Reverse Charge Under GST, Reverse Charge Mechanism Under GST - GST In India

Thursday, 22 February 2018

Reverse Charge Under GST, Reverse Charge Mechanism Under GST

(RCM)Reverse Charge Under GST, Reverse Charge Mechanism Under GST: Before we should understand what is Reverse Charge Mechanism Under GST we should understand what is Reverse Charge Mechanism?
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What is Reverse Charge Mechanism?

Under normal supplies, where supplier collects the tax from the recipient and deposits the same after adjusting his output tax liability with input tax credits, but under the reverse charge mechanism liability to pay tax on a particular supply is on the recipient of supply.
This concept of Reverse charge, is common to many countries where it is applicable on imports of services and intangible properties. Normally, the supplier pays the tax on supply. In certain cases, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed and because of that it is called reverse charge.
The purpose of this charge is to increase tax compliance and tax revenues. Earlier, the government was unable to collect service tax from various unorganized sectors like goods transport. Compliances and tax collections will therefore be increased through reverse charge mechanism.
The concept of reverse charge mechanism was also present in service tax. In GST regime, reverse charge is applicable for both services as well as goods.
In the normal course of business, the person supplying goods or services is required to deposit GST. But by virtue of Sec 9(4) & 9(5) of the CGST Act, 2017 and in terms of Sec 5(3) & 5(4) of the IGST Act, 2017, the liability to deposit GST has been vested on recipient of goods & services.

Reverse Charge under GST:

As per Section 2 (98 ) of CGST Act 2017:
  • the liability to pay tax by the recipient of supply of goods or services or both
  • instead of the supplier of such goods or services
Under Reverse charge liability to pay tax is on the recipient of goods/services instead of the supplier. Reverse charge may be applicable for both services as well as goods.
GST REGISTRATION UNDER RCM
All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold
[Threshold:- turnover in a financial year exceeds Rs 20lakhs (Rs 10 lakhs for North eastern and hill states)]
Situations Where The Reverse Charge Will Apply under GST
As of now there are three situations under where Reverse charge will apply under GST:
1. Unregistered dealer selling to a registered dealer under GST
In such a case, the registered dealer has to pay GST on the supply on behalf of unregistered dealers. (Reverse Charge in case of Unregistered dealers has been suspended till 31.03.2018. This decision has been taken in 22nd council meeting dated 06.10.2017)
2. Services through an e-commerce operator
If an e-commerce operator supplies services then reverse charge will apply on the e-commerce operator. He will be liable to pay GST.
For example, Ola Cabs enlist drivers to ply their cars. Drivers are providing chauffeur/driving services to Ola. Ola is the service receiver and pays drivers a share of the fare collected from passengers. Ola pays GST on the drivers’ services on reverse charge basis.
If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.
3. CBEC has issued a list of services on which reverse charge is applicable.

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—
(a) the date of receipt of goods OR
(b) the date of payment OR
(c) the date immediately after 31st day (in case of goods, and 61st day in case of services) from the date of issue of invoice by supplier
If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.
For clause (b)- the date of payment shall be earlier of-
1. The date on which the recipient entered the payment in his books
OR
2. The date on which the payment is debited from his bank account
Example:
1. Date of receipt of goods 10th May 2018
2. Date of payment 15th July 2018
3. Date of invoice 1st July 2018
4. Date of entry in books of receiver 18th May 2018
Time of supply of goods 10th May 2018
If for some reason time of supply could not be determined supply under (1), (2) or (3) then it would be 18th May 2018 i.e., date of entry

