Reverse Charge Under Central Goods and Services Tax Act, 2017

Introduction To Reverse Charge Under GST

The Government reserves the power of introducing this system of reverse charge through Section 68(2) of the Finance Act, 1994. The Hindu, calls the reverse charge mechanism as the most potent check that has been inserted into GST.[1] It is a continuing provision from the Pre-GST era with certain amends.

What is Reverse Charge?

Typically, the supplier of the goods or services is liable to pay taxes to the authorities. However, under the CGST Act, 2017, some circumstances have been enumerated under which the person receiving the goods or services is liable to pay taxes instead of the supplier. “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.[2]

Why is Reverse Charge Important?

The unorganized business community is one of the main reasons for the introduction of Reverse Charge Mechanism. This mechanism provides for a mandatory receipt of tax, i.e., when the supplier fails to bear the tax, the recipient of goods or services himself is liable to pay the relevant tax. Thus, the primary purpose of introducing reverse charge is to ensure better administration. Furthermore, it is necessary to keep a check on tax evasion.

Difference Between Pre and Post GST Era

The change brought to the reverse charge mechanism by CGST Act is the introduction of the concept of ‘Input Tax Credit.’ The input tax credit is defined as the credit of input tax or the central tax, state tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to.

When is Reverse Charge imposed?

Reverse charge is imposed in two conditions as according to the CGST Act, 2017:

-> Based on Nature of Goods or Services

Section 9(3) of the CGST Act and Section 5(3) of the IGST Act specifies this scenario. According to these provisions, the Government, on the recommendation 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.

These goods which are specifically subject to reverse charge mechanism are as follows[3]:

• Cashew nuts, not shelled or peeled, supplied by an agriculturist.
• Bidi Wrapper leaves (tendu), supplied by an agriculturist.
• Tobacco leaves supplied by an agriculturist.
• Silk yarn supplied by any person who manufactures it.
• Raw cotton supplied by the agriculturist.
• Supply of lottery supplied by any Government authority to a lottery distributor or selling agent, unlike any registered person.
• Used vehicles, seized & confiscated goods, old and used goods, waste and scrap, supplied by any Government authority.

Likewise, the specific services are:

• Any service supplied by a person in non-taxable territory to a person in the non-taxable online recipient.
• Services by a Goods Transport Agency who has not paid an integrated tax rate of 12% and the recipient can provide by any entity.
• Legal Services by an advocate to a business entity.
• Services supplied by an arbitration tribunal to a business entity.
• Services provided by way of sponsorship to any corporate or partnership firm, etc.

-> Supply by Unregistered Person to Registered Person

Section 9(4) of the CGST Act and Section 5(4) of the IGST Act provides for this provision. Here, wherever a registered person procures supplies from an unregistered supplier, he needs to pay GST on reverse charge basis. However, if the value of such supply is less than Rs. 5000 in a day the provision does not apply.[4] In addition to this, the exception has been extended to all transactions irrespective of their amount till 30^th September 2019.[5]

The concept of self-invoicing is a part of this provision. Here a person issues an invoice in respect of themselves due to the inability of the supplier to do so due to him being unregistered.

What is Time of Supply?

Time of supply means the point of time from which a good/service becomes accountable to GST. In case of reverse charge, where the recipient is liable to pay tax, the scenario is completely different from normal tax circumstances.

• In the case of goods[6], the time of supply shall be the earliest of the following dates, namely:—

1. the date of the receipt of goods; or
2. the date of payment; or
3. the date after 30-days from the date of issue of invoice by the supplier.

• In case of services[7], the relevant time of supply would be the earliest of the following dates:-

1. the date of payment; or
2. the date after 60-days from the date of issue of invoice by the supplier.

In both the cases, where 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 of the supply.

Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.

CONCLUSION

This mechanism is an extra measure adopted by the Government in order to ensure stability and proper administration of resources and so as to ensure enough receipt of tax. It keeps a check on registered vendors and ensures the participation of the recipients of goods/services in ensuring the same.

Thus, this mechanism is of huge importance for administration, and a close check should be maintained for ensuring its actualization.

[1] Lokeshwarri SK, ‘Why reverse charge mechanism must stay’ (The Hindu, 11 July 2018)

<https://www.thehindubusinessline.com/opinion/columns/lokeshwarri-sk/why-reverse-charge-mechanism-must-stay/article24391492.ece> accessed 06 June 2019.

[2] Section 2(98), The Central Goods and Services Tax Act, 2017.

[3] CBEC, Reverse Charge Mechanism GST

<http://www.cbic.gov.in/resources//htdocs-cbec/gst/51_GST_Flyer_Chapter12.pdf> accessed 06 June 2019.

[4] Notification no. 8/2017, Central Tax (Rate).

[5] Notification no. 22/2018, Central Tax (Rate).

[6] Supra note 2, Section 12(3).

[7] Ibid, Section 13(3).