All about Reverse Charge under GST

Reverse charge is a mechanism where the recipient of the goods and/or services is liable to pay GST instead of the supplier.

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.

Under normal GST payment process, Receiver of goods/services pays the price for goods/services and with that the GST applicable on it. Thus the supplier of goods/services receives the GST and forwards the payment to government.

GST payment in case of reverse charge, the supplier of goods/services only receives the price of those goods/services and not the GST from the receiver of goods/services. The receiver of goods/ services, themselves are responsible for payment of GST to the government!

When is Reverse Charge Applicable?

Supply from an unregistered dealer to a registered dealer

If a vendor who is not registered under GST, supplies goods to a person who isregistered 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.

The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made. Self-invoicing has been covered on later in this article!

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, shopify provides the service of creating a beautiful ecommerce website builder profileshopify 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.

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:

• the date of receipt of goods
• the date immediately after 30 days from the date of issue of an invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

Illustration:

Date of receipt of goods 15th June 2018. Date of invoice 1st July 2018. Date of entry in books of receiver 18th June 2018

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

Time of Supply in case of Services

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

• The date of payment
• The date immediately after 60 days from the date of issue of invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

Illustration:

Date of payment 3^rd march 2018Date immediately after 60 days from the date of issue of invoice (Suppose the date of invoice is 1^st jan15 2018, then 60 days from this date will be 2^nd march 2018). Date of entry in books of receiver 6^th march 2018

The Time of supply of service, in this case, will be 2^nd march 2018

What is Self-Invoicing?

Self-invoicing is done when you have purchased from an unregistered supplier AND as such, those purchases of goods or services falls under reverse charge.

This is due to the fact that your supplier cannot issue a GST-compliant invoice to you, and thus you become liable to pay taxes on their behalf. Hence, self-invoicing, in this case, becomes necessary.

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 individuals who are required to pay tax under reverse charge have to register for GST, and get their registration number.

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.

What if an Input Service Distributor receives supplies liable to Reverse Charge?

An ISD (it is a business which receives invoices for servicesused by its branches. It distributes the tax paid, to such branches on a proportional basis by issuing an ISD invoice.)Cannot make purchases liable to Reverse Charge. If the ISD wants to procure such supplies and take the Reverse Charge paid as credit, the ISD should register as a Normal Taxpayer.

Import of service for RCM basis

Import of service means where an individual located inside the territories and boundaries of India, receives service from a supplier outside of India.

One of the notified service of which RCM is applicable is any service supplied by any person who is located in a non-taxable territory, to any person other than non-taxable online recipient.

IGST payable under RCM in case of Import of service were the payment is made in cash/credit to the extent of IGST paid in cash is to be utilized in the same month.

Under GST regime, temporary transfer or permitting the use or enjoyment of intellectual property right constitute supply of service

Based on agreement entered between service provider and recipient, analysis can be done with respect to treatment of usage of Intellectual property right i.e. either it is in respect of goods (12%) or information technology software (18%) since rate of tax is different for each of the categories.