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 that the liability
under the GST Act shall be discharged by recipient instead of supplier of goods
or services. This is popularly known as reverse charge mechanism (‘RCM’).

While the RCM is not entirely a new concept under the Indian
indirect tax landscape, given the fact that it was quite common under the
erstwhile Sales tax regime.  However, the
tax considerations were quite different back then, considering that Sales tax
was a single point levy (i.e. levied at the first point of sale) with limited
input tax credits, leading to value shifting and leakage of tax revenue. In
contrast, the current Value Added Tax regime is a multi-point levy whereby the
full value is captured under the tax net. Similarly, under the Central Excise
legislation, full value is sought to be covered by levying tax on the Maximum
Retail Price (‘MRP’). Due to this reason, perhaps, neither the Central Excise
nor VAT legislation (barring the States of Punjab, Assam and Madhya Pradesh)
presently provides for RCM. Given its successful implementation under service
tax legislation, the Government has decided to continue the same in GST also.

Administrative convenience and ease of tax collection are
primary motivations for using 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 and he is required to pay applicable tax i.e. CGST and
SGST/ UTGST, 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 under the
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 and hence, the supplier does
not get credit of tax paid under RCM by the recipient.

Once the tax is paid under RCM by the recipient, it becomes
an input tax and 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 read 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.”

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

Reverse Charge Mechanism (‘RCM’) in brief

Based on the above, it can be said that reverse charge
applies in case of notified supplies of goods and services or in case of
supplies by a specified category of suppliers.

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

Presently, the GST Council has recommended very few goods,
i.e., tobacco leaves, cashewnuts in shell, etc. are 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:

While the aforesaid list of services covered under reverse
charge is by and large on the same lines as the current list of services
(specified in Notification no 30/2012-ST read with Rule 2(1)(d) of Service tax
Rules, 1994, it is pertinent to note that (a) services by Online Information
Data Access providers, (b) services related to distribution and marketing of
lottery tickets, (c) supply of manpower for any purpose or security, and (d)
references to representational services by senior advocates have been excluded
and certain changes / additions have been made such as: (a) in case of GTA
services – casual taxable persons have also been obligated to pay on a reverse
charge basis, (b) 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 and (c)
in case of radio taxis or passenger transport services provided through
ecommerce operators – the obligation has been cast upon the ecommerce operator.

Partial reverse charge: 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 (taxable) person is liable to pay tax under RCM on
any goods or services or both procured by him from an unregistered
person. Following are likely to be the unregistered persons under the GST
regime:

–   Person not carrying on any business or
profession; or

–   Person whose aggregate turnover is below the
threshold limit; or

–   Supplying exempt goods or services

–   Supplying goods or services which are taxed
at NIL rate of tax

–   Supplying services which are covered under
reverse charge

–   Person located in Jammu & Kashmir; or

–   Person located outside India; or

–   In simple terms, he is not registered though obliged
to get registered.

Followings 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 Rs. 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.

Obligation on Service
providers (providing services covered by reverse charge) to obtain registration
under GST legislation

Service providers supplying the aforementioned services if
they are not already registered under some other category or those not given
the benefit of migration will have to obtain registration under GST
legislation, as and when the portal is enabled for the same.

In this regard, there is an ongoing controversy whether or
not persons covered under reverse charge are required to obtain registration.
In this connection, attention is invited to section 22(1) of the CGST Act which
provides that ‘Every supplier shall be liable to be registered under this
Act in the State or Union territory, other than special category States, from
where he makes a taxable supply of goods or services or both,
if his aggregate turnover in a financial year exceeds twenty lakh rupees’.
It is highlighted that unlike Service tax legislation wherein the obligation to
register was cast upon the person liable to pay tax, under the GST legislation,
the obligation has been linked to making a taxable supply (irrespective of
whether the said service is covered by forward or reverse charge). While the
GST Council in its 16^th meeting has resolved that lawyers /
advocates would be exempted from obtaining registration as per a notification
(proposed to be issued) u/s. 23(2) of the CGST Act, the fate of various other
service providers such as insurance agents, GTAs, independent directors, etc.,
remains undecided.

