Reverse Charge- Know all the New Aspects under GST

Reverse charge, where the recipient is liable to pay tax, is common to many countries like Canada 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 which is why it is called reverse charge.

In India, this is a partly new concept introduced under GST.  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 is already present in service tax. In GST regime, reverse charge may be applicable for both services as well as goods.

Current scenario

At present, similar provisions of Reverse Charge are available in Service Tax for the services like-

• Insurance agent
• Services of a director to a company
• Manpower supply
• Goods Transport Agencies
• Non-resident service providers
• Any service involving aggregators

Currently there is no reverse charge mechanisms in supply of goods.

Reverse Charge under GST

Reverse charge means the liability to pay tax is by the recipient of goods/services instead of the supplier.
Reverse charge may be applicable for both services as well as goods.

Situations where reverse charge will apply

1. Unregistered dealer selling to a registered dealer

In such a case, the registered dealer has to pay GST on the supply.

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, 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 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.

All provisions of GST will apply on the recipient (i.e., the buyer).

Registration
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)]

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 THIRTY days from the date of issue of invoice by the supplier (60 days for services)

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 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

Time of supply of goods 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 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

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 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 May 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.

Example for associated enterprises:

ABC Ltd. in India has setup a subisidiary CAB in Singapore. CAB provided services to ABC Ltd. for which ABC paid 1,00,000 SGD on 5th July 2017. It recorded on 8th July 2017. ABC 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

For Services

We should look at the present reverse charge provisions under Service Tax, applicable on certain services.

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. This becomes cost to Ola which is later recovered from passengers.

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 (drivers) to large companies (Ola) with enough resources.

For Goods

For the first time under GST, reverse charge is applicable on goods.

For example, unregistered dealer sells for Rs 100. Buyer will deduct GST of say 5% = Rs 5 and deposit it under reverse charge. So now, will seller receive Rs 100 or Rs 95?

Now if we look at the present VAT laws, some states treat purchases from unregistered dealers as 0% transaction,i.e, VAT is not applied. For other states such as Karnataka, purchase tax is applicable on all purchases made by a registered dealer from an unregistered dealer, irrespective of the purpose for which such goods are purchased.

Further, such tax paid by a registered dealer will be available as input tax credit, subject to certain conditions as per Karnataka VAT Act.

Nothing has been yet prescribed for reverse charge mechanism for goods under GST. It is expected that it will follow the same treatment as reverse charge mechanism for services above. The list of goods on which reverse charges apply has not yet been issued by CBEC.

So, by the above treatment,  the seller will receive Rs.100. The buyer will deposit rs. 5 with the government on his own.

Input tax credit on 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 service recepient (i.e., who pays reverse tax) can avail input tax credit.

Tax Invoice

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

GST Compensation Cess

GST Compensation Cess will also be applicable on reverse charge.

GST Compensation Cess will be levied and collected at a rate which will be notified later. This will apply on all supplies of goods and services, including imports and reverse charge supplies. The purpose is to compensate States for loss of revenue on implementation of GST. This will be applicable for 5 years from the date GST gets implemented.

 

GST is a completely new tax regime already taking India by storm. New concepts like reverse charge, continuous supply, mixed supply will mean challenges for businesses transition and application of GST.