Reverse Charge Mechanism Availed on Goods and Services Under GST

Reverse Charge Under GST: Payment of GST is generally made by the supplier or the seller of the goods or services. But in Reverse Charge, GST payment is made by the person who is the purchaser of goods or services. It means the person who is liable to pay the tax gets reversed. It is referred Reverse Charge Mechanism (RCM). E-commerce, like the services made by Amazon, or Uber, is the best illustration of Reverse Charge.

Cases Where Reverse Charge Mechanism Is Applicable

Reverse Charge is applicable in two cases:

Reverse Charge applies to the supply of certain goods or services as specified by CBEC [section 9(3)]: When a person who is unregistered sells goods or supplies services to a person registered under GST, in that case, Reverse Charge is applicable. It means that the receiver has to pay GST to the Government directly. The registered dealer needs to self-invoice his/her purchases. For the buyer to make interstate purchases, he needs to pay IGST. It is also applicable to dealers registered under the Composition Scheme of GST [section 9(4)].

Requirements for Registration: A person who supplies goods and services only on which payment of GST is made on a Reverse Charge basis, then registration of such person is not required even if the specified limits of turnover are exceeded. For example, a farmer who is engaged with the cultivation of cashew nuts and sells it to a trader is liable for the payment of GST based on the Reverse Charge Mechanism. The farmer is not liable to register under GST if he is not involved with trading any other taxable goods.

Purchase Of Specific Product Or Services

Reverse Charge is charged explicitly for some services and products. The receiver is liable to pay the reverse Charge even when the seller is registered under GST, subject to conditions specified for such specific products and services.

The person who is liable for the tax paid under Reverse Charge Mechanism has to register first regardless of the threshold limit.

The seller of such products or services covered under this condition has to mention that GST payment is based on Reverse charges on their tax invoices.

Example: A trader registered under GST takes services of Goods Transport Agency (GTA) for ₹15,000. This service falls under the reverse charge list. As a result, the trader has to pay tax @ 18% on ₹15,000 based on Reverse Charge Mechanism. However, there will be no increase in net tax liability as the amount of GST paid is allowed in the same month as an Input tax credit.

At the end of the article, a list of such services and products is provided.

Purchase Of Any Goods/Services From Unregistered Personstrong

When an unregistered person sells any goods or services to a person registered under GST, then the payment of GST has to be made by the registered person on a Reverse Charge basis. When the registered person purchases goods from other states, he has to pay IGST.

There is an exemption of ₹5,000 per day provided by the Government. It means that if a purchase of less than ₹5,000 is made in a day from a person who is not registered under GST, then the person is not liable to pay tax under Reverse Charge. The limit of ₹5,000 is applicable as a total from all suppliers and not from a single supplier. The person registered under GST has to self-invoice the purchases made.

GST Rate

The tax rate already specified on such goods or services is to be used as a tax rate. When Reverse Charge is applicable, GST compensation cess is to be applied. If the purchase of such goods and services falls under exempted or zero percent tax slab, then no tax will be payable under Reverse Charge.

Dealers under Composition Scheme are liable for the payment of Reverse charges at standard tax rates (5%, 12%, 18%, and 28%). The dealer will not be able to pay at composition rates (1% or 5%).

Payment Of Input Tax Credit Of GST Under Reverse Charge Mechanism

An input tax credit means that while paying output tax, a person can reduce the tax that is already paid on inputs. It includes the amount paid as IGST on imports and the amount paid under Reverse Charge. It is to be noted that credit allowed to such business is under normal circumstances. For example, dealers under the composition scheme won’t be able to take input tax credit under normal circumstances. Therefore they are prohibited from taking input tax credit on the amount of GST paid under Reverse Charge.

The amount of GST to be paid under Reverse Charge should be in cash only. It cannot be paid from the available input tax credit. The amount of reserve charge is the amount of GST that is to be paid in that period.

GST is levied on the advance amount that is paid on a Reverse Charge basis. The person is liable to pay tax under a reverse charge basis for advance payment. (Mentioned provision is currently postponed)

Reverse Charge Accounting Entries

Entries To Be Made While Purchasing Such Goods Or Services:

Particulars	Debit (Dr) / Credit (Cr)
Purchase A/c	Dr
Input SGST A/c	Dr
Input CGST A/c	Dr
To Creditor A/c		Cr
To Output SGST Reverse Charge Mechanism A/c		Cr
To Output CGST Reverse Charge Mechanism A/c		Cr

Specific accounts will get debited on the purchase of any asset or any expenses made. Output SGST Reverse Charge Mechanism A/c is used instead of normal Output SGST A/c to distinguish both taxes. It is because taxes charged under Reverse Charge Mechanism cannot be adjusted in opposition to input taxes, and it is to be paid in cash only.

Entries To Be Made While Making Payment Of GST

Particulars	Debit (Dr) / Credit (Cr)
Output SGST Reverse Charge Mechanism A/c	Dr
Output CGST Reverse Charge Mechanism A/c	Dr
To Cash/Bank A/c		Cr

Self-Invoicing Under Reverse Charge Mechanism

A person registered under GST is liable for the payment of tax under reverse Charge to purchase products or services on which amount of tax falls under reverse charge mechanism and purchase of products or services from a person who is not registered under GST. In such cases, the person has to issue an invoice for the products or service received by him/her. The registered person, while making payment to the supplier for such supplies, has to issue a payment voucher.

There isn’t any precise format mentioned for self-invoicing. The structure that the registered person uses for invoicing can be used with specific changes to the heading.

Tax Payment Under Reverse Charge Mechanism On The Basis Of Supply Time:

The specified time to deposit GST with the Government is 20 days from the month-end in which services were dispensed. Therefore it is essential to ascertain the supply time to levy taxes based on Reverse charges under GST.

Payment Date

For the purpose of calculation of Date of Supply, the Date of Payment shall be earlier among the following:-

The date on which the entry of payment is made on the recipient’s books, or
The date on which the amount is debited from his bank account

In Case Of Goods Time Of Supply

Under Reverse Charge, the supply time would be the earliest among the following:

The date of payment, or
The date of receipt of goods, or
The immediate date after 30 days from the date of issue by the supplier.

If the time of supply cannot be determined under (a), (b) or (c) above, then in the recipient’s books of account, the date of entry shall be the time of supply.

In Case Of Services Time Of Supply