Reverse Charge Mechanism in GST Regime: Every Government wants speedy and smooth collection of its taxes from public. The ‘Reverse Charge Mechanism’ is nothing but a system of Government to collect its Taxes from easy point. The term ‘Reverse Charge’ is defined under the Central Goods and Service Tax Act, 2017 as under:

Section 2. Definitions. –

(98) “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) of section 5 of the Integrated Goods and Services Tax Act;

In the Indian GST law (CGST, IGST, SGST and UTGST) it is provided that apart from supply of Goods or Services received from un-registered person, the Government may notify certain Goods and Services on which recipient of such Goods or Services would be liable to pay tax under Reverse Charge.

Charging Provisions of Reverse Charge Mechanism in GST

The Central Goods and Service Tax Act 2017 

Section 9. Levy and collection:

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

(4) The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

The Integrated Goods and Services Tax Act 2017

Section 5. Levy and collection:

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

(4) The integrated tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

So, in nutshell the reverse charge will apply on followings:

  • Supply of Notified Taxable Goods and Services
  • Supply of Taxable Goods and Services by Unregistered Person to a Registered Person
  • Import of Goods and Services from a person out side India.

The Central Government and the State Governments are empowered to issue notifications to give effect to certain provisions such as goods and services that would be liable to tax on reverse charge basis, supplies that are exempted from tax, supply of goods that shall be treated as supply of services, etc. For a notification to be valid under GST, it must be published in the Official Gazette of India, as published by the Government of India’s Department of Publication, Ministry of Urban Development.

Notified Taxable Services on which Reverse Charge in Applicable

The existing law of Service Tax (Finance Act, 1994) is provides list of Taxable Services on which Service Tax has to be deposited by Service Recipient with Government exchequer in terms of Notification No.30/2012-ST dated 20-06-2012. The list of specified services are as under:

  1. Insurance Agent of Insurance Company.
  2. Recovery Agent of Banks, NBFC etc.
  3. Lottery Tickets Agent
  4. Goods Transport Agency Services
  5. Sponsorship
  6. Services of Arbitral Tribunal
  7. Legal Services from Advocate or firm of Advocates
  8. Director of Body Corporate
  9. Services by Government or Local Authority
  10. Motor Vehicle designed to Carry Passengers
  11. Supply of Manpower or Security Services
  12. Works Contract Service
  13. Import of Services
  14. Services of Aggregator through E-Commerce
  15. Transportation of goods by a vessel from a place outside India up to the customs station of clearance in India

Recently in GST Council meetings held on 19-05-2017 & 11-06-2017, list of services has been approved on which Reverse Charge mechanism will apply. Following chart is give to understand the Reverse Charge Mechanism (RCM) under GST with comparison to Existing Service Tax Law:

Services on Which RCM will continue under GST Law Services on which RCM not applicable under GST Law Services which are First time covered under RCM in GST Law
1.Insurance Agent 1.Agent of lottery tickets 1.Transfer or permitting the use or enjoyment of Copyrights
2. Recovery Agent Banks etc. 2.Supply of Manpower or Security Services 2.Job work [Jewellery Sector]
3. Goods Transport Agency 3.Works Contract Service
4.Sponsorship
5.Arbitral Tribunal
6.Advocate or firm of advocates
7.A Director of a company or a body corporate
8.Government or local authority
9.Import of Services
10.Aggregator
11.Motor Vehicle
12.Transportation of goods by a vessel from a place outside India up to the customs station of clearance in India

Key points of Reverse Charge Mechanism under GST Law

  • In case of purchase of goods from unregistered dealers the receiver of goods would be liable to pay tax under reverse charge.
  • Persons required to pay tax under reverse charge are required to obtain registration under the GST whether or not they make any outward supplies, and without having regard to the threshold limits for registration – in case of notified goods and services.
  • Composition suppliers being recipients of supplies on which tax is payable on reverse charge basis, will have to remit tax at the applicable rates, and not the concessional composition tax rates.
  • The recipient paying tax on reverse charge basis, should issue a ‘payment voucher’ at the time of making paying to the supplier.
  • Since ‘Output Tax’ excludes tax payable under reverse charge basis, accordingly in our view the tax payable under reverse charge basis must be discharged by cash only and credit cannot be utilized for discharging such a liability. The relevant section is under:

Section. 2 (82) “output tax” in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis;

  • The recipient paying tax on reverse charge basis on account of effecting inward supplies from unregistered persons, should issue an invoice in respect of the goods or services inwarded, at the time of receipt of such goods or services.

