The reverse charge mechanism under GST emerges as a distinctive process, where the recipient of goods or services who bears the responsibility of paying the GST, as opposed to the conventional practice where the supplier assumes this obligation. Typically, the supplier takes on the tax payment on the supplied goods or services. However, under the reverse charge mechanism, this dynamic is flipped, and the onus shifts to the recipient, effectively reversing the chargeability.
It’s crucial to note that not all business entities fall under the purview of the reverse charge mechanism under GST. To discern whether a business entity is subject to this mechanism, one can utilise the GST search tool to explore the business constitution associated with a GST number.
Understanding Reverse Charge Mechanism under GST
Reverse charge mechanism under GST registration is very important, particularly in intrastate and interstate transactions. Section 9 of the Central GST and State GST Acts govern intrastate reverse charge scenarios, and Section 5 of the Integrated GST Act is for inter-state reverse charge scenarios.
Reverse Charge Scenarios under GST
The reverse charge mechanism under GST is applicable in the following scenarios:
Supply of Specified Goods and Services by CBIC
Under the authority of Section 9(3) of the CGST Act, the Central Board of Indirect Taxes and Customs (CBIC) has outlined a comprehensive list of goods and services subject to reverse charge. This list basically outlines the not only the particular goods but also services upon which reverse charge mechanism under GST becomes applicable.
Supply from Unregistered Dealer to Registered Dealer
According to Section 9(4) of the CGST Act, if an unregistered vendor supplies goods to a registered person under GST, reverse charge is triggered. In this scenario, the registered buyer is responsible for paying the GST directly, engaging in self-invoicing for the purchases made.
Tax Implications
This includes:
1. Intrastate Purchases
For intrastate purchases, the purchaser is required to pay both Central GST and State GST under the reverse charge mechanism.
2. Interstate Purchases
In the case of interstate purchases, the buyer is obligated to pay the Integrated GST. The government periodically notifies the list of goods or services to which this provision applies.
3. Real Estate Sector
In the real estate sector, the government mandates that promoters must procure 80% of inward supplies from registered suppliers. Shortfalls in registered dealer purchases attract an 18% GST on the reverse charge.
For purchases from unregistered suppliers, such as cement, the applicable tax rate is 28%, regardless of the 80% calculation.
Promoters are liable to pay GST on a reverse charge basis for Transferable Development Rights or Floor Space Index supplied on or after April 1, 2019.
Even individuals not engaged in regular land-related business activities must pay GST on the transfer of development rights, as it is considered a supply of service under Section 7 of the CGST Act.
In the case of outward supply of TDR from one developer to another, GST is applicable at 18% on reverse charge.
Reverse Charge on E-commerce Services in GST
Section 9(5) of the CGST Act outlines the reverse charge mechanism pertaining to the supply of services through an e-commerce operator. This provision places the responsibility of paying Goods and Services Tax on the e-commerce operator under specific circumstances. The services covered by this section include:
1. Transportation Services through E-commerce Platforms:
This includes services provided by radio-taxis, motor cabs, maxi cabs, and motorcycles through e-commerce operators, as exemplified by platforms like Ola and Uber.
2. Accommodation Services via Electronic Commerce:
The provision applies to services offered by hotels, inns, clubs and campsites, or even other commercial places intended for residential or lodging purposes. However, exceptions exist if the service provider is liable for registration for the turnover exceeding the threshold limit. The examples include Oyo and MakeMyTrip.
3. Housekeeping Services through E-commerce Platforms:
Housekeeping services, such as plumbing and carpentry, fall under the reverse charge mechanism when provided through electronic commerce operators. For instance, Urban Company offers services of plumbers, electricians, teachers, beauticians, etc. In this case, the responsibility for GST payment shifts to Urban Company instead of the registered service providers, assuming Urban Company is liable for registration because of the turnover beyond the threshold limit.
4. Liability for E-commerce Operators without Physical Presence:
If an e-commerce operator lacks physical presence in the taxable territory, an individual representing such an operator becomes liable to pay taxes for any purpose. In the absence of a representative, the operator must appoint one, who will then be held accountable for GST payments.
Time of Supply Under Reverse Charge Mechanism under GST for Goods
In the context of goods subject to reverse charge mechanism under GST, the time of supply is determined based on the earliest occurrence of the following events:
1. The date of receipt of goods.
2. The date of payment.
3. The date immediately after a period of 30 days from the date of issue of invoice by the supplier.
Note: The point related to the date of payment is no longer applicable based on Notification No. 66/2017 – Central Tax which was issued on 15th November 2017.
Illustration:
- Date of receipt of the goods: 15th May 2021
- Date of the invoice: 1st June 2021
- Date of the entry in the books of the receiver: 18th May 2021
In this example, the time of supply for the goods will be 15th May 2021.
Time of Supply Under Reverse Charge Mechanism for Services
For services under reverse charge, the time of supply is determined by the earliest of the following events:
1. The date of payment.
2. The date immediately after a period of 60 days from the date of issue of invoice by the supplier.
Illustration:
- Date of the payment: 15th July 2021
- Date immediately after period of 60 days from the date of the invoice (assuming that date of the invoice is 15th May 2021): 14th July 2021
- Date of entry in books of the receiver: 18th July 2021
In this example, the time of supply for the services will be 14th July 2021.
Registration Requirements and Payment Guidelines under Reverse Charge Mechanism under GST
The reverse charge mechanism under GST aims to achieve several objectives. It widens the tax net, extending the levy of tax to encompass various unorganised sectors. Additionally, it allows for the exemption of specific classes of suppliers. Furthermore, it facilitates the taxation of imported services, particularly relevant when the supplier is based outside India.
The registration requirements under the reverse charge mechanism under GST are as follows:
I. Registration Obligations Under RCM
According to Section 24 of the CGST Act, 2017, individuals obligated to pay Goods and Services Tax under the reverse charge mechanism are compulsorily required to register under GST. The standard threshold limits of Rs. 20 lakh or Rs. 40 lakhs, as applicable, do not apply to entities liable under RCM.
II. Parties Liable to Pay GST Under RCM
The responsibility for paying GST under RCM falls on the recipient of goods or services. However, it is imperative for the person supplying the goods to explicitly mention in the tax invoice whether tax is payable under RCM.
III. Points to Consider for GST Payments Under RCM
1. The recipient can claim Input Tax Credit on the tax amount paid under RCM only if the goods or services are used for business purposes or the furtherance of business.
2. Composition dealers are required to pay tax at the normal rates (not composition rates) when discharging liabilities under RCM. Additionally, they are not even eligible to claim any input tax credit for tax paid.
3. GST compensation cess can be applied to the tax payable or paid under RCM.
IV. Input Tax Credit Under RCM
1. A supplier cannot claim the GST paid under RCM as Input Tax Credit.
2. The recipient is eligible to avail ITC on the GST amount paid under RCM for received goods or services, provided they are used or intended to be used for business purposes.
3. The ITC cannot be utilised to offset output GST on goods or services under reverse charge; it must be paid in cash.
Final Thoughts
The Reverse Charge Mechanism under GST framework is a vital aspect, shifting the responsibility of tax payment from the supplier to the recipient for specified transactions. Governed by Sections 9(3), 9(4), and 9(5) of the CGST and IGST Acts, RCM applies to intrastate and interstate transactions, as well as services provided through e-commerce operators. The determination of time of supply, registration requirements, and input tax credit eligibility are crucial components. Reverse charge mechanism under GST streamlines tax compliance, ensuring transparency and accountability in the GST system, although placing added responsibilities on the recipient of goods or services.