Reverse Charge Under GST, Reverse Charge Mechanism Under GST

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 SIXTY days from the date of issue of invoice by the supplier (30 days for goods)
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.
For clause (a)- the date of payment shall be earlier of-
1. The date on which the recipient entered the payment in his books
OR
2. The date on which the payment is debited from his bank account
Example for reverse charge:
1. Date of payment 15th July 2018
2. Date of invoice 1st July 2018
3. Date of entry in books of receiver 18th July 2018
Time of supply of service 15th July 2018
If for some reason time of supply could not be determined supply under (a) or (b) then it would be 18th July 2018 i.e., date of entry in books.
When supplier is located outside India
In case of ‘associated enterprises’, where the supplier of service is located outside India, the time of supply shall be-
1. the date of entry in the books of account of the receiver OR
2. the date of payment
-whichever is earlier
Example for associated enterprises:
XYZ Ltd. in India has setup a subisidiary CAB in Singapore. CAB provided services to XYZ Ltd. for which ABC paid 1,00,000 SGD on 5th July 2017. It recorded on 8th July 2017. XYZ will pay reverse charge as CAB is located outside India.
Time of supply will be 5th July 2017.
Example to understand reverse charge
Let us assume that supply of cement will attract Reverse Charge. Now a supplier dispatched the goods on 1st August, received by the buyer on August 5, payment was made on 25th July (Advance Payment) and invoice raised by supplier on 1st August.
Time of Supply under reverse charge would be 25th July and must be included in the return for July period though the goods are received in August.

Treatment of Reverse Charge under GST:


List of Goods on which Reverse Charge is Applicable Under GST:

For the first time under GST, reverse charge is applicable on goods.
The Central Government, vide Notification No.4/2017-Central Tax (Rate) Dated 28th June 2017 and vide Notification No.43/2017-Central Tax (Rate) Dated 14th November 2017 has specifies the supply of following goods, tax on which shall be paid on reverse charge basis by the recipient of such goods, if he is a registered person.
  • Cashew nuts, not shelled or peeled
  • Bidi Wrapper leaves (tendu)
  • Tobacco leaves
  • Silk yarn
  • Supply of Lottery
  • Raw Cotton by Agriculturist

List of Services on which Reverse Charge is Applicable Under GST:

ServiceProvider of  service% of  service tax payable by  service providerRecipient of  Service% of service tax payable by  any person other than the
service provider
Taxable  services provided  or agreed to  be  provided by  any person  who    is   located  in   a non-taxable territory and received    by      any    person located in  the taxable territory other  than  non-assessee online recipient (OIDAR)Any       person who  is located in       a    non- taxable territoryNilAny     person   located   in     the taxable territory other than non-assessee online recipient (Business Recipient)100%
Services provided or  agreed to be      provided by      a     goods transport agency (GTA) in respect     of transportation  of goods by roadGoods Transport Agency (GTA)Nil(a) any factory registered under or  governed by  the Factories Act,  1948;
(b) any society registered under the Societies Registration Act,
1860 or  under any other law for  the time being in force in any part of India;
(c) any co-operative          society established by  or  under  any law;
(d) any person registered under
CGST/SGST/UTGST Act; (e) any body corporate
established, by  or  under any law;  or
(f) any partnership firm  whether registered  or   not  under  any law including association of persons.
(g) Casual taxable person
100%
Services provided or  agreed to be  provided by  an individual advocate or  firm  of  advocates by     way     of    legal     services, directly or indirectlyAn individual advocate or firm   of advocatesNilAny business entity.100%
Services provided or  agreed to be    provided by    an   arbitral tribunalAn        arbitral tribunalNilAny business entity.100%
Sponsorship servicesAny personNilAnybody        corporate         or partnership firm.100%
Services provided or  agreed to be  provided by  Government or local authority excluding, –
(1) renting of immovable property, and
(2) services specified below-
(i)  services      by        the Department of  Posts  by way   of  speed  post, express parcel post, life insurance, and agency services provided to a person other than Government;
(ii)    services in  relation to  an aircraft    or     a    vessel, inside or  outside the precincts of a port or an airport;
(iii)   transport   of    goods   or passengers.
Government
or               local authority
NilAny business entity.100%
Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017 (12 of 2017)Central Government, State Government, Union territory or local authorityNilAny person registered under the Central Goods and Services Tax Act, 2017100%
Services provided or  agreed to be  provided 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
NilA company or a body corporate.100%
Services provided or  agreed to be   provided by   an  insurance agent to  any person carrying on  insurance businessAn  insurance agentNilAny       person     carrying     on insurance business.100%
Services provided or  agreed to be    provided   by    a   recovery agent to  a banking company or  a financial institution or  a non-banking   financial companyA        recovery agentNilA  banking  company or  a financial institution  or   a non- banking financial company.100%
Services by   way   of transportation of  goods  by  a vessel from a  place  outside India   up   to     the   customs station of clearance in IndiaA           person located       in non-taxable territory  to   a person located       in non-taxable territoryNilImporter  as  defined under clause (26)  of  section 2  of  the Customs Act,  1962.100%
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 covered under section 13(1)(a) of the Copyright Act,1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like.Author or music
composer,photographer,
artist, or the like
NILPublisher, music
company, produceror the like, located
in the taxable
territory.
100%
Supply of service by the members of overseeing committee to Reserve Bank of IndiaMembers of the Overseeing Committee constituted by the Reserve Bank of IndiaNILReserve Bank of India100%