No Concept of Partial Reverse Charge in GST Law

Unlike to Service Tax Law, there is no concept of Partial Reverse Charge in GST Law. The recipient of taxable supply has to pay entire liability of GST on specified Goods or Services. Whereas the Service Tax law have two type of Reverse Charge one in which entire liability of Service Tax is to be paid by Service Recipient and in second type the specified percentage of applicable Service Tax is to be paid by Service Recipient and Service Provider.

Time of Supply of ‘Goods’ under Reverse Charge in GST

Where tax is payable on reverse charge basis, the time of supply is appointed to be the earliest of

  • date of receipt of goods,
  • date of payment or
  • 30 days from the date of issue of invoice by the supplier.

If for any reason, one or these three dates cannot be determined then the time of supply will be the date of recording the supply in the books of the recipient.

Time of supply for ‘Services’ under Reverse Charge in GST

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

(a) The date of payment

(b) 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 under (a) or (b), the time of supply shall be the date of entry in the books of account of the receiver of service.


GST Reverse Charge Notification  No. 13/2017- Central Tax (Rate) dated 28-06-2017 [F. No. 334/1/2017- TRU]

In exercise of the powers conferred by sub-section (3) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government on the recommendations of the Council hereby notifies that on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table:-

Sl.No.

Category of Supply of Services Supplier of service

Recipient of Service

(1)

(2) (3)

(4)

1.

Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road to:-

(a) any factory registered under or governed by the Factories Act, 1948(63 of 1948);or

(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or

(c) any co-operative society established by or under any law; or

(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or

(e) any body corporate established, by or under any law; or

(f) any partnership firm whether registered or not under any law including association of persons; or

(g) any casual taxable person.

Goods Transport Agency (GTA)

(a)Any factory registered under or governed by the Factories Act, 1948(63 of 1948); or

(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or

(c) any co-operative society established by or under any law; or

(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Union Territory Goods and Services Tax Act; or

(e) any body corporate established, by or under any law; or

(f) any partnership firm whether registered or not under any law including association of persons; or

(g) any casual taxable person;

located in the taxable territory.

2.

Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or  indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity.

An individual advocate including a senior advocate or firm of advocates.

Any business entity located in the taxable territory.

3.

Services supplied by an arbitral tribunal to a business entity.

An arbitral tribunal.

Any business entity located in the taxable territory.

4.

Services provided by way of sponsorship to any body corporate or partnership firm.

Any person

Any body corporate or partnership firm located in the taxable territory.

5.

Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, –

(1) renting of immovable property, and

(2) services specified below-

(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority;

(ii)services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

(iii)transport of goods or passengers.

Central Government, State Government, Union territory or local authority

Any business entity located in the taxable territory.

6.

Services supplied by a director of a company or a body corporate to the said company or the body corporate.

A director of a company or a body corporate

The company or a body corporate located in the taxable territory.

7.

Services supplied by an insurance agent to any person carrying on insurance business.

An insurance agent

Any person carrying on insurance business, located in the taxable territory.

8.

Services supplied by a recovery agent to a banking company or a financial institution or a non- banking financial company.

A recovery agent

A banking company or a financial institution or a non-banking financial company, located in the taxable territory.

9.

Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like.

Author or music composer, photographer, artist, or the like

Publisher, music company, producer or the like, located in the taxable territory.

Explanation.- For purpose of this notification,-

(a) The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.
(b) “Body Corporate” has the same meaning as assigned to it in clause (11) of section 2 of the Companies Act, 2013. (c) the business entity located in the taxable territory who is litigant, applicant or petitioner, as the case may be, shall be treated as the person who receives the legal services for the purpose of this notification.
(d) the words and expressions used and not defined in this notification but defined in the Central Goods and Services Tax Act, the Integrated Goods and Services Tax Act, and the Union Territory Goods and Services Tax Act shall have the same meanings as assigned to them in those Acts.

2.This notification shall come into force on the 1st day of July, 2017.


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