Complete Guide on GST Reverse Charge Mechanism
What is Reverse Charge Mechanism(RCM)?
Under taxation system, RCM refers to a process in which an organized business (registered) takes over the burden of tax compliance of an unorganized business (unregistered). Under Reverse Charge mechanism a recipient of a supply is generally liable to pay taxes.
Under GST, the government has specified various scenarios where reverse charge applies. They are:
- Where goods or service is supplied by an unregistered person to a registered person
- few prescribed supplies of goods and services
- Supply of services through an E-Commerce operator (like Bro4U)
While calculating tax liability under GST, apart from other things, “place of supply” and “time of supply” is very important. There is no separate provision of “place of supply” for reverse charge transactions. However, “time of supply” for reverse charge transaction is prescribed separately. Let us read it one by one.
RCM, where goods or service is supplied by an unregistered person to a registered person [u/s 9(4)]
In order to increase the tax base, Govt. is trying to merge those unorganized sectors into an organized sector. As per section 9(4) of CGST Act, 2017 every registered person is liable to pay GST (CGST+SGST) on every inward supply from a un registered person. Not only this, a registered person is also liable to issue tax invoice and Payment vouchers on every inward supply from such unregistered person.
This will discourage registered person from procuring supplies from an unregistered person. In order to protect the business, unregistered persons will be compelled to get GST registration.
However, the department has decided to provide a relief by giving an exemption of Rs.5000/- per day in respect of supplies received from an unregistered person. Example: Mr. Ram (registered) purchase goods from 3 unregistered persons valuing Rs.1500, Rs.2000, Rs.1000 in a day. Here Mr. Ram will not be liable to pay tax under RCM because the total purchase (1500+2000+1000) in a day does not exceed Rs.5000.”
RCM, Where a person receives supplies of specified goods or services [u/s 9(3)]
The government has specified through notification certain supplies of goods and services on which Reverse Charge mechanism applies. Get the List of such goods on which RCM applies- HERE and the list of services on which RCM applies-HERE.
“Under Reverse Charge Mechanism, the Recipient (buyer) will be liable to comply all the provision of GST”.
Credit of Tax paid on Reverse Charge
Tax paid on the basis of Reverse Charge Mechanism shall be eligible for Input tax credit provided the goods or services are used or will be used in the furtherance of his business. A composite dealer is not eligible for any input credit whether it be on reverse charge basis or forward charge basis.
Issue of Invoice (not tax invoice) and payment voucher under RCM
Every registered person who is liable to pay tax under reverse charge [section 9(3) & (4)] shall issue invoice while purchasing and payment voucher while making payment to the suppliers.
RCM, Where services are provided through an E-commerce platform [u/s 9(5)]
If any intra-state service is provided through an E commerce than such E commerce platform shall be liable to pay GST (CGST+SGST) in respect of such supplies.
Example: An E-commerce called as bro4U provides some sorts of personal service to its user through its certified professional. In this case, certified professionals are the service provider and Bro4U’s user is the recipient. Generally, both the service provider and recipient are the unregistered person in these situations. Section 9(5) of CGST Act, 2017 declare E commerce (bro4U) as the service provider in these situations.
“These E Commerce can charge GST (CGST+SGST) from their user or consumers through TAX invoices. In Tax invoice, e commerce must mention that the tax is payable on reverse charge.”
Time of Supply under Reverse charge where goods are involved
Earlier of the following dates:
- Date of receipt of goods
- Payment date(earlier of date of entry in the recipient’s book or date of debit in bank a/c)
- 30 days from the issue of invoice or any other documents
If it is not possible to determine the time of supply under (1), (2) or (3), the time of supply shall be the date of entry in the books of account of the recipient.
Time of Supply under Reverse charge where services are involved
Earlier of the following dates:
- Payment date (earlier of date of entry in the recipient’s book or date of debit in bank a/c)
- 60 days from the issue of invoice or any other documents
If it is not possible to determine the time of supply under (1) or (2), the time of supply shall be the date of entry in the books of account of the recipient.
In case of supply of service by associated enterprises(Example: Foreign branch of TCS), 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(Indian Company i.e TCS) or
- the date of payment,
-whichever is earlier.