List of Services on which Reverse Charge is Applicable Under GST in Excel

Input Tax Credit under GST for RCM:

  • Tax paid under reverse charge mechanism is available as ITC to the registered recipient person.
  • The service recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services.
  • The only condition is that the goods and services are used or will be used for business or furtherance of business.
  • ITC cannot be used to pay output tax, which means that payment mode is only through cash under reverse charge.

Reverse Charge Entries Under GST:

Entry for Purchase of Goods / Services Availed:

  • If purchases/services are availed within the state (Intra State) 
Purchase / Expense A/c. ———10,000
Input CGST A/c. ——————- 900
Input SGST A/c.  ——————- 900
To Creditors A/c. or Cash/Bank Ac —— 10,000
To CGST A/c Payable ———————–900
To SGST A/c Payable ———————–900
  • If purchases / services are availed from other state (Inter State) 
Purchase / Expense A/c. ———10,000
Input IGST A/c. ——————– 1,800
To Creditors A/c. or Cash/Bank A/c. —— 10,000
To IGST A/c Payable ———————–1,800
  • If purchases / services are availed from other Country (Import)
Purchase / Expense A/c. ———10,000
Input IGST A/c. ——————– 1,800
To Creditors A/c. or Cash/Bank A/c. —— 10,000
To IGST A/c Payable ———————–1,800
To see GST Accounting Entries, How to Pass Accounting Entries Under GST Click Here

Section wise details of Reverse Charge under GST:

As informed above Reverse charge mechanism has been introduced both for Goods and Services.
  • As per Section 12 (3) Under Reverse Charge Time of supply of goods shall be :
In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely—
(a) the date of the receipt of goods, or
(b) the date on which the payment is made, or
(c) the date immediately following thirty days from the date of issue of invoice by the supplier:
PROVIDED that where it is not possible to determine the time of supply under clause (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.
Explanation.- For the purpose of clause (b), “the date on which the payment is made” shall be the date on which the payment is entered in the books of accounts of the recipient or the date on which the payment is debited in his bank account, whichever is earlier.

  • As per Section 13 (3) Under Reverse Charge Time of supply of services shall be :
In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely-
(a) the date on which the payment is made, or
(b) the date immediately following sixty days from the date of issue of invoice by the supplier:
PROVIDED that where it is not possible to determine the time of supply under clause (a) or (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:
PROVIDED FURTHER that in case of ‘associated enterprises’, 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 or the date of payment, whichever is earlier.
Explanation.- For the purpose of clause (a), “the date on which the payment is made” shall be the date on which the payment is entered in the books of accounts of the recipient or the date on which the payment is debited in his bank account, whichever is earlier.