Welcome GST Reverse Charge Mechanism under Goods and Services Tax (GST)

Preamble:

Usually a supplier of goods or service is a taxable person liable to
discharge tax liability under Goods and Service Tax Act (‘GST Act’). However in
exceptional cases, GST legislation stipulates discharge of tax liability by
recipient instead of supplier of goods or services. This is popularly known as
reverse charge mechanism (‘RCM’).

Neither excise nor VAT legislation presently provides for RCM. It is a
well- founded concept in service tax legislation and same is adopted in GST
also.

Administrative convenience and ease of tax collection are prime
objectives of RCM. The tax authorities prefer to collect tax from small number
of assessees from organised sector instead of chasing large number of small and
unorganised tax payers. Broadening tax base could be another purpose of RCM.

Basics of RCM:

Reverse charge applies only when there is a charge on supply. If supply
is exempted, nil rated or non-taxable, RCM does not apply in such a case.

Recipient of goods or services discharges GST under RCM as if he is the
person liable for paying the tax on supply procured by him. All provisions of
the Act including the collection, recoveries and penal provisions apply to the
recipient.

Recipient is required to pay applicable tax i.e. CGST and SGST, CGST and
UGST or IGST depending on location of supplier and place of supply. The tax
liability needs to be discharged under RCM at applicable rate of tax.

Recipient makes payment on his own account. It is paid under recipient’s
GSTIN number and is declared in his GST Returns as taxable supplies on which
tax liability is discharged.

Payment made under RCM is not a Tax Deducted at Source (‘TDS’) paid by
recipient on behalf of supplier. The supplier does not get credit of tax paid
under RCM by the recipient.

Tax paid under RCM by the recipient is an input tax and not output tax.
The recipient (payer of tax under RCM) is entitled to avail Input Tax Credit
(‘ITC’) thereof subject to other provisions contained in Chapter V of CGST Act
and Input Tax Credit Rules.

Relevant Legal Provisions:

Section 9 of Central Goods and Services Tax Act, 2017 (‘CGST Act’)
provides for levy and collection of Central Goods and Service Tax (‘CGST’). The
power to collect tax under RCM from recipient is derived by government u/s.
9(3) and 9(4) of CGST Act which reads as under:

“Section 9(3) – the Government, on recommendation of the Council, by
notification, specify categories of supply of goods or services or both, tax on
which shall be paid on reverse charge basis by recipient of such goods or
services or both and all the provision 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.

Section 9(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 GST legislation 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.”

Section 5 of Integrated Goods and Services Tax Act, 2017 (‘IGST Act’),
section 7 of Union Territories Goods and Services Tax Act, 2017 (‘UGST Act’)
and respective section of State Goods and Services Tax Act, 2017 (‘SGST Act’)
also provide for RCM on a similar pattern to that of CGST Act.

Reverse Charge Mechanism (‘RCM’) in brief:

RCM on notified goods or services:

Recipient of notified goods or services or both is liable to pay CGST
under RCM on supply of notified goods or services u/s. 9(3) of CGST Act.

Recipient is liable to discharge GST liability under RCM irrespective
of:

–   Recipient being registered person or
unregistered person; or

–   Supplier of notified goods or services is
registered person or unregistered person.

Notified goods under RCM

GST Council has recommended only tobacco leaves as notified goods
for the purpose of RCM. Any person buying tobacco leaves will be liable to
discharge GST under RCM on purchase of tobacco leaves.

The Government, on the recommendation of GST Council, may in future
expand the list of goods liable under RCM.

Notified services under RCM

GST Council has recommended following services on which tax will be
payable on RCM:

Under service tax, partial reverse charge is prescribed on
few services wherein certain portion of tax liability is to be discharged by
service provider and balance to be discharged by service recipient under RCM.

There is no concept of partial reverse charge in GST.

RCM on procurement of goods or services from unregistered
persons:

Registered person is liable to pay tax under RCM on any goods
or services or both procured by him from an unregistered person. Following may
be the unregistered person:

–  Person not carrying on any business or
profession; or

–   His aggregate turnover is below the threshold
limit; or

–  He is located in Jammu & Kashmir; or

–   He is located outside India; or

–   He is not registered though obliged to get
registered

Following are a few illustrations to demonstrate the
circumstances in which RCM triggers:

–   An unregistered architect (whose turnover is
Rs. 15 lakh) raises an Invoice of Rs. 1 lakh on builder. In such a case,
builder being registered person will be liable to pay GST on Rs. 1 lakh under
RCM.

–    An item of stationery is bought by registered
business entity from small unregistered shop. In such a case, such business
entity will have to discharge GST under RCM.

Time of supply for RCM:

Due date of payment of tax under RCM is linked to the time of
supply as prescribed u/s. 12 and 13 of CGST Act.

Time of Supply for goods:

It shall be earliest of following:

–   Date of receipt of goods; or

–   Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

–  Date immediately after 30 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Time of supply for services:

It shall be earliest of following:

–   Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

–  Date immediately after 60 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Mandatory registration for person liable to pay GST under RCM:

Section 24(iii) of CGST Act mandates compulsory registration
for persons liable to pay tax under RCM. Threshold limit is not applicable to
persons liable to pay under RCM. Person having less than 20 lakh turnover or
supplier of exclusively exempt or non-taxable goods / services will also be
liable for GST registration if he is obliged to discharge tax under RCM.

Illustration: Co-operative society availing goods
transport agency (‘GTA’) services of nominal value will be liable to pay GST
under RCM and consequently liable to get itself registered irrespective of the
fact that such a society is not making any taxable supply or their aggregate
turnover is below the threshold limit.

Documentation:

Section 31(3)(f) mandates registered person liable to pay GST
under RCM to issue an invoice in respect of goods and services received by him
from un-registered supplier. Such invoices should contain all particulars as
prescribed u/s. 31(1) and 31(2) read with GST Invoice Rules to the extent
applicable. This would mean registered person procuring goods and services and
paying tax under RCM is obliged to mention HSN Codes and Service Accounting
codes of goods or services procured by him.

Rule 1 of Input Tax Credit Rules provides that a registered
person shall avail input tax credit on the basis of an invoice raised in
accordance with provisions of section 31(3)(f).

Further registered person liable to pay GST under RCM shall
issue a payment voucher at the time of making payment to supplier.

Conclusion:

The person paying tax under RCM is entitled to tax credit in
most of the cases. The Government may not be getting substantial revenue from
RCM. In the past, most of the State legislations for sales tax were having
concept of ‘purchase tax’ to be paid by registered dealer on purchases from
unregistered dealers. However, it was found to be a futile exercise (not
resulting into any substantial revenue to Government), and therefore, in most
of the State VAT legislations, the concept of URD tax (purchase tax) was
scrapped.

RCM has inherent disadvantage of being obstacle in free flow
of tax credits across the businesses and nation. It also raises the question
whether it is fair on the part of government to put more burden of compliance
on law abiding organised sector of the economy.

It would be too cumbersome for majority of the assessees to
comply with such a rigid compliance requirement. Moreover, it is difficult for
assessee to reconcile their expenses as per financial statements with tax paid
under RCM as per returns. It is indeed a pain for any organisation to reconcile
such figures and satisfy the authorities in course of scrutiny, assessment,
audit and investigations, etc.