As per Sec 2(98) of the CGST Act, 2017 "Reverse-Charge", means 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 or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) if section 5 of the Integrated Goods and Services Tax Act
Reverse Charge Mechanism rises in the cases where the receiver becomes liable to pay taxes on the goods and services instead of the supplier.
In what cases Reverse Charge Mechanism becomes applicable?
- Reverse Charge Mechanism in respect of an unregistered person. When a supplier who is not registered under GST supplies goods to a person who is registered under the GST regime, then Reverse Charge applies. In such cases, the recipient or the receiver of the goods directly pays the GST to the government instead of the supplier and has to self-invoice himself and pay his GST therein.
- Reverse Charge Mechanism when e-commerce operator provides services. An e-commerce operator supplying goods or services through an electronic mode (online transactions) is liable to pay GST under Reverse Charge Mechanism. When the e-commerce operator is not present physically in a taxable territory then a person representing the e-commerce operator will be liable to pay tax on his behalf.
- Reverse Charge Mechanism in respect of the supply of specific goods listed by CBIC.
When there is a supply of certain goods that are listed by CBIC [Central Board of Indirect Taxes and Customs] like raw cotton, silk yarn, cashew nuts not shelled/peeled, bidi wrapper lottery then reverse charge is applicable.
Time of Supply of Goods and Services under Reverse Charge Mechanism -
In the GST Regime, under Reverse Charge Mechanism the time of supply of goods and services are different. The time of supply of goods and services makes it easier to find the rate of tax applicable on goods and services and the person liable to pay the taxes, due dates, and filing returns under GST.
In case of Goods –
Date of receipt of goods Or Date of payment Or 30 days from the date of issue of the invoice whichever is earlier.
*Date of payment – the date of payment as entered in the books of account of the recipient.
the date on which the payment is debited in his bank, whichever is earlier.
In case of Services – Date of payment
Date immediately following 60 days from the date of issue of invoice by supplier whichever is earlier.
*Associates Enterprises – Suppliers of service located outside India
Date of entry in the books of account of the recipient of supply
Date of payment
Input Tax Credit under Reverse Charge Mechanism –
Since the supplier is an unregistered dealer he is therefore not eligible to avail of the benefits of ITC under GST. While the recipient being a registered person paying taxes on Reverse Charge Mechanism can claim Input Tax Credit under GST fulfilling the condition that the goods will be used in furtherance of business.
The recipient cannot use ITC on the payment of output tax on goods and services under the Reverse Charge Mechanism.
Important Key points –
- The recipient liable to pay GST under Reverse Charge Mechanism has to mandatorily register under GST irrespective of his threshold amount.
- The composition dealers under GST cannot avail of ITC and has to pay taxes at normal rates.
- Reverse Charge Mechanism applies only to intrastate transactions.
- Advance payment made is also leviable to GST and such advance payment shall be in Reverse Charge Mechanism only.
GST compensation cess will be applicable to the tax payable or paid under the reverse charge mechanism.