The Reverse Charge Mechanism is the method of paying GST by the recipient rather than the seller. In this situation, the recipient/receiver assumes the responsibility for tax payment rather than the seller.
When is Reverse Charge under GST Applicable
|Supply from Unregistered or Registered Dealers –||Reverse Charge will occur if a seller who is not registered for GST supplied products to an individual who is registered for GST. This ensures that the GST would have to be billed directly to the government by the recipient rather than the seller. The licensed dealer who is required to pay GST under reverse charge must self-invoice for sales made. The customer would pay IGST on interstate sales. The customer must pay CGST and SGST on intra-state purchases under RCM.|
|Services through eCommerce Operators –||Where an e-commerce operator provides facilities, the e-commerce operator would be subject to a reverse charge. He would be required to pay GST. For eg, UrbanClap offers the services of plumbers, electricians, teachers, beauticians, and other professionals. Instead of licensed service providers, UrbanClap is required to pay GST and receive it from consumers. If the e-commerce operator does not have a physical presence in the taxable jurisdiction, a person representing such an e-commerce operator for any reason must pay tax. If there is no official, the operator will nominate one who will be responsible for GST.|
|CBEC-specified supply of such goods and services –||The CBEC has published a list of products and services that are subject to a reverse payment.|
This case is reversed when the individual purchasing the goods and services is required to pay taxes. If the recipient purchases products from an unregistered provider, GST must be charged on their behalf. The retailer must give a payment voucher to the receiver. According to Section 2(94) of the CGST Act, 2017, the recipient must be a registered individual.
According to Section 2(98) of the CGST Act of 2017, a “reverse charge” is the obligation to pay tax by the purchaser of delivery of products or services or both rather than the seller of those goods or services or both.
Current RCM under GST
In the current situation, the reverse charge process is used in service tax for utilities such as insurance agents, manpower supply, and goods transport agencies, among others. In contrast to the Service Tax, there is no definition of a partial reversal fee. The recipient would pay the full amount of tax on the supply.
Previously, it was difficult to raise service tax from the various unorganized markets, equivalent to goods transportation. The attempt has been made to position the facilities in accordance with the current system, and as a result, compliance and tax revenues can be improved by the reverse charge process. The reverse fee is now available on all goods and services.
Goods supplied under the Reverse Charge Mechanism
|S.No.||Description of supply of goods||Supplier||Recipient|
|1||Cashew nuts||Agriculturist||Any Registered Person|
|2||Bidi wrapper||Agriculturist||Any Registered Person|
|3||Tobacco Leaves||Agriculturist||Any Registered Person|
|4||Silk Yarn||A person who manufactures silk yarn.||Any Registered Person|
|5||Supply of Lottery||State Government, Union Territory or any local authority||Lottery distributor or selling agent|
|6||Used vehicles, seized & Confiscated goods||Central Govt or State Govt. Union Territory or the local Authority||Any Registered Person|
|7||Raw Cotton||Agriculturist||Any Registered Person|
|8||Priority Sector Lending Certificate||Any Registered Person||Any Registered Person|
RCM GST List For Services
|1||Goods transport agency||Casual Taxable person, body corporate, partnership firm, any society, factory, and persons registered under CGST, SGST, IGST Act|
|2||Recovery Agent||Banking Company, NBFC or financial institutions|
|3||Director of a company or a body corporate||Company or the body corporate|
|4||Individual advocate or firm of advocates||Any business entity|
|5||An insurance agent||Persons carrying on insurance business|
Reverse Charge Mechanism under GST – FAQs
Q1. What happens if the recipient of products and/or services is expected to pay Reverse Charge tax but is not a licensed dealer?
Both taxpayers eligible to pay tax under reverse charge must register for GST, and the Rs 20 Lakhs threshold does not apply to them.
Q2. Is Input Tax Credit permissible under Reverse Charge?
Payment charged on a reverse charge basis would be eligible for a production tax credit if the products and/or services are or will be used for commercial purposes. The input tax credit is available to the receiver (i.e., the one who pays reverse tax).
Q3. What happens if an Input Service Distributor provides products that are subject to Reverse Charge?
An ISD cannot allow transactions that are subject to Reverse charges. If the ISD wishes to obtain those supplies and use the Reverse Charge charged as credit, it must file as a Regular Taxpayer.
Q4. Is it legal to raise tax on a reverse charge basis from the recipient of a supply?
Yes, as long as the tax is levied, the government is entitled to receive it from anybody, whether the seller, the recipient, or anyone else. Even a third party can be compelled to deposit the tax where there is a nexus, such as the receipt of payment for a supply between two other people.
Q5. What impact does the reverse fee have on the input tax credit?
The recipient who pays tax on a reverse charge basis is entitled to an input tax credit for the tax collected on a reverse charge basis. The amount of a supply made by a seller whose tax is paid by the recipient is considered as an ‘exempt supply.’