Difference Between Forward Charge and Reverse Charge in GST

Forward charge mechanism and reverse charge mechanism are two methods of collecting goods and services tax. However, there are several differences between the two mechanisms. In this article, we will take a look at the forward charge mechanism in GST and reverse charge mechanism in GST and explore the differences between forward charge and reverse charge.

What is forward charge mechanism in GST?

Forward charge mechanism is also referred to as normal charge mechanism or forward mechanism. The supplier has the liability to pay tax under forward charge. The process of collecting and remitting GST under forward charge is entrusted to the supplier. Under the mechanism, the recipient is relieved from the direct burden of tax payments. However, the recipient still has to pay the supplier the tax component on the invoice, while the latter remits the same to the government.

Examples of transactions covered under forward charge

Let's consider a practical scenario where a customer purchases a car from a dealership. The price of the car is ₹300,000. An 18% GST rate is applicable on the sale of the car.

Here's how the tax calculation works:

The GST amount = (Price of Car * GST Rate) / 100

= (₹300,000 * 18) / 100

= ₹54,000

Thus, the GST payable on the purchase of the car is ₹54,000.

Consequently, the total cost incurred by the customer, inclusive of GST, would be:

Total Cost = Price of Car + GST Amount

= ₹300,000 + ₹54,000

= ₹354,000

In this transaction, the dealership collects the total amount of ₹354,000 from the customer, which includes the price of the car and the GST component. The dealership is then responsible for remitting the GST portion of ₹54,000 to the government under the forward charge mechanism.

What is reverse charge mechanism in GST? 

Under the reverse charge mechanism, the liability falls on the recipient to pay the tax amount directly to the government. This is the opposite of the forward charge mechanism where the supplier is obligated to remit the GST to the government. Here, the recipient is liable for the process of both self-invoicing and payment of GST under reverse charge. In case there is any delay from the recipient side, the supplier holds no responsibility to pay the tax. 

Examples of transactions covered under reverse charge 

Let's consider a specific transaction involving the supply of cashew nuts, not shelled or peeled, categorised under Tariff Item 0801. Suppose an agriculturist sells 100 kg of cashew nuts to a GST-registered person at a rate of ₹200 per kg, making the total value of the supply ₹20,000.

Under the reverse charge mechanism, the liability to pay GST shifts from the supplier (agriculturist) to the recipient (registered person). The applicable GST rate on cashew nuts is 5%. Therefore, the GST payable by the registered person can be calculated as follows:

GST Payable = (Value of Supply  GST Rate) / 100

= (INR 20,000  5) / 100

= INR 1,000

The registered person is required to pay INR 1,000 as GST to the government under the reverse charge mechanism.

Key differences between forward charge and reverse charge in GST

Let us take a look at the key differences between forward charge and reverse charge in GST to get a better understanding: 

To sum it up, the difference between forward charge and reverse charge in GST lies in who pays the tax to the government, the supplier or the recipient. Forward charge puts the responsibility on the supplier, offering relief to the recipient, while reverse charge shifts the burden to the recipient. Understanding these differences is vital for businesses to navigate GST regulations effectively.