Reverse charge is the mechanism to collect tax on the services where Government was unable to collect tax, like unorganized sectors like goods transports, lawyers or professionals. It is difficult to collect tax or bring them under the tax criteria, hence the tax is levied on the persons using the services. In normal course, the supplier of goods or services raise the bills and collect tax from recipient of goods or services and deposit the same with the tax authority. While in reverse charge mechanism, the liability of tax is on the recipient of services. The liability gets reversed and that is why it is called reverse charge.
The reverse charge mechanism was also present in service tax, where in some services was defined under reverse charge mechanism while under GST regime, Government may notify the goods as well under the reverse charge. Accordingly, Government notified all the taxable goods supplied by a unregistered person to a registered person, though exempted goods or services is not covered under reverse charge.
In all the cases liability to pay tax under reverse charge mechanism shall be on the recipient except electronic commerce operator. If services are supplied through e-commerce operator, all the provisions of GST Act shall apply to such e-commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services or goods. Even the e-commerce operator, if not in the taxable territory, he shall appoint a person in such taxable territory for the purpose of paying tax and all the liability under the act shall be upon the such person. Here, it is to note that e-commerce operator shall collect the tax from the customers instead of service providers.
The services covered under GST act are as under
- Insurance agent
- Recovery agent of a Bank, FI or NBFC
- Services of a Lawyer or lawyer firm to a business entity.
- Renting of immovable properties by Government or local authority
- E-commerce operator
- Services of a director to a company
- Manpower supply
- Goods Transport Agencies
- Non-resident service providers
- Any service involving aggregators
In case of reverse charge –
- the date of supply of goods shall be determine earliest of the following
(a) the date of receipt of goods OR (b) the date of payment OR (c) the date immediately after THIRTY days from the date of issue of invoice by the supplier.
Even if it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.
- the time of supply of services shall be the earliest of the following
(a) the date of payment of the service OR (b) the date immediately after SIXTY days from the date of issue of invoice by the supplier
If it is not possible to determine the time of supply under (a) or (b), the time of supply shall be the date of entry in the books of account of the receiver of service.
Under GST regime, the reverse charge is applicable on goods for the first time. Under VAT laws earlier, some states treat purchases from unregistered dealers as nil tax while some states imposed purchase tax on such purchases and the same tax was available as input tax credit for such dealer. Under GST law, the purchase from unregistered dealers shall attract the GST and the buyer (registered dealer) shall be liable to pay tax on such purchases irrespective of the purpose for which such goods are purchased. The tax deposited by the dealer shall be available for input tax credit.
Government made an important provision in the act, that when both supplier and the recipient of goods or services are under threshold limit to obtain registration and the recipient receive goods or services notified for tax payment under reverse charge mechanism, the recipient shall mandatory to be registered under GST, even if his turnover is less than the threshold limit.
If the dealer opted for the composition scheme, he shall have to pay the tax at the normal rate of tax applicable to such supply on the goods and services notified under reverse charge mechanism and being a composition dealer, the ITR shall not be available to him for such tax payment.
If dealer who is paying tax on goods or services notified under reverse charge mechanism, is supplying the goods or services or both where output tax is either exempted or zero valued or supplying partially taxable and partially zero tax or exempted goods or services, ITR of tax paid by him under reverse charge mechanism shall be restricted to the tax liability on the supplies made by him. Means if his output supply of goods or services attract zero tax, his ITR shall be NIL.