For clause (a)- the date of payment shall be earlier of-

1. The date on which the recipient entered the payment in his books

OR

2. The date on which the payment is debited from his bank account

Example for reverse charge:

1. Date of payment 15th July 2018

2. Date of invoice 1st July 2018

3. Date of entry in books of receiver 18th July 2018

Time of supply of service 15th July 2018

If for some reason time of supply could not be determined supply under (a) or (b) then it would be 18th July 2018 i.e., date of entry in books.

When supplier is located outside India

In case of associated enterprises, where the supplier of service is located outside India, the time of supply shall be-

1. the date of entry in the books of account of the receiver OR

2. the date of payment

-whichever is earlier

Example for associated enterprises:

XYZ Ltd. in India has setup a subisidiary CAB in Singapore. CAB provided services to XYZ Ltd. for which ABC paid 1,00,000 SGD on 5th July 2017. It recorded on 8th July 2017. XYZ will pay reverse charge as CAB is located outside India.

Time of supply will be 5th July 2017.

Example to understand reverse charge

Let us assume that supply of cement will attract Reverse Charge. Now a supplier dispatched the goods on 1st August, received by the buyer on August 5, payment was made on 25th July (Advance Payment) and invoice raised by supplier on 1st August.

Time of Supply under reverse charge would be 25th July and must be included in the return for July period though the goods are received in August.

Treatment of Reverse Charge under GST:

List of Goods on which Reverse Charge is Applicable Under GST:

For the first time under GST, reverse charge is applicable on goods.

The Central Government, vide below mentioned notification has specified the supply of following goods under reverse charge.

Following goods are notified u/s 9(3) of CGST Act & u/s 5(3) of IGST Act,2017

Notification No. 4/2017-Central Tax (Rate) Dated 28^th June 2017 ,
Notification No. 36/2017-Central Tax (Rate) Dated 13^th October 2017 and
Notification No. 43/2017-Central Tax (Rate) Dated 14^th November 2017
Notification No. 11/2018- Central Tax (Rate) Dated 28^th May 2018

List of Services on which Reverse Charge is Applicable Under GST:

Following Services are notified under reverse charge mechanism of CGST Act and IGST Act, 2017

List of Services on which Reverse Charge is Applicable Under GST in Excel

Input Tax Credit under GST for RCM:

1.) Tax paid under reverse charge mechanism is available as ITC to the registered recipient person.

2.) The service recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services.

3.) The only condition is that the goods and services are used or will be used for business or furtherance of business.

4.) ITC cannot be used to pay output tax, which means that payment mode is only through cash under reverse charge.

Reverse Charge Entries Under GST:

Entry for Purchase of Goods / Services Availed:

1.) If purchases/services are availed within the state (Intra State) 

Purchase / Expense A/c. ———10,000

Input CGST A/c. ——————- 900

Input SGST A/c.  ——————- 900

To Creditors A/c. or Cash/Bank Ac —— 10,000

To CGST A/c Payable ———————–900

To SGST A/c Payable ———————–900

2.) If purchases / services are availed from other state (Inter State) 

Purchase / Expense A/c. ———10,000

Input IGST A/c. ——————– 1,800

To Creditors A/c. or Cash/Bank A/c. —— 10,000

To IGST A/c Payable ———————–1,800

3.) If purchases / services are availed from other Country (Import)

Purchase / Expense A/c. ———10,000

Input IGST A/c. ——————– 1,800

To Creditors A/c. or Cash/Bank A/c. —— 10,000

To IGST A/c Payable ———————–1,800

To see GST Accounting Entries, How to Pass Accounting Entries Under GST Click Here