Generally, the supplier of goods or services is liable to incur tax on supply. However, in specified cases, such as imports and other notified supplies, the recipient becomes liable to pay the tax. Reverse charge, therefore, means the liability to account for output GST may be cast on the receipt instead of the supplier.
In India, the concept of reverse charge under GST is fairly new. Its purpose is to primarily reduce tax evasion, particularly from the unorganized sectors, like goods transport. An entity who has to pay tax under reverse charge is required to mandatorily register under GST and the threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for special category states except Jammu and Kashmir) does not apply to them.
Note - Upon the recommendations of GST Council, the Central government has deferred the reverse charge mechanism till 30th September, 2019.
i) Nature of supply and/or nature of supplier - this is covered under Section 9 (3) of the CGST/SGST (UTGST) Act and Section 5(3) of the IGST Act.
Section 9(3) of the CGST/SGST (UTGST) Act reads “The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions 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 5(3) of the IGST Act reads “The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions 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.”
ii) Taxable supplies by any unregistered person to a registered person - This is covered under Section 9(4) of the CGST/SGST (UTGST) Act and Section 5(4) of the IGST Act.
Section 9(4) of the CGST/SGST (UTGST) Act reads “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 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.”
(Exemption: The government has exempted goods or services received from unregistered persons during the course of intra-state supply, covered under Section 9(4), provided the value (aggregate) of such supplies in a day, from any or all suppliers, does not surpass Rs. 5,000.)
Section 5(4) of the IGST Act reads “The integrated 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 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.”
| Description of supply of Goods | Supplier of goods | Recipient of goods |
|---|---|---|
| Cashew nuts, not shelled or peeled | Agriculturist | Any registered person |
| Bidi wrapper leaves (tendu) | Agriculturist | Any registered person |
| Tobacco leaves | Agriculturist | Any registered person |
| Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm yarn |
Any registered person |
| Raw cotton | Agriculturist | Any registered person |
| Supply of lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent |
| Used vehicles, seized and confiscated goods, old and used goods, waste and scrap |
Central Government, State Government, Union territory or a local authority | Any registered person |
Source: Official website of the Central Board of Indirect Taxes and Customs
| Description of supply of Service | Supplier of service | Recipient of service |
|---|---|---|
| Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. | Any person located in a non-taxable territory | Contnent R1C3 |
| GTA Services | Goods Transport Agency (GTA) who has not paid integrated tax at the rate of 12% | Contnent R2C3 |
| Legal Services by advocate | An individual advocate including a senior advocate or firm of advocates | Any business entity located in the taxable territory |
| Services supplied by an arbitral tribunal to a business entity | An arbitral tribunal | Any business entity located in the taxable territory |
| Services provided by way of sponsorship to any body corporate or partnership firm | Any person | Any body, corporate or partnership firm located in the taxable territory |
| Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, - (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local Authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers. | Central Government, State Government, Union territory or local authority | Any business entity located in the taxable territory |
| Services supplied by a director of a company or a body corporate to the said company or the body corporate | A director of a company or a body corporate | The company or a body corporate located in the taxable territory |
| Services supplied by an insurance agent to any person carrying on insurance business | An insurance agent | Any person carrying on Insurance business, located in the taxable territory |
| Services supplied by a person located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India | A person located in Non-taxable territory | Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory |
| Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1) | Author or music composer, photograph her, artist, or the like | Publisher, music company, Producer or the like, located in the taxable Territory |
| Supply of services by the members of Overseeing Committee to Reserve Bank of India | Members of Overseeing Committee constituted by the Reserve Bank of India | The Reserve Bank of India |
Source: Official website of the Central Board of Indirect Taxes and Customs
Self-invoicing has to be done when purchase of goods or services is made from an unregistered supplier and such a purchase falls under reverse charge. This is on account of the fact that the supplier cannot issue a GST-compliant invoice, making the buyer liable to incur taxes on their behalf. Therefore, self-invoicing, in this case, becomes necessary.
Does the reverse charge mechanism apply only to services?
No, reverse charge is applicable to supply of both goods and services, as notified by the government on the recommendations of the Council.
Is ITC allowed under reverse charge?
Tax paid on reverse charge basis shall be available for ITC, if such goods and/or services are used, or will be used, for business. The entity paying the reverse tax can avail ITC.
How is the time of supply of goods determined under the reverse charge mechanism?
The time of supply (of goods) will be the earliest of:
a) date of receipt of goods; or b) date of payment on the basis of books of account or date of debit in bank account, whichever is sooner; or c) the date immediately following 30 days from the date of invoice issue or similar document.
How is the time of supply of services determined under the reverse charge mechanism?
The time of supply (of services) will be the earliest of:
a) date of payment on the basis of books of account or date of debit in bank account, whichever is sooner; or b) the date immediately following 60 days from the date of invoice issue or similar document.
Will TCS be collected on supplies on which the recipient is required to pay tax on reverse charge basis?
No, TCS does not have to be collected on supplies where the recipient is required to pay tax on reverse charge basis.
