Reverse Charge UnderGST

Reverse Charge under GST | Explained with Examples

Reverse Charge Under GST: Usually, GST should be collected by the person who is selling goods and services. Although in some cases, GST should be managed by the buyer of goods or services, not by the seller. This is called RCM in short or Reverse Charge Mechanism.

In some cases of trade through E-commerce administrators such as Uber, Ola, etc., the tax is not accumulated and deposited by the seller but by the e-commerce operator. Such cases are not named reverse charges.

RCM is Applicable in which Cases?

The notification number and summary are listed below for these two cases where RCM can be applied:

  • 8/2017 of Central Tax (Rate): This notification spares RCM under section 9(4) up to Rs. 5000 per day.
  • 38/2017 of Central Tax (Rate): This notification eliminates the limit of Rs. 5,000 up to Mar 31st, 2018. Therefore, no RCM under section 9(4) is applicable.
  • 10/2018 of Central Tax (Rate): This notification increased the date of exemption to Jun 30th, 2018.
  • 12/2018 of Central Tax (Rate): This notification increases the date of exemption to Sep 30th, 2018.
  • 22/2018 of Central Tax (Rate): This notification increases the date to an exemption to Sep 30th, 2019.

Note: Supply of specified goods or services notified by the government [section 9(3)]. In the case of a registered person purchasing goods or services from an unregistered person. RCM is also applicable to composition dealers, as mentioned under section 9(4).

This section is postponed till Sept 30th, 2019, via notifications as under

Buying any Goods or Services from Unregistered Persons

When a registered person buys any goods or services from an unregistered person, such a registered person must pay GST on a reverse charge basis. An unregistered dealer cannot make interstate sales; therefore, such sales are mostly intra-state sales.

Even though the government has given a lease of Rs. 5,000 per day. Therefore, if a total procurement of less than Rs. 5,000 is made in a day from an unregistered person, and then there is no need to pay tax on RCM. This limit is a total of Rs. 5,000 from every supplier and not per supplier according to notification No. 8/2017 of Central Tax (Rate).

Note: The registered person has to furnish a self-invoice.

Purchase of Specified Product or Services from a Person

For some products/services, reverse charge is expressly provided. In such cases, the receiver pays a reverse amount even if the seller is a registered person subjected to the conditions specified for such product or service.

The person needed to pay tax under RCM under this heading has to register irrespective of the threshold limit. The seller of services or goods on which covered under this point must mention in the tax invoice that GST is payable on reverse charge.

Example: A trader registered in GST takes GTA or Goods Transport Agency for services. 10,000. This service is recorded under the reverse charge list; therefore, trader has to pay tax at 18% on Rs. 10,000 on Reverse Charges. However, such GST is also allowed as an input tax credit in the same month, and therefore the net liability of tax will not increase.

GST Rate

The tax rate to be used is applicable on such goods or services. GST Compensation Cess on reverse charge is also relevant.

  • If the goods or services bought are exempted or nil rated, no tax is payable under RCM.
  • Composition dealers are required to pay reverse charges at standard rates of 5%, 12%, 18%, 28%, and not at composition rates of 1% or 5%.

GST Input Tax Credit Paid in Reverse Charge Mechanism

Any amount paid as the reverse charge is permitted as input tax credit subject to the condition where credit is allowed in normal situations to such business.

Example: Composition dealers are not permitted to take the input tax credit in normal circumstances. Therefore, they are not allowed to take the input tax credit on GST amount paid on reverse charge.

Besides, the amount of GST under Reverse charge is paid in cash only and cannot be reimbursed from ITC. The net result is that the minimum amount of GST payable in a tax period is the reverse charge in that period.

Advance paid for reverse charge supplies are also applicable to GST. The person making an advance payment must pay tax on a reverse charge basis.

Accounting Entries meant for Reverse Charge Mechanism

At time of purchasing such goods/ services

  1. Purchase A/c Dr
  2. Input SGST A/c Dr
  3. Input CGST Ac Dr
  4. To Creditor A/c
  5. To Output SGST RCM A/c
  6. To Output CGST RCM A/c

In case of the purchase of an asset, the specified account will be debited. The Output SGST RCM A/c is applied in place of standard Output SGST A/c to differentiate taxes as taxes under RCM cannot be adjusted against input taxes and paid in cash.

During Payment of GST

  1. Output SGST RCM A/c
  2. Output CGST RCM A/c
  3. To Cash/Bank A/c

Invoice Under RCM

A registered person is responsible for paying tax under RCM (both for supplies on which the tax must be paid under RCM and supplies received from unregistered persons). The registered person must issue an invoice regarding goods or services. Such a registered person regarding the before-mentioned supplies also has to issue a payment voucher when making his payment to the supplier.

There is no specific format for such self-invoicing. The exact form which the person is using for invoicing should be used. Only the heading should be changed.

Registration Requirements

If a seller only supplies goods and services on which GST is levied on a reverse charge basis, in that case, such a person is not needed to take registration even if the turnover exceeds the specified limits.

