Reverse charge mechanism under GST - Reverse gear of tax burden

A. Introductory provisions of reverse charge under GST Law.

• In terms of section 9(1) of Central Goods and Services Tax Act, 2017, Central Goods and Services Tax (CGST) shall be levied on all intra-state supplies of goods & services or both except the supply of alcoholic liquor for human consumption.

• In terms of section 5(1) of Integrated Goods and Services Tax Act, 2017, Integrated Goods and Services Tax (IGST) shall be levied on all inter-state supplies of goods & services or both except the supply of alcoholic liquor for human consumption.

• However, by virtue of section 9(3) of Central Goods and Services Tax Act, 2017 and section 5(3) of Integrated Goods and Services Tax Act, 2017, the Government on recommendations of council may specify categories of supply of goods or services or both wherein tax shall be paid under reverse charge. Government has issued the list of goods vide Notification No. 4/2017 - Central Tax (Rate) dated 28th June, 2017 & 4/2017 - Integrated Tax (Rate) dated 28th June, 2017 & services vide Notification No. 13/ 2017- Central Tax (Rate) dated 28th June, 2017 & 10/2017- Integrated Tax (Rate) dated 28th June, 2017 on which reverse charge will be applicable.

• In addition to above, if a registered person receives goods/ services having value more than ₹ 5000/- per day from unregistered persons (may be one or more), then such registered person will be liable to pay tax under reverse charge as per the provision of section 9(4) of Central Goods and Services Tax Act, 2017 read with Notification No. 8/2017 - Central Tax (Rate) dated 28th June, 2017 and section 5(4) of Integrated Goods and Services Tax Act, 2017. In respect to this, no notification has been issued under IGST Law.

B. Concept of Reverse Charge Mechanism.

• Reverse Charge is defined under Section 2(98) of Central Goods & Services Tax Act, 2017: 'Reverse charge means the liability to pay tax by the recipient of the supply of the 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 & Services Tax Act.'

• Reverse charge is only a mode of collection of CGST/SGST or IGST on Supplies of goods and services where the service receiver (may be wholly or partially) will be liable to pay CGST/SGST or IGST to Government.

• As per Section 9 of the CGST Act, 2017 there are two types of supplies which are liable to tax under reverse charge mechanism which are:

• Specified categories of supply of goods or services or both as notified under GST Law.
• Supply of taxable goods or services or both having value more than ₹ 5000/- per day by an unregistered supplier to a registered person.

C. Reasons for Reverse Charge

 • Safeguarding the interest of revenue to the Government.

• Collection of GST on all supplies even supplied by unregistered person.

• Administrative Convenience to the department.

D. Services covered under reverse charge (Notification No. 13/ 2017- Central Tax (Rate) dated 28th June, 2017 & 10/2017- Integrated Tax (Rate) dated 28th June, 2017) Import of Services - (Not Covered in CGST LAW)

• Taxable services provided by any person located in non-taxable territory.

• Services should be received by any person located in taxable territory other than non-taxable online recipient.
• Liability of service receiver - 100%
• Taxable territory - Whole of India except Jammu & Kashmir.

• GTA Services

• Services provided by GTA in respect of transport of goods by road.
• Liability of service receiver - 100%
• Service receiver should be the following persons: a) Any factory registered under or governed by the Factories Act, 1948. b) Any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India. c) Any co-operative society established by or under any law. d) Any dealer of excisable goods, who is registered under the Central Excise Act, 1944 or the rules made there under. 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 g) Casual Taxable Person
• Person who pays the freight shall be treated as receiver of service.

• Legal service

• Services provided by individual advocate or a firm of advocates including senior advocate.
• Service receiver should be a business entity in taxable territory.
• Liability of service receiver is 100%.
• Service provided to another advocate or firm of advocates; non business entity or business entity having turnover of less than ₹ 20 lacs in previous year exempted.
• Services of Arbitral Tribunal

• Services provided by an arbitral tribunal.

• Service receiver should be a business entity in taxable territory.
• Liability of service receiver - 100%

• Services of Arbitral Tribunal to non business entity are exempted.
• Services of Arbitral Tribunal to business entities having turnover less than ₹ 20 lacs in previous year are exempt.

• Sponsorship Services

• Services provided by way of sponsorship by any person.
• Service receiver should be any body corporate or partnership firm in taxable territory.
• Body Corporate means as same in Section 2(11) of Companies Act, 2013.
• Liability of service receiver is 100%.

• Services by govt. or local authorities

• Services provided by Government or local authority excluding,- (1) Renting of immovable property, and (2) Services of Post office, transportation of passengers/goods and services in relation to air craft or vessel inside or outside the precincts of a port or an airport.
• Service receiver should be a business entity located in taxable territory.
• Liability of service receiver - 100%

• Director’s services

• Services provided by a director.
• Service receiver -Company or body corporate - liable for 100 %

• Services by An Insurance Agent

• Services provided by an insurance agent. • Service receiver is any person carrying on insurance business.
• Liability of service receiver - 100% Services by Recovery Agent

• Services provided by a Recovery Agent.
• Service receiver is Banking Company or Financial Institution or a non banking financial company.
• Liability of service receiver - 100%

• Goods Transportation up to Custom Station (Not Covered in CGST LAW)

• Services provided by way of transportation of goods by a vessel from a place outside India up to the Customs station of clearance in India by a person located in non-taxable territory to a person located in non-taxable territory.
• Importer as defined under sec. 2(26) of the Customs Act, 1962 is to be deemed as Service Recipient.
• Liability of service receiver - 100%

• Enjoyment of Copy Rights

• Services provided by Author or music composer, photographer, artist, etc. by way of transfer or permitting the use or enjoyment of a copyright covered under the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works.
• Service Receiver should be publisher, Music Company, producer.
• Liability of service receiver - 100%

E. Goods covered under reverse charge (Notification No. 4/2017 - Central Tax (Rate) dated 28th June, 2017 & 4/2017 - Integrated Tax (Rate) dated 28th June, 2017)

 F. Services on which reverse charge was applicable in earlier law are now out of reverse charge:

• To be provided by mutual fund agent or distributor to a mutual fund or asset management company.

• To be provided by a selling or marketing agent of lottery tickets to a lottery distributor or selling agent.

• Renting of motor vehicle except through e-commerce operators.

 • Supply of manpower or security service.

 • Work Contract Service

G. Issues

Is the reverse charge mechanism applicable only to services? - No, reverse charge applies to supplies of both goods and services.

Composition scheme not applicable for tax payable under RCM: It is important to note that for any tax payable under reverse charge mechanism, the option of payment under composition scheme will not be available as per the provision of section 10(1) of CGST Act, 2017. In other words, a taxable person opting for composition scheme will be required to pay tax on supplies taxable under RCM at regular rates and not the composition rate.

• Time of Supply of Goods under Reverse Charge - Where tax is payable on reverse charge basis, the time of supply is appointed to be the earliest of (a) date of receipt of goods, (b) date of payment (c) 30 days from the date of issue of invoice by the supplier. If for any reason, 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 of Services under Reverse Charge - Where tax is payable on reverse charge basis, the time of supply is appointed to be the earlier of (a) date of payment (b) 60 days from the date of issue of invoice by the supplier. If for any reason, all of these two dates cannot be determined then the time of supply will be the date of recording the supply in the books of the recipient.

H. Difficulties/Conclusion

• It will be difficult for small business houses, who procure goods and services from unregistered dealers, to pay tax every time they procure such supplies and will become even more difficult for unregistered dealers to find buyers. Who will purchase goods from them? (Only limit is 5000/- per day.)