Reverse charge mechanism under GST - Reverse gear of tax burden

[Lakhvinder Singh]

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)

S. No.	Goods Description	Supplier	Recipient
1.	Cashew Nuts, Not Shelled or peeled	Agriculturist	Any Registered Person
2.	Bidi wrapper leaves (Tendu)	Agriculturist	Any Registered Person
3.	Tobacco Leaves	Agriculturist	Any Registered Person
4.	Silk Yarn	Any person who manufactures silk yarn from raw silk or silk warm cocoons for supply of silk yarn Person	Any Registered Person
5.	Supply of lottery	State Govt. Union Territory or any local authority	Lottery distributor or selling agent

 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.)
 

Discussions to this article

[Maninder Singh]

Sir,

As per section 5(4) of IGST Act, if a registered person purchase any goods or service exceeding ₹ 5000/- per day from any or all unregistered supplier, he is liable to pay IGST on reverse charge basis. However when we have a look on the section 24 of CGST Act, it says that person making any inter-state taxable supply, will have to take registration mandatory, it means that unregistered person can not make inter-state supply, So here how the question of reverse charge arise. Please correct me if I am taking a wrong view and clarify in case of goods or service or both.

I have one more query regarding the reverse charge on expenses incurred by employees for official purpose, like conveyance, food and beverages, telephone or internet where they receive services from unregistered person. Whether company is liable to pay GST on reverse charge when it makes reimbursement of these expenses to employees or these expenses are covered under schedule III. Requesting you to please clarify this also.

[KASTURI SETHI]

Sh.Lakhavinder Singh Ji,

Sir, Nice article. Gaager Mein Saager hai. One more reason for RCM is to shift the burden of tax to body corporate from individual/Proprietorship, partnership firm, One Person Company etc. Those persons who will supply goods or services to body corporate will also forgo threshold exemption inasmuch as companies prefer to buy from registered persons only. Hence the facility/policy of RCM is a well planned strategy evolved by Govt. to plug the leakage of revenue..

[Gautam Kumar Bera]

Sir

I have a doubt relating RCM of Rs.5000/- per day . please clarify with a example to clear the matter.

ALL UNREGISTERED DEALER:-

Suppose if I purchase from A - ₹ 5000/- Tea in a day , ₹ 4500/- Printing & Stationery from B, RS. 2000/- office expenses from C, Now the total unregistered purchase is ₹ 11500/- in a day. Is it liable to pay RCM.

I seen some youtube video , they are telling that ₹ 5000/- per day from a single person not in gross or in total. further I purchase ₹ 6000/- then may it be taxable in whole under RCM.

[Rohit Bhura]

Sir, under point D you have written

• Taxable territory - Whole of India except Jammu & Kashmir

But as GST is applicable to J & K also so the taxable territory should be whole of india

[MANOHARAN ARUMUGAM]

Sir,

For inter-state services the service provider has charges us IGST @ 18% But in the invoice, they have shown this as CGST & SGST. The service provider says that this is per their system. My query is if the recipient unit can avail input tax credit? Pl. clear my doubt.

A.Manoharan

[KASTURI SETHI]

Under RCM, recepient can take credit only after making payment in cash.

[Ganeshan Kalyani]

Nice article.

[Lakhvinder Singh]

Dear Maninder singh ji regarding your query on expenses incurred by employees for official purpose, like conveyance, food and beverages, telephone or internet, as per my opinion GST not applicable on these reimbursements by employer as the main transaction is between unregistered persons(employee & unregistered supplier) and these reimbursements are as per employment terms.

[Lakhvinder Singh]

Kasturi sethi sir you have rightly said that the facility/policy of RCM is a well planned strategy evolved by Govt. to plug the leakage of revenue..

[Lakhvinder Singh]

Shri Gautam Beraji following is clarification regarding exemption of 5000 per day available on purchase from unregistered person:-

1. In case of supply more than ₹ 5,000/- per day, whole of such supply shall be taxable under reverse charge.
2. Limit is in respect of all suppliers, not in respect to one supplier.

[Maninder Singh]

Dear Sir,

Thanks for giving clarifications on the query. Request you to please share your opinion on reverse charge in case of interstate supply where registration is mandatory for a person making interstate supply.

[swaminathan venkataraman]

IMPROMPTU

The term 'reverse charge', as explained, calls for an elucidation. To be precise, the point not made quite clear is this: Whether the recipient acts only as a collecting agent of the levy; that is, the burden has to be picked up and borne by the supplier, in all situations?

To Dilate:

“• 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.”

The term’ reverse charge’, as thus explained, in one’s view, is lacking in clarity.

According to the scheme of things, as read and understood: Any levy of service tax, be it on supply of services (or of goods), if remember right, -as held out by the SC in a leading case,- the primary liability is that of the supplier . That is, strictly speaking, as per the law, he is the ‘principal debtor’, and as such, is ‘liable to pay the tax’. Even so, it is invariably taken for granted, rightly or wrongly so, that the supplier is , in the normal course, entitled to pass on the burden to the recipient. That, in one’s independent conviction, which is recalled to find support in observations of courts in certain decided cases, is not the ‘rule’; but with the exception of the recipient having not ‘agreed’ to bear the burden of the levy.
POSER (for an in-depth deliberation by eminent Experts):

Should not, having regard to the foregoing aspects, even under the new concept of ‘reverse charge’, as to who has to bear the brunt of the levy require to be decided on a case-to-case basis?

