Under Service Tax regime, Reverse Charge Mechanism (RCM) was applicable to certain services and not goods. There were 15 services in which reverse charge is applicable under service tax such as works contract service, Insurance agent service, manpower supply service, Goods Transport Agency etc.
Under GST, reverse charge mechanism covers not only service but also goods under its scope. In GST, supplier will be liable to collect tax on goods and services provided. But government has specified certain goods and services under which tax has to paid under reverse charge basis irrespective of whether supplier is GST registered or not.
Situations where the reverse charge will apply
Goods subject to reverse charge – Notification no. 04/2017 dated 28th June 2017
| Tariff item, sub-heading, heading or Chapter | Description of supply of Goods | Supplier of Goods | Recipient of supply |
|---|---|---|---|
| 0801 | Cashew nuts, not shelled or peeled | Agriculturist | Any registered person |
| 1404 90 10 | Bidi wrapper leaves(tendu) | Agriculturist | Any registered person |
| 2401 | Tobacco leaves | Agriculturist | Any registered person |
| 5004 to 5006 | Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn. | Any registered person |
| - | Supply of lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent. |
Services subject to reverse charge- Notification No.13/2017-CT dated 28th June 2017
| Category of Supply of Services | Supplier of service | Recipient of Service |
|---|---|---|
|
Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road |
Goods Transport Agency | Any factory, any society, any co-operative society, any person registered under the GST, any body corporate established, by or under any law, any partnership firm whether registered or not, and any casual taxable person. |
| Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory | An individual advocate including a senior advocate or firm of advocates | Any business entity located in the taxable territory. |
| Services supplied by an arbitral tribunal to a business entity | An an arbitral tribunal | Any business entity located in the taxable territory. |
| Services supplied 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 | The company or a body corporate located in the taxable territory. |
| Services provided by way of sponsorship to any body corporate or partnership firm | Any Person | Any body corporate or partnership firm located in the taxable territory. |
|
Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, -
|
Central Government, State Government, Union territory or local authority | Any business entity located in the taxable territory. |
| Services supplied by an insurance agent to any person carrying on insurance business. | An insurance agent | Any person carrying on insurance business, located in the taxable territory. |
| Services supplied by a recovery agent A recovery agent to a banking company or a financial institution or a nonbanking financial company. | A recovery agent | A banking company or a financial institution or a non-banking financial company, located in the taxable territory. |
| 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 | Author or music composer, photographer, artist, or the like | Publisher, music company, producer or the like, located in the taxable territory. |
The more important RCM service viz., works contract service, security services and manpower supply services are now out of RCM and the provider has to pay GST.
However, another important and troublesome feature in GST is Reverse Charge on procurement of goods or services to a registered person from unregistered person. This is discussed below:
Section 9(4) of CGST/SGST Act provides that in case of procurement of goods or services to a registered person from an unregistered person then the registered person shall pay GST on reverse charge basis as if he is the person liable for paying the tax.
This provision of section 9(4) is applicable for all the procurement whether same is for procurement of raw material or any other direct or indirect expenses.
Section 9(4) shall come into play if the below conditions are met:
- There should be supply.
- Supply should be in respect of taxable goods or services or both.
- Supply must be by unregistered person.
- Supply must be to registered person.
If the supply involved exempt goods or services or both this section won’t be applicable.
Vide Notification No.08/2017 dated 28/06/2017, reverse charge provisions would not be applicable if the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or not registered, does not exceed Rs.5,000/- in a day. This limit of Rs.5,000/- appears to be only for taxable supplies by unregistered person. If any exempt supply is procured then such amount shall not be considered for the limit of Rs. 5000.
Registration:
All persons procuring goods/services notified above, on which GST is payable on reverse charge, have to be registered mandatorily as per Section 24 (iii) of CGST/SGST law, irrespective of the threshold.
Registration All persons procuring gods/services notified above, on which GST is payable on reverse charge, have to be registered mandatorily as per Section 24 (iii) of CGST/SGST law, irrespective of the threshold.
If the recipient doesn’t require the input tax credit, then it is advisable to receive the supplies from a person under composition scheme.
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 –
The date of receipt of goods OR the date of payment OR the date immediately after 30 days from the date of issue of invoice by the supplier
If it is not possible to determine the time of supply as per above, the time of supply shall be the date of entry in the books of account of the recipient.
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 60 days from the date of issue of invoice by the supplier
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.
Input tax credit on reverse charge supplies
Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used in the course or furtherance of business. The service recipient (i.e., who pays tax under reverse charge) can avail input tax credit.
Invoice in case of reverse charge
As per section 31(3)(f), person discharging GST liability under reverse charge under section 9(3) or 9(4) shall issue an invoice in respect of goods or services or both received by him from the supplier. Further as per 31(3) (g) shall issue a payment voucher at the time of making payment to the supplier
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