Typically, taxes are collected by business owners on behalf of the customers, which is then paid to the government. Reverse charge is when the buyer pays the tax directly to the government. The responsibility of reverse charge can either rest completely on the buyer or in certain special cases, it can be partially / jointly borne both by the buyer and the seller.
Under Goods and Services Tax (GST) laws, a supplier of goods or services collects GST from the receivers and deposits it with the tax authorities. Reverse charge is a mechanism where the recipient of the goods or services is liable to pay GST instead of the supplier. Thus, if a person is a recipient of goods or services under reverse charge, he / she must remit only the purchase payments to suppliers. As for GST, the recipient must deposit the tax directly with the tax authorities. The mechanism is aimed at reducing tax evasion, particularly from the unorganized sectors. Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, a reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he / she is otherwise eligible.
Applicability of reverse charge mechanism
Reverse charge is applicable in the following situations:
- Supply from an unregistered dealer to registered
If a registered dealer is purchasing goods / services from an unregistered dealer, the registered dealer must pay the GST. However, he / she is exempted to pay GST on purchasing from the unregistered seller if it does not exceed INR 5,000.
- Supply of Goods and Services Specified by CBEC (Central Board of Excise and Custom)
If a registered person is purchasing goods / services which are specified by the CBEC under reverse charge, he /she as a recipient must pay GST. These include
- Goods transport services
- Insurance agencies
- Recovery agencies
- Legal services
- Transportation services for imported goods etc.
- Services provided by an e-commerce operator
In case a person is an e-commerce operator supplying services, reverse charge will apply. Hence, the person as an e-commerce operator is responsible to pay the GST.
For an instance, a transport service provided by taxi aggregator, Uber is liable to pay GST. Uber will collect tax from passengers instead of the registered service providers. There are cases where an e-commerce operator does not have a physical presence in the taxable territory. In such a case, a person representing such e-commerce operator for any purpose will be liable to pay tax. If there is no such representative, the operator would appoint a representative who will be liable to pay GST (Goods and Service Tax).
Requirements under the reverse charge mechanism
Below mentioned are the requirements under reverse charge mechanism:
- The recipient of goods / services must be registered under GST.
- There should be a maintained accurate record of supplies by every registered business owner that would incur reverse charge.
- Wherever reverse charge applies, the supplier must clearly mention on the invoice that the tax payable for that specific transaction is through reverse charge. Similarly, the same should be mentioned on receipt vouchers and refunds vouchers.
- Advance paid on supplies that incur reverse charge is taxable under GST. The taxpayer making advance payment should pay tax on reverse charge basis.
Time of supply for goods and services under reverse charge
The time of supply for a transaction is the date on which taxes are levied upon the supplies. The time of supply under reverse charge will be the earliest of the following dates:
- Date of receipt of goods or
- Date of payment or
- Date immediately after 30 days from the invoice date for goods and 60 days from the invoice date for services.
Self-invoicing is done when a business owner purchases supply from an unregistered supplier under reverse charge mechanism as the unregistered supplier cannot issue an invoice.
Thus, reverse charge mechanism requires registered recipients of goods and services to remit tax directly to the authorities if transacting with unregistered dealers or purchasing specific goods and services are listed by the CBEC.
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