If so inspired, suggest that, professionals in field practice, may search for, and look up the material on the subject topic, available in public domain , for useful guidance.

[swaminathan venkataraman]

WRT -"Taxable territory -Whole of India except Jammu & Kashmir"

There is another aspect which has been brought out and shared on Facebook / Linked in, intended for deliberation by eminent experts. That is on the point of doubt in one’s mind, -whether it is amply clear that the service tax jurisdiction is limited to or extends beyond the territorial waters of India (i.e. 12 nautical miles ) . For comparison, need to keep in focus the areas of ongoing controversy , and issues still kept alive, in the matter of income-tax jurisdiction.

[Pratik Jain]

Dear Sir,

In Case of reimbursement by employer to employee for telephone exp, food, etc, we understand RCM is not applicable, so how would be book these expenses in our balance sheet, under employee exp or under individual heads like telephone exp, food exp, etc.

[Pratik Jain]

Also please help, what entries we have to make for RCM purchase of business expense say housekeeping exp. in our accounts.

[Raman Singla]

Sir,

U are right ,govt make RCM to avoid the leakage of tax.

I think it is only the matter of book keeping.

I deals in scrap where scrap only prefer cash. They sell in cash.

Earlier we were buying scrap by showing them first party purchase and sell it the party and submit the tax to the govt. that we charge to the party.

Same thing is now..we will charge to party and pay to government.

What is the difference between current and previous scenario ???

What is the maximum purchase limit of goods from unregistered persons in cash ?????

[Rohit Bhura]

WRT -"Taxable territory -Whole of India except Jammu & Kashmir"

If i am supplying material to Jammu and kashmir than the GST on transportation of good would be payable by service recipient in J&K as per Reverse Change or the GTA (SERVICE PROVIDER)

[Amit Choudhary]

Lalhvinder Singh ji very nice article.

Sir I have query i.e. does advance payment to FOREIGN VENDOR for import of goods, liable to IGST under RCM as the foreign vendor is unregistered dealer as per GST Act ?

Further if we pay IGST on RCM basis on payment of advance, again the same will be taxed at the time of import when the BILL OF ENTRY will be filed, which implies double taxation.

Sir please clarify this issue.

Thanks in advance.

[Gautam Kumar Bera]

ALL UNREGISTERED DEALER:-

Suppose if I purchased fro July-2017

1. Tea Expenses Rs.10000/-

2. Printing & Stationery Rs.10000/-

3. office expenses Rs. 10000/-

I have incurred ₹ 30,000/- all unregistered Purchases and we need to pay GST under RCM and Bill may be raised all together in a single bill at the end of July-2017.

a) In case of billing we need to mention separate HSN Codes for the above items separately or it may be included in a single HSN Code.

b) In case of separate HSN Code is there any exact HSN Codes for the above items

Please discuss

[KASTURI SETHI]

It cannot be composite supply. All HSN codes available on various sites including Board's site.

[abhishek ghai]

Respected Sir,

Request you to answer the following queries-

1. Since RCM has been specified in case of goods also, please tell in what circumstances will the Supplies from Unregistered person to Registered person be leviable to IGST as per Sec 5(4) of IGST Act. Because as per Sec 24 of CGST Act specifies that Person making Interstate taxable Supply is liable for compulsory registration under GST. So if Place of Supply of the sender of goods falls in state different to his local state, then how come the GST be payable by Registered person under RCM u/s 5(4) because in this case sender would require to be compulsorly registered??

For Ex: A Supplier from U.P. purchases a machinery from Delhi by taking delivery at the factory gate of Unregistered Supplier of Delhi for Supply to another registered person in Delhi itself. In the said transaction, he himself arranges the transporter and the risk & rewards of the goods are transferred to recipient on the factory gate of person in delhi. What shall be the place of Supply???

- If i consider place of Supply at Delhi only- The same would amount to Intrastate Transaction, thus out of IGST. Will I be Liable to take registration as casual dealer??

- If The Place of Supply is U.P.- Who will discharge IGST?? Will the Supplier be liable for Compulsory registration?

Please Guide.

Thanks & Regards,

Abhishek

[Raman Singla]

What is the maximum cash purchase limit from unregistered person in a single day under RCM ????

[abhishek ghai]

Sir,

Waiting for your response. kindly also clarify the manner of billing to be done in case of Purchases from Unregistered persons- Whether Self billing (Treating as outward Supply) or Inward Purchase billing to be done??

Thanks & regards,

CA Abhishek

[Gautam Kumar Bera]

In case of Inward supply RCM will be applicable but if we ( West Bengal ) pay ₹ 30000/- to avail GTA services for delivery the materials on our behalf to Madhyapradesh - one of our customer , then RCM will be applicable or it should be treated as INWARD SUPPLY