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Reverse Charge Mechanism under GST


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MEANING-

Reverse Charge Mechanism under GST : It implies recovery of tax from the recipient of goods or services or both, instead of the supplier.

“As per section 2(98) of CGST Act’2017, “reverse charge” means the liability to pay tax by the recipient of supply of 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 subsection (4) of section 5 of the Integrated Goods and Services Tax Act;”

 Category of Supply (CGST)-

Section 9(3) of CGST Act’2017 says:  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.

 Supply from unregistered dealer to unregistered dealer (CGST)-

 Section 9(4) of CGST Act’2017 says:  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.

 Category of Supply (IGST)-

 Section 5(3) of IGST Act’2017 says:  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.

 Supply from unregistered dealer to unregistered dealer (IGST)-

 Section 5(4) of IGST Act’2017 says:  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.

RATIONALE OF RCM-

  • Difficulty in collection of tax and compliances
  • Out of Jurisdiction eg.Imports
  • More revenue collection with burden on less people

 

PRE-REQUISTIES FOR RCM-

  • Supply of taxable goods or services or both
  • Recommendation by GST Council wrt categories of supply of goods or services
  • CG/SG shall issue a notification wrt categories of supply of goods or services
  • Recipient will step into the shoes of the person making the supply and all the provisions shall apply accordingly i,e, take registration, file the returns, comply with all the relevant rules, etc
  • The supplier must mention on the tax invoice that GST is payable under RCM.

APPLICABILITY OF RCM-

  • Supply of goods or services or both by UNREGISTERED DEALER TO REGISTERED DEALER.
  • Supply through Electronic Commerce Operator.

Section 9(5) of CGST Act states that “The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services”.

Where an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax. Again If an electronic commerce operator does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax.

  • Not an exempt supply.
  • Supply is received in taxable territory e.g. Jammu and Kashmir is out of the preview of CGST & IGST.
  • Chck the category of provider and recipient of supplier. Refer the list issued by the Council containing the categories of services on which RCM is applicable.
  • Threshold limit of provider and recipient of supplier is irrelevant for registration and payment under RCM.

Section 24 starts with a non-obstante clause as follows:

“ Notwithstanding anything contained in sub-section (1) of section 22, the following categories of persons shall be required to be registered under this Act,––

(i)…

(ii)….

(iii) persons who are required to pay tax under reverse charge; “

  • GST Compensation Cess will also be applicable.
  • There is no concept of partial RCM under GST Act (Unlike existing RCM under Finance Act).

TIME OF SUPPLY FOR RCM-

As per Section 12(3) of CGST Act, 2017,

Time Of Supply shall be earliest of –

  • The date of the receipt of goods; or
  • The date of payment as entered in the books of account of the recipient; or
  • The date on which the payment is debited in his bank account, whichever is earlier; or
  • the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

However, where it is not possible to determine the time of supply as above, the time of supply shall be the date of entry in the books of account of the recipient of supply.

PAYMENT OF RCM LIABILITY-

Must be paid in cash. ITC cannot be utilised for payment of liability under RCM.

Output Tax-

Section 2 (82) of CGST Act 2017, states that “output tax” in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis;

Section 49(4) states that “The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.”

Hence, it can be interpreted from above that ITC available cannot be utilized for the payment of liability under reverse charge and it must be paid in cash.

 INPUT TAX CREDIT (ITC) OF TAX PAID UNDER RCM-

  • ITC is available as soon as the liability of RCM is discharged, provided such ITC is not specifically under the Act.

Definition of Input Tax

Section 2(62)of CGST Act states that: “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes:

(a) ………;

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9; (c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act; (d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or (e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act –

  • ITC is not denied if payment to the supplier is not made within 180 days of the time of supply.

 Second Proviso to Section 16

 “where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.”

  • Supplies on which tax is payable under RCM shall be considered as exempt supply for the supplier and ITC is not available on such exempt supplies.

Value of Exempt Supply-

As per Section 17 (3) of CGSST Act’2017 – “The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

 

 ITC for taxable as well as exempt supplies-

As per Section 17(2) of CGST Act’2017 – “Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”

  • Composite Dealer will need to pay tax under RCM at the normal rates and not at the concessional rate generally applicable. Also, he cannot claim ITC of tax paid under RCM as per section 10(4).

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