Reverse Charge Mechanism

With the onset of GST, a levy of tax under reverse charge has been introduced.
In the normal scenario, supplier is liable to pay tax on supply of goods or services or both but reverse charge is the situation where recipient is liable to pay tax i.e. chargeability gets reversed. The concept of reverse charge was present in Service Tax Act but in GST regime, reverse charge is applicable on both services as well as goods. The purpose of this charge is to increase compliance and tax revenues.
Every person who is liable to pay tax under Reverse Charge is liable for registration under GST irrespective of threshold limit. The tax paid under reverse charge can be claimed as Input Tax Credit if such goods or services have been used in the course or furtherance of business (except for certain blocked credits like food and beverages etc. as mentioned in Sec 17(5) of CGST Act,2017.

Situations where Reverse Charge will be applicable:-

  • Sec 9(3) of CGST Act or Sec 5(3) of IGST Act- Government has notified specific categories of goods or services or both where tax shall be paid by the recipient of such supply of goods or services or both.

Example: In case of services, GTA services in respect of transportation of goods by road wherein service recipient shall pay tax on reverse charge basis (the categories of recipient has also been notified).
In case of goods, Cashew nuts, Bidi wrapper leaves and Tobacco leaves if supplier is Agriculturist.

  • Sec 9(4) of CGST Act or Sec 5(4) of IGST Act- (Supply of taxable goods or services by an Unregistered Person to a Registered Person) – In such case, Registered person who is making inward supplies from Unregistered person is liable to pay tax under Reverse Charge.

Example: – Mr. A (Registered) purchased Rs.10000 value of goods from Mr. B (Unregistered) then, Mr. A is liable to pay tax on such supply.
However, where the aggregate value of intra-state supply of goods or services or both from one or all unregistered persons does not exceeds Rs.5000 per day then, no tax shall be applicable under Reverse Charge. However, in case the amount exceeds then, reverse charge will become applicable on entire inward supply.

  • Services through E-commerce operator– If a person is supplying goods through E-commerce then tax shall be payable by E-commerce operator under reverse charge.

Example:- In case of Cab services, Uber is liable to pay tax under reverse charge.
It is important to realize this provision which shall have far reaching impact. The mere inclusion of a registered person under reverse charge implies that the tax should be paid on all items of expense appearing in Profit and Loss Account (either under forward or reverse charge).
The monthly payments to small unregistered vendors shall also be covered under reverse charge. This is notwithstanding the fact that the tax paid under reverse charge may not be eligible for input tax credit in certain circumstances (Sec16-Sec18 of CGST Act). This shall increase paper work and increase cash flow issues as well.
A GST registered business may hesitates purchasing goods/ services from an unregistered person owing to reverse charge applicability and consequent increase of paper work and other compliance (including issue of tax invoice on self).
It is yet to be seen whether such provision shall lead to higher number of voluntary registrations.

The successful, effective and willing adoption of this mechanism percolating to the last level of GST registered business may take time.

It goes without saying that the reverse charge provision will ensure that almost every transaction in the country, where any party to transaction is registered, shall fall under the net of GST and tax shall be levied.

For any query, please feel free to contact us.