Reverse Charge Under GST

reverse charge under gst

Reverse Charge under GST

The Goods and Services Tax has been a transformation in the Indian Economy System, changing the way business has been carried out for years. Earlier, a business would have to pay tax under various heads such as VAT, Indirect Tax, Service tax, etc. which all added up to 17 different types of tax heads depending on the sector of business you were in. Now with GST, no matter what business you carry out, all enterprises have to pay tax under one head – The Goods and Service Tax. This is further divided as the following

    • Central Goods and Service Tax
    • State Goods and Service Tax
    • Integrated Goods and Service Tax
  • Union Territory Goods and Service Tax

This depends on the location your business is situated in and whether you carry out inter-state transactions or no. Under all these heads and different GST terminologies, there is one which is of utmost importance and is changing the way business is carried out i.e. The Reverse Charge Mechanism under GST.

Before GST rolling in, the reverse charge mechanism was only applied to services and service tax, however, in GST changes have been made and reverse charge is applicable to both goods and services.

Reverse Charge under Goods and Service Tax

The Reverse charge under GST is a new concept that has been incorporated to increase the revenue for the government through the unorganized/partly organized sectors. In GST, normally the supplier of the goods/services is liable to pay tax. However, under the reverse charge mechanism, the receiver of the goods/services are charged and liable to pay tax.

When will the Reverse Charge be applicable?

  1. Supply from an unregistered dealer to a registered dealer

XYZ is not a registered enterprise under the GST portal and provides goods/services to ABC a registered business party on the GST portal. Under these circumstances, the reverse charge is applicable and the receiver of the goods/service will have to pay the taxes directly to the Government.

ABC will have to pay the taxes directly on the GST portal by the process of self-invoicing(Scroll down to know more about self-invoicing).

Purchases under Rs. 5000 per day from an unregistered supplier will not attract GST. In short, the reverse charge is to be paid only when the transaction amount from the unregistered supplier exceeds Rs. 5000 per day.

  1. Services offered by an operator or an e-commerce portal

If an e-commerce seller provides goods/services, the tax has to be paid by the receiver of the goods and services and not the service provider who has registered on the online portal.

Suppose you as a customer, have ordered a study table for and the supplier is a registered business entity called PQR designs, the GST is paid by you – the customer on behalf of the website and not by PQR Designs.

3. Supply of certain goods and services specified by the Central Board of Excise and Customs (CBEC) attract a reverse charge. You can see the list of services on which a reverse charge is applicable here.

Time of Supply under Reverse Charge

Compared to when GST is charged normally, provisions for GST under reverse charge are different. The time of supply under reverse charge is the earlier of the following:

In the case of goods

  • The date of receipt of goods
  • The date of payment *
  • The date immediately after 30 days of issue of an invoice
  • The date of entry in the books of account if it is not possible to determine the time of supply

*Date of payment is no more applicable from the provision by the Central Government as on 15.11.2017

For example:

Date of receipt of goods – 18th August 2018

Date of Invoice – 1st September 2018

Date of Entry in Books of Accounts – 20th August 2018

The time of supply under reverse charge for this particular example will be Date of receipt of goods i.e. 18th August 2018

In case of supplies

  • The Date of Payment
  • The Date immediately 60 days after the date of issue of invoice
  • The Date of entry in the books of account if it is not possible to determine the time of supply

Date of Payment – 18th August 2018

Date of Invoice – 1st September 2018

Date of Entry in Books of Accounts – 20th August 2018

The time of supply under reverse charge for this example will be the Date of Payment i.e. 18th August 2018. In case this date could not be determined then the date of entry of books of account will be mentioned i.e. 20th August 2018.

Input Tax Credit

Tax paid on reverse charge basis is available for Input Tax Credit if the good/service is used for the business purpose or for furthermore transactions of the business.

On the other hand, a supplier cannot claim Input Tax Credit on reverse charge basis on the goods/services supplied because the liability of tax is not paid by the supplier anyway.

Self-Invoicing under Reverse Charge Basis

Like mentioned in point no. 1 when the reverse charge is applicable, self-invoicing is a process when a purchaser transacts with someone who is unregistered under the GST Portal. Self-Invoicing needs to take place because the supplier is unregistered and hence cannot issue an invoice for the purchaser. While the purchaser needs an invoice because he is liable to pay the tax he needs to make his own invoice. This gives rise to the process of self-invoicing.

There is an exemption from the process of self-invoicing when the value of goods/services does not exceed Rs. 5000 per day.

There are a few details that are mandatory to be mentioned on the Self- Invoice, they are:

    • Invoice date (Date must be mentioned according to the date of supply), Invoice Number or Reference Number
    • Due Date – The date by which the payment is to be made to the supplier (however this entry is not mandatory)
    • Vendor Name – Name of the supplier providing the goods/services
    • Description of the goods/services
    • Total amount/ value of the goods/services provided
  • The invoice must mention that this invoice includes payment of Tax under the RCM – Reverse Charge Mechanism Method.

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