Know all about Reverse Charge under GST

1. What is Reverse Charge?

Normally, the supplier of goods or services pays the tax on supply. In the case of Reverse Charge, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed.

2. When is Reverse Charge Applicable?

2.1. Supply from an Unregistered dealer to a Registered dealer

If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier.

Points to keep in mind:

An unregistered dealer cannot make interstate supplies. This means that Reverse Charge in this case will apply only in case of intra-state supply by an unregistered dealer.

Only if the total supply from unregistered person exceeds Rs 5,000 in a day, then reverse charge will be applicable (Notification No.8/2017-Central Tax)

2.2. Supply of Specific Goods or Services

2.2.1. Services through an e-commerce operator

If an e-commerce operator supplies services then reverse charge will be applicable to the e-commerce operator. He will be liable to pay GST.

For example, UrbanClap provides services of plumbers, electricians, teachers, beauticians etc. UrbanClap is liable to pay GST and collect it from the customers instead of the registered service providers.

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.

2.2.2. Supply of certain goods and services specified by CBEC

CBEC has issued a list of goods and a list of services on which reverse charge is applicable.

 

3. Characteristics Of Reverse Charge

3.1  What happens if the receiver of goods and/or services is required to pay tax under Reverse Charge but is not a registered dealer?

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 20 lakhs (Rs 10 lakhs for North eastern and hill states)

3.2   Is Input Tax Credit allowed under Reverse Charge?

Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The recipient (i.e., who pays reverse tax) can avail input tax credit.

3.3. How to determine Time of Supply under Reverse Charge?

Time Of Supply in case of Goods

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 THIRTY days from the date of issue of invoice by the 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.

*The date of payment shall be earlier of:

• The date on which the recipient entered the payment in his books OR
• The date on which the payment is debited from his bank account

Illustration:

1. Date of receipt of goods 15th May 2018
2. Date of payment 15th July 2018
3. Date of invoice 1st June 2018
4. Date of entry in books of receiver 18th May 2018

The Time of supply of service in this case will be 15th 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

Time Of Supply in case of Services

In case of reverse charge, the time of supply shall be the earliest of the following dates:

(1) The date of payment** OR

(2) The date immediately after SIXTY days from the date of issue of invoice by the supplier

If it is not possible to determine the time of supply under (1) or (2), the time of supply shall be the date of entry in the books of account of the recipient.

The date of payment shall be earlier of:

• The date on which the recipient entered the payment in his books  OR
• The date on which the payment is debited from his bank account

Illustration:

1. Date of payment 15th July 2018
2. Date of invoice 15st May 2018
3. Date of entry in books of receiver 18th July 2018

The Time of supply of service in this case will be 15th May 2018

If for some reason time of supply could not be determined supply under (1) or (2) then it would be 18th July 2018 i.e., date of entry in books.

3.4. Details to be mentioned in the Tax Invoice by the Supplier

The supplier must mention in his tax invoice if the tax is payable on reverse charge

 

4. Reverse Charge Case Study

Consider a supply of cashews by an agriculturist to a buyer. Cashews are listed by CEBC as goods that attract Reverse Charge.

Now let us assume that :

• The supplier dispatched the goods on 1st August
• The buyer received the goods on August 5
• The payment was made on 25th July (Advance Payment)
• Invoice was raised by the supplier on 1st August.

Time of Supply under reverse charge would be 25th July and must be included by the buyer in his July Returns, even though the goods are received in August.

The Buyer can avail input tax credit on the reverse charge.

The Seller needs to mention the Reverse Charge tax applied in the tax invoice.

The aim of reverse charge is to bring unorganised sector into the tax umbrella. It also removes the burden of tax compliance from individuals with limited resources to large companies with enough resources.