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 unregistered 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.

Unintended casualties,
unanswered question and challenges posed by reverse charge provisions
pertaining to unregistered persons

While the Government may claim that there are laudable
objectives in casting obligation to pay tax on URD purchases, there are certain
unintended casualties and unanswered question and challenges which will have to
be faced going forward. Some of these are briefly described below:

Freshly qualified Chartered Accountants: One of
the outcomes expected post implementation of GST legislation is that most
businesses will shy away from dealing with an unregistered person. This would
be primarily on account of the additional compliance burden attached to the
consumption of such supplies. One direct and unintended casualty to these
provisions will be a freshly qualified Chartered Accountant and small
practitioners. It is quite likely that their turnover will be below the
threshold limit on account of which they have not obtained registration. Notwithstanding
this fact, reverse charge would apply and business will cringe at the time of
availing their services. Such small practitioners will be forced to obtain
registration, maintain records and file no less than 37 returns annually, thus
casting a huge financial and administrative burden on the fledgling
practitioner.

Requirement for a minimum threshold limit: The
obligation pay tax on procurements from unregistered persons has been cast
without reference to any monetary limit and without prescribing any exceptions.
As a result, even the smallest of purchases – i.e. purchase of a cutting chai
or basic refreshments, photocopying charges or the like will have to be mapped
and reported. In this connection, entry no. 81 of the Service exemption list released
on 18^th of May suggests that an omnibus exemption may be granted
from payment of GST u/s. 9 (4) of CGST/SGST Act in respect of supplies upto Rs
10,000/-. We will have to wait and watch out for relevant notifications to this
effect. Key factors would be whether the exemption will be qua the
suppliers or qua the transaction, etc.

Obligation to issue an invoice, classification of
supply and maintain records

Every recipient procuring supplies from unregistered persons
is obligated to issue an invoice at the time of procuring the services (refer
section 31 of CGST Act). Does this mean that the Government intends all
businessmen and their employee should carry an invoice book with them wherever
they go and make an invoice every time they procure basic items or that they
should only work with the organised (registered) players and cut out the small
and medium (mom & pop stores) enterprises. Painful and yet pertinent
question which remains unanswered.

Value addition is already taxed

Considering that GST is a tax on the value added, it is a
fact taken for granted that all supplies from unregistered would form part of
the value added and ultimately form part of the price charged at the time of
making outward supply. In such cases, there would be no loss of revenue to the
Government. Despite this glaring fact, the Government seems to have fallen a
prey to its greed to garner revenue.

Inter-State transactions

Legally speaking inter-State suppliers are required to obtain
registration from Rupee 1 (i.e. without a threshold limit), nonetheless, the
Government machinery maintains a stoic silence when asked a direct question as
to whether reverse charge would apply in case of inter-State supplies. The
silence becomes even more apparent when they are asked what happens if the
inter-State supplier is later made to pay tax on the same transaction, won’t it
result in double taxation – what are the safeguards? Questions like these speak
volumes of the challenges that are likely to be faced by business and the
administration when dealing with such transactions.

Transactions with non-residents

In the earlier paras, we have described the obligation
cast by sections 22 and 24 of the CGST Act to register, that too
notwithstanding the fact that supplies procured from non- residents would be
taxed in the hands of the importer. One is at a loss to understand, how the
Government proposes to administer these transactions.

Transactions with persons located in Jammu and Kashmir

CGST Act does not extend to the State of Jammu and Kashmir (J
& K) and recent reports in the public domain suggest that J & K is not
likely to implement GST on 1^st of July along with the rest of the
country. All trade with businesses / suppliers / customers are likely to face
uncertainty. Questions raised to the Government have remained unanswered.

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 was 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 the 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 an obstacle in the
free flow of tax credits across the businesses and  the 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 a majority of the assessees to
comply with such a rigid compliance requirement. Moreover, it is difficult for
an 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.