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REVERSE CHARGE MENCHANISM UNDER GST
SAHU & ASSOCIATES:
GST which has subsumed various tax and now stands as one single head-The Goods and Service Tax" impacting our Indian Economy in diverse fields, changed the way of business being carried out for years together and when it comes to taxability, apart from CGST, SGST, IGST & UTGST - The Reverse Charge Mechanism under GST" plays a vital role in the current scenario. Before GST being rolled out, the reverse charge mechanism was only applied to services under service tax but under GST it is applicable to both goods and services.
WHAT IS REVERSE CHARGE MECHANISM?
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.
In Simple terms Reverse charge is a mechanism where the recipient of the goods and/or services is liable to pay GST instead of the supplier. Eg- When Mr. A (Unregistered dealer) is supplying goods to Mr. B (Registered dealer), here Mr. B is liable to pay tax as RCM.
TYPES OF REVERSE CHARGE MECHANISM?
1. REVERSE CHARGE U/S 9(3) OF CGST ACT, 2017 AND U/S 5(3) OF IGST ACT, 2017
2. REVERSE CHARGE U/S 9(4) OF CGST ACT, 2017 AND U/S 5(4) OF IGST ACT, 2017
3. REVERSE CHARGE U/S 9(5) OF CGST ACT, 2017 AND U/S 5(5) OF IGST ACT, 2017
1. REVERSE CHARGE U/S 9(3) OF CGST ACT,2017 AND U/S 5(3) OF IGST ACT, 2017
Under this section 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"
LIST OF GOODS UNDER RCM SEC 9(3) CGST ACT / SEC 5(3) IGST ACT:
- Cashew nuts, not shelled or peeled
- Bidi wrapper leaves (tendu)
- Tobacco leaves
- Silk yarn
- Raw cotton
- Supply of lottery
- Used vehicles, seized and confiscated goods, old and used goods, waste and scrap
LIST OF SERVICES UNDER RCM SEC 9(3) CGST ACT / SEC 5(3) IGST ACT
- Any service supplied by any person who is located in a non-taxable territory to any person other than non taxable online recipient
- Goods transport agency (GTA Services)
- Legal Services by advocate
- Services supplied by an arbitral tribunal to a business entity
- Services provided by way of sponsorship to any body corporate or partnership firm
- Supply of services by the members of Overseeing Committee to Reserve Bank of India
- Services supplied by a recovery agent to a banking company or a financial institution or a non banking financial company
- 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
- 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) (a) of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like
- Services supplied by the CG, SG, 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 CG, SG 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.
- Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs).
- Services provided by business facilitator (BF) to a banking company
- Services provided by an agent of business correspondent (BC) to business correspondent (BC)
- Security Services services provided by way of supply of security personnel) provided to a registered person :Provided that nothing contained in the entry shall apply to,- (i)(a) a Department or Establishment of the CG or SG or Union territory; or (b) local authority; or (c) Government agencies;which has taken registration under the CGST Act, 2017 (12 of 2017) only for the purpose of deducting tax under Section 51 of the said Act and not for making a taxable supply of goods or services; or (ii) a registered person paying tax under Section 10 of the said Act.
- Services provided by way of renting of a motor vehicle provided to a body corporate
- Services of lending of securities under Securities Lending Scheme, 1997 (Scheme") of Securities and Exchange Board of India (SEBI"), as amended.
2. REVERSE CHARGE U/S 9(4) OF CGST ACT,AND U/S 5(4) OF IGST ACT, 2017
Supply of taxable goods and/or services or both by an un-registered supplier to a registered person is taxable under reverse charge u/s 9(4) of CGST Act, 2017 and u/s 5(4) of IGST Act, 2017, in the hands of recipient registered person from 1st July 2017 to 12th October 2017. In the Notification no. 8/2017-CTR dated 28-06-2017, the tax was exempted if the aggregate value of the supplies of goods or services or both received by a registered person from any or all the suppliers , who is or are not registered does not exceeds Rs.5000.Thereafter in the Notification no.38/2017-CTR dated 13-10-2017 the provision of section 9(4) of CGST Act was suspended till 31-03-2018,following the Notification no. 10/2018-CTR dated 23-03-2018 it was suspended till 30-06-2018, continuing on the suspension , it was further suspended till 30-09-2018 in the Notification no.12/2018-CTR dated 29-06-2018. Now only specified categories of goods or services shall be liable to pay tax under RCM from 01-02-2019as per the charging provision U/s 9(4).