Example: Suppose a farmer sells cashew nuts to a trader. The trader is liable to pay GST on an RCM basis. But, if a farmer is not engaged in trading other taxable goods, he cannot take registration under GST. as per Notification No. 5/2017 of Central Tax.

Time Of Supply

When RCM Tax is to be Paid

For the Reverse Charge tax under GST, it is essential to ascertain the time of supply since GST would be needed to be deposited to the Govt within 20 days from the end of the month.

In case of Goods Supply

In the case of Reverse Charge, the time of supply would be the earliest of the following.

  • The date of receiving goods
  • The date of payment
  • The date directly after 30 days of issue of invoice by the supplier.

If it is not likely to determine the time of supply for the points above, the time of supply shall be the entry date in the books of accounts of the recipient.

In the case of Service Supply

In the subject of the Reverse Charge Mechanism, the time of supply would be the earliest for the following:

  • For the date of payment
  • For the date directly after 60 days from the date of issuing of the invoice by the supplier.

If it is not likely to determine the time of supply for the points above, the time of supply shall be the entry date in the books of accounts of the recipient.

Date of Payment

For the calculation of Date of Supply, the Date of Payment should be earlier of the following:

  • The date of payment debit from their bank account
  • The date of entry of payment in the recipient’s book.

GST on Reverse Charge – A List of Services

Note: Service tax percentage owed by the provider is nil in this case

Service tax percentage owned by anyone apart from the service provider is 100%

The Supplier and Receiver of Services for every Section are listed below:

  • Services provided by anyone located in a non-taxable area and received by anyone located in a taxable area except non- assessee recipient (OIDAR)
  • Supplier can be anyone who is located in a non-taxable area
  • Receiver can be any person located in the taxable territory other than non-assessee online recipient (Business Recipient)
  • Services provided by a GTA or goods transport agency in respect of transportation of goods by road
  • Supplier is Goods Transport Agency (GTA)

Receiver may be:

  1. Any factory which is registered or governed by the Factories Act of 1948.
  2. Any society registered which is under the Societies Registration Act of 1860 or below any other laws in force in any part of India.
  3. Any cooperative society is established by or under any law.
  4. Any individual registered under CGST or SGST or UTGST Act.
  5. Any corporate established by any law or under any law.
  6. Any partnership firm, which is registered or not following any law, including an association of several people.

Casual chargeable person

  • Services are provided by an individual advocate or firm of advocates through legal services, directly or indirectly.
  • Supplier can be an individual advocate or firm of advocates
  • Receiver can be any business entity.

Services provided by an arbitral tribunal

  • Supplier is an arbitral tribunal
  • A receiver is any business entity.

Sponsorship services

  • Supplier can be any person.
  • Receiver can be any corporate or partnership firm.

Services provided by Government or local authority apart from renting of immovable property or services are specified below-

  1. Services by the Department of Posts through speed post, life insurance, express parcel post, and agency services provided to an individual other than the Government.
  2. services concerning an aircraft or a vessel, inside or outside the precincts of a port or an airport;

transport of goods or passengers

  • Supplier can be Government or local authority
  • Receiver can be any business entity.

Services provided to the said company or the body corporate by a director of a company or a body corporate

  • Supplier should be a director of a company or a body corporate
  • Receiver should be a company or a body corporate.

Services provided to any person carrying on insurance business by an insurance agent

  • Supplier should be insurance agents
  • Receiver can be any person having an insurance business.

Services provided by any recovery agent to a financial banking company or a non-banking financial company

  • Supplier should be a recovery agent
  • Receiver may be financial banking company or a non-banking financial company.

Services by the transportation of goods by a vessel from a location outside India up to the customs station of clearance in India.

  • Supplier can be a person located in a non-taxable area to a person located in a non-taxable area.
  • The receiver can be an importer as defined under clause (26) of section 2 for the Customs Act, 1962.

Services for Transfer or allowing the use of copyright as covered under clause (a) of subsection (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical, or artistic works.

  • Supplier is an author or music composer, photographer, artist, etc
  • Receiver is a publisher, Music company, or Producer.

Services for Radio taxi or Passenger Transport Services provided through electronic commerce operators.

  • Supplier may be a taxi driver or rent a cab worker.
  • Receiver maybe anyone.

GST on Reverse Charge | A List of Goods

Tariff item, title or
Section
Account of Goods Supply Goods supplier Receiver of Supplies
0801 Cashew nuts that are not shelled or peeled An agriculturist Any registered person
1404 90 10 Bidi wrapper
leaves (tendu)
An agriculturist Any registered person
2401 Tobacco leaves An 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
none Lottery supply State Government, Union Territory local authority Lottery distributor/selling agent.
Purposes of this entry, lottery distributor or selling agents are the same in clause (c) of Rule 2 of the Lotteries Rules, 2010, made under the provisions of sub section 1 of section 11 of the Lotteries (Regulations) Act, 1998 (17 of 1998).

 

 

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