Deepak Gupta | Jun 25, 2017 |
(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.
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)]
Situations Where The Reverse Charge Will Apply under GST
As of now there are three situations under where Reverse charge will apply under GST:
1. Unregistered dealer selling to a registered dealer under GST
Reverse Charge Mechanism (in case of supplies made by unregistered persons to registered persons) will apply, starting from 1st Feb 2019, only on specified goods/services and specified persons.
The list of persons or items subject to the provisions is yet to be notified.
[Click here to read official notification]
2. Services through an e-commerce operator
If an e-commerce operator supplies services then reverse charge will apply on the e-commerce operator. He will be liable to pay GST.
For example, Ola Cabs enlist drivers to ply their cars. Drivers are providing chauffeur/driving services to Ola. Ola is the service receiver and pays drivers a share of the fare collected from passengers. Ola pays GST on the drivers services on reverse charge basis.
If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.
3. CBEC has issued a list of services on which reverse charge is applicable.
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
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.
(RCM) Reverse Charge Under GST, Reverse Charge Mechanism 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 28th June 2017 ,
Notification No. 36/2017-Central Tax (Rate) Dated 13th October 2017 and
Notification No. 43/2017-Central Tax (Rate) Dated 14th November 2017
Notification No. 11/2018- Central Tax (Rate) Dated 28th May 2018
| Sl No. | Description of supply of goods | Supplier of goods | Recipient of goods |
| 1 | Cashew nuts, not shelled or peeled | Agriculturist | Any registered person |
| 2 | Bidi Wrapper leaves (tendu) | Agriculturist | Any registered person |
| 3 | Bidi Wrapper leaves (tendu) | Agriculturist | Any registered person |
| 4 | Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn | Any registered person |
| 4A | Raw Cotton | Agriculturist | Any registered person |
| 5 | Supply of Lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent |
| 6 | Used vehicles, seized and confiscated goods, old and used goods, waste and scrap | Central / State Government, Union territory or a local authority | Any registered person |
| 7 | Priority Sector Lending Certificate | Any registered person | Any registered person |
Following Services are notified under reverse charge mechanism of CGST Act and IGST Act, 2017
| Service | Provider of service | % of service tax payable by service provider | Recipient of Service | % of service tax payable by any person other than the service provider |
| Taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non-assessee online recipient (OIDAR) | Any person who is located in a non- taxable territory | Nil | Any person located in the taxable territory other than non-assessee online recipient (Business Recipient) | 100% |
| Services provided or agreed to be provided by a goods transport agency (GTA) in respect of transportation of goods by road [who has not paid central tax at the rate of 6%] | Goods Transport Agency (GTA) | Nil | (a) any factory registered under or governed by the Factories Act, 1948; (b) any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India; (c) any co-operative society established by or under any law; (d) any person registered under CGST/SGST/UTGST Act; (e) any body corporate established, by or under any law; or (f) any partnership firm whether registered or not under any law including association of persons. (g) Casual taxable person | 100% |
| Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly | An individual advocate or firm of advocates | Nil | Any business entity. | 100% |
| Services provided or agreed to be provided by an arbitral tribunal | An arbitral tribunal | Nil | Any business entity. | 100% |
| Sponsorship services | Any person | Nil | Anybody corporate or partnership firm. | 100% |
| Services provided or agreed to be provided by Government or local authority excluding, – (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers. | Government or local authority | Nil | Any business entity. | 100% |
| Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017 (12 of 2017) | Central Government, State Government, Union territory or local authority | Nil | Any person registered under the Central Goods and Services Tax Act, 2017 | 100% |
| Services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate; | A director of a company or a body corporate | Nil | A company or a body corporate. | 100% |
| Services provided or agreed to be provided by an insurance agent to any person carrying on insurance business | An insurance agent | Nil | Any person carrying on insurance business. | 100% |
| Services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company | A recovery agent | Nil | A banking company or a financial institution or a non- banking financial company. | 100% |
| Services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India | A person located in non-taxable territory to a person located in non-taxable territory | Nil | Importer as defined under clause (26) of section 2 of the Customs Act, 1962. | 100% |
| Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1)(a) of the Copyright Act,1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like. | Author or music composer, photographer, artist, or the like | NIL | Publisher, music company, producer or the like, located in the taxable territory. | 100% |
| Supply of service by the members of overseeing committee to Reserve Bank of India | Members of the Overseeing Committee constituted by the Reserve Bank of India | NIL | Reserve Bank of India | 100% |
| Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs) | Individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm. | NIL | A banking company or a non-banking financial company, located in the taxable territory. | 100% |
| Services provided by business facilitator (BF) to a banking company | Business facilitator (BF) | NIL | A banking company, located in the taxable territory | 100% |
| Services provided by an agent of business correspondent (BC) to business correspondent (BC) | An agent of business correspondent (BC) | NIL | A business correspondent, located in the taxable territory | 100% |
| Security services (services provided by way of supply of security personnel) provided to a registered person: Provided that nothing contained in this entry shall apply to, (i)(a) a Department or Establishment of the Central Government or State Government or Union territory; or (b) local authority; or (c) Governmental agencies; which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services; or (ii) a registered person paying tax under section 10 of the said Act. | Any person other than a body corporate | Nil | A registered person, located in the taxable territory. | 100% |
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.
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
As informed above Reverse charge mechanism has been introduced both for Goods and Services.
As per Section 12 (3) Under Reverse Charge Time of supply of goods shall be :
In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely
(a) the date of the receipt of goods, or
(b) the date on which the payment is made, or
(c) the date immediately following thirty days from the date of issue of invoice by the supplier:
PROVIDED that where it is not possible to determine the time of supply under clause (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.
Explanation.- For the purpose of clause (b), the date on which the payment is made shall be the date on which the payment is entered in the books of accounts of the recipient or the date on which the payment is debited in his bank account, whichever is earlier.
As per Section 13 (3) Under Reverse Charge Time of supply of services shall be :
In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely-
(a) the date on which the payment is made, or
(b) the date immediately following sixty days from the date of issue of invoice by the supplier:
PROVIDED that where it is not possible to determine the time of supply under clause (a) or (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:
PROVIDED FURTHER that in case of associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.
Explanation.- For the purpose of clause (a), the date on which the payment is made shall be the date on which the payment is entered in the books of accounts of the recipient or the date on which the payment is debited in his bank account, whichever is earlier.
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