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A comprehensive summary of reverse charge & its basics
What is reverse charge?
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.
Note: Reverse charge applicable on supplies made by unregistered vendors to their registered customers has been suspended till June 30, 2018.
When is reverse charge applicable?
Reverse charge is applicable on both, goods and services. The following are the situations in which reverse charge will be applicable:
- A registered business owner receiving goods or services from an unregistered vendor. Example: A registered wholesaler or a retailer buying farm produce (for the purpose of selling it to other vendors/consumers) from unregistered vendors, has to pay the GST associated with the purchase to the government.
- Services offered by an aggregator or e-commerce operator.
- The following list of goods and services specified by Central Board of Excise and Customs (CBEC).
| S.No | Tariff item, sub-heading, heading or chapter | Description of supply of Goods | Supplier of goods | Recipient of supply (the person who pays tax on reverse charge) |
|---|---|---|---|---|
| 1. | 0801 | Cashew nuts, not shelled or peeled | Agriculturist | Registered taxable person. |
| 2. | 1404 90 10 | Bidi wrapper leaves (tendu) | Agriculturist | Registered taxable person. |
| 3. | 2401 | Tobacco leaves | Agriculturist | Registered taxable person. |
| 4. | 5004 to 5006 | Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons. | Registered taxable person. |
| 5. | — | Supply of lottery | State Government, Union Territory or any local authority. | Lottery distributor or selling agent. |
- List of services applicable to be taxable under reverse charge from the 14th GST council meet. Here the receiver of such services is liable to pay GST on reverse charge.
| S.No | Service | Service provider | Recipient of supply (the person who pays GST on reverse charge) |
|---|---|---|---|
| 1. | Services provided by a person in a non-taxable territory | Supplier in non-taxable territory | Registered taxpayer |
| 2. | Transport of goods by road | Goods Transport Agency | Registered taxpayer |
| 3. | Legal services | Legal firm or advocate | Registered taxpayer |
| 4. | Services provided by an arbitral tribunal | Arbitral Tribunal | Registered taxpayer |
| 5. | Sponsorship services | Individual or business | Corporate or partnership firms |
| 6. | Services provided by government or local authority (excludes renting of immovable property, postal services, insurance and agency services, services provided to an aircraft or ship in an Indian air port or port and transport of goods/passengers) | Government/Local authority | Registered taxpayer |
| 7. | Services offered by a director or corporate body to their own company | Director or corporate body | The company to which they offer their services |
| 8. | Services of an insurance agent | Insurance agent | Insurance company |
| 9. | Recovery agent services | Recovery agent | Banking company/Financial firm |
| 10. | Transport of goods by a vessel from overseas to a customs office in India | Transporting agency | Importer of goods |
| 11. | Transfer/Giving permission to copyrighted content (as according to section 13(1) of copyright act 1957) | Artist, musician or any creative person | Publishing company |
| 12. | Taxi services through an e-commerce operator | Taxi driver | E-commerce operator |
Requirements under the reverse charge mechanism
- The recipient of goods/services must be registered under GST.
- Every registered business owner should maintain accurate records of supplies 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
- the date immediately after 30 days from the invoice date for goods and 60 days from the invoice date for services.
Note: If none of the above applies, then it can also be the date of entry in the books of the receiver.
Examples for determining time of supply for goods and services:
Goods:
Let’s say, you purchase goods from an unregistered vendor on October 28, 2017. The goods are delivered to your workplace on October 29, 2017. Now, you complete your payment on November 1, 2017. So, you have to pay GST under reverse charge, as the supplier is unregistered.
In this case, time of supply would be 29 October 2017 (Date of receipt of goods).
Services:
For example, if you are the owner of a goods transport agency, and you provide transportation services to a client. Since reverse charge is applicable on goods transportation service, the client (recipient) has to pay reverse charge. Now, you’ve provided the services on 28 October 2017, and issued an invoice the very same day, and the client pays you on 5 November 2017.
In this case, the time of supply would be 5 November 2017.
If the client fails to make the reverse charge payment to you within 60 days, the time of supply will be 60 days from the date of invoice, that is the 28th of December.
ITC on reverse charge
Input tax credit can be claimed by the buyer as long as they use the goods and services they bought on reverse charge basis for business purposes only.
Also, a supplier cannot claim ITC on the tax paid on goods/services that were used to make supplies that incur reverse charge.
Self-invoicing
Under reverse charge mechanism, self-invoicing is done when a business owner purchases supply from an unregistered supplier. This is done, as the unregistered supplier cannot issue an invoice.
Exemptions under reverse charge
A registered business owner is exempted from paying GST through reverse charge on intra-state purchases from unregistered sellers, as long as the total value of the supply received per day is less than or equal to Rs.5,000/-.