Jayesh Sanghrajka & Co LLP Chartered Accountants

Reverse Charge under GST

INTRODUCTION TO REVERSE CHARGE MECHANISM 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. 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 under GST. PURPOSE OF 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-

1. Insurance agent 2. Services of a director to a company 3. Manpower supply 4. Goods Transport Agencies 5. Non-resident service providers 6. Any service involving aggregators

Currently there is no reverse charge

mechanism in supply of goods.

GST SCENARIO

Under GST, Reverse Charge will apply in following

situations –

1. Unregistered dealer selling any goods or services to a registered dealer - In such a case, the registered dealer has to pay GST on the supply.

2. List of services issued by CBEC on which reverse charge is applicable. (Attached herewith)

REGISTRATION All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold limit.

Jayesh Sanghrajka & Co LLP Chartered Accountants

TIME OF SUPPLY

FOR GOODS 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. 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.

FOR SERVICES 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. 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

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 unorganized 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.

Jayesh Sanghrajka & Co LLP Chartered Accountants

FOR GOODS For the first time under GST, reverse charge is applicable on goods. For example, unregistered dealer sells goods for Rs 100. The seller will receive Rs.100. The buyer will deposit Rs. 2.5 as CGST and Rs. 2.5 as SGST (Assuming GST rate to be 5%) with the government on his own and take input set off against output liability if available as per ITC rules. 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 recipient (i.e., who pays reverse tax) can avail input tax credit. TAX INVOICE The supplier must mention in his tax invoice that 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. MISCELLANEOUS POINTS FOR ATTENTION 1. If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim

any credit of tax paid. Along with the dealer is liable to pay tax at normal rates applicable to such supply and not the rate applicable for composition scheme.

2. Even advance payments are subject to Reverse charge mechanism. 3. Unlike Service Tax, there is no concept of partial reverse charge. The recipient has to pay 100% tax

on the supply. 4.

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