LIST OF GOODS OR SERVICES COVERED UNDER RCM U/S 9(4) OF CGST ACT, 2017/ SEC 5(4) IGST ACT
In exercise of the powers conferred by sub-section (4) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on therecommendations of the Council, hereby notifies that the registered person specified in column(3) of the table below, shall in respect of supply of goods or services or both specified in column(2) of the Table below, received from an unregistered supplier shall pay tax on reverse chargebasis as recipient of such goods or services or both, namely.
SL NO. (1)
CATEGORY OF SUPPLY OF
GOODS AND SERVICES (2)
Supply of such goods and services or both [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.
Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.
Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) supplied to a promoter for construction of a project on which tax is payable or paid at the rate prescribed for items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.
3. REVERSE CHARGE U/S 9(5) OF CGST ACT, AND U/S 5(5) OF IGST ACT, 2017
Under this section 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".
The below mentioned suppliers of services covered u/s 9(5) are exempted from compulsory registration and can take benefit of threshold limit.
LIST OF SPECIFIED SERVICES COVERED UNDER U/S 9(5) OF CGST ACT AND U/S 5 (5) OF IGST ACT
- Transportation of passengers by a radio-taxi, motorcar, maxi cab and motor cycle
- Providing accommodation in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes
- Services by way of house-keeping, such as plumbing, carpentering etc
WHO IS REQUIRED TO REGISTER?
All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold as it falls under mandatory registration and no threshold limit is applicable. In other words, the threshold limit for GST registration of Rs 40 Lakhs in case of goods and Rs 20 Lakhs in case of services shall not apply to such persons.
If a person only supplies goods and services on which GST is paid on reverse charge basis then such person is not required to take registration even if the turnover exceeds the specified limits. Stating an example of a farmer who sells cashew nuts to a trader, here the trader is liable to pay RCM.
Eg- If a farmer is not engaged in trading of other taxable goods then he is not liable to take registration under GST. (Reference: Notification No. 5/2017 – Central Tax - This notification came into force on the 22nd day of June, 2017).
INPUT TAX CREDIT UNDER REVERSE CHARGE?
Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The recipient (i.e., who pays reverse tax) can avail input tax credit.
And in relation to Input Service Distributor, they have to register as a Normal Taxpayer on receipt of supplies liable to Reverse Charge so as to take the Reverse Charge paid as credit. When it comes to composition dealers, they are not allowed to take input tax credit in normal circumstances and therefore they are also not allowed to take input tax credit on RCM.
AT WHAT RATE OF GST?
The rate of tax to be used is the rate which is applicable on such goods/service. GST Compensation Cess is also applicable on reverse charge. If the goods/services purchased in exempted or nil rated then no tax is payable under RCM. Composition dealers are required to pay RCM at normal rates (5%,12%,18%,28%) and not at the composition rates (1%/ 5%).
Also the amount of GST under Reverse charge is to be paid in cash only and cannot be paid from ITC available.
WHEN IS REVERSE CHARGE MECHANISM TAXED?
The point of taxation is based on the time of supply of goods & services, under reverse charge it is taxed earlier of the following:
IN CASE OF GOODS
- The Date of receipt of goods>The Date of Payment >The Date immediately after 30 days of issue of an invoice>The Date of entry in the books of account if it is not possible to determine the time of supply
Date of receipt of goods-10th Mar'20
Date of Payment - 20th Mar'20
Date of Invoice – 12th Mar'20
Date of Entry in Books of Accounts – 15th Mar'20
The time of supply under reverse charge of goods for this case will be Date of receipt of goods i.e. 10th March 2020. In case this date could not be determined then the date of entry of books of account will be mentioned i.e. 15th Mar'20.
IN CASE OF SERVICES
- The Date of Payment >The Date immediately after 60 days of issue of an invoice>The Date of entry in the books of account if it is not possible to determine the time of supply
Date of Payment - 12th Mar'20
Date of Invoice – 20th Mar'20
Date of Entry in Books of Accounts – 15th Mar'20
The time of supply under reverse charge of Services for this case will be Date of Payment i.e. 12th March 2020. In case this date could not be determined then the date of entry of books of account will be mentioned i.e. 15th Mar'20.
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