Finally, after a 13-year long journey, the landmark Goods & Services Tax (GST) has been rolled out.This would simplify and harmonize the Indirect tax regime in the country. The Indian GST model is a dual GST which differs from other countries where the Centre & State simultaneously levy on a common tax base and thus keeping with the constitutional requirement of fiscal federalism.
GST is a destination based tax on consumption of goods & services with a continuous chain of set-off benefits from the producer’s point and service provider’s point up to retailer’s level along with Reverse Charge Mechanism for better compliance. GST would replace eight central and nine state taxes and thus reduce the tax burden and compliance costs, removal of cascading of taxes, Increase competitiveness of trade and boosting exports. The GST rates in India are Nil, 5%, 12%, 18% & 28% where a majority of goods in India are taxed at 18% whereas the average rate in Austria is 20 % and in New Zealand, it is 15 %. It is estimated that at least 100 lakh Indirect tax assesses would get impacted by GST. As per Economic Survey 2016,the Indirect tax collections for 2016-17 are a Rs.8.63 trillion and GST is expected to increase the collections by at least 10%.
Purpose of Reverse Charge Mechanism
Earlier in the Service tax mechanism, the service tax was paid by the provider of the service. To give you an example of that, suppose a Chartered Accountant provides service to his client, here the CA being the service provider is liable to pay the service tax collected from the client & comply with the return filing process. Since India has a vast informal economy comprising 90% of the unorganized workforce, it gets difficult for the Government to collect service tax from unorganized sector and thus Reverse Charge Mechanism had been introduced. Hence under Reverse Charge Mechanism, a Service receiver is liable to pay Service tax and comply with the other provisions of Finance Act,1994
Under the GST regime, the concept of Reverse Charge Mechanism more or less, remains the same. Under GST, Reverse Charge Mechanism is applicable for both services as well as goods under circumstances mentioned in Section 9(3) and Section 9(4) and hence it is the receiver of goods/services and not the supplier of goods/services, who is liable to pay and deposit GST. The supplier receives the payment exclusive of GST from the recipient and the recipient deposits the GST with the government. Example: RCM is applicable to an unregistered supplier making intrastate supply to a registered supplier as well as for supply of specified goods & services notified by the government.
The law also casts an additional responsibility upon the registered buyer of goods/ services, to raise an invoice on self (‘self-invoicing’) for such purchases from unregistered persons and self-assess HSN code/ services accounting code (SAC) classification and the applicable GST rate on goods or services procured from an unregistered person.
Input Tax Credit
Input Tax Credit can be availed by filling the GST returns; provided those goods & services availed are used for the purpose of business.
It is mandatory to register under GST to those liable to pay tax under Reverse Charge Mechanism irrespective of the threshold limit of 20 lakhs and 10 lakhs (North eastern States).
Applicability of Reverse Charge
- In case of services provided by taxi driver or rent a cab operator through electronic commerce operator then GST has to be paid by E-commerce operator;
- Services through an E-commerce operator for supply of services (Startups like Housejoy shall be liable to collect GST from customers and pay to Government);
- Unregistered dealer providing supply to the Registered dealer (Here the Registered dealer is liable to pay GST on such supply);
- Supply of Cashew nuts, Bidi leaves, tobacco leaves by an agriculturist to any registered person, the registered person is liable to pay GST;
- Service of Goods Transport Agency;
- Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly (Clarified by the Delhi High Court);
- Sponsorship Service received from any person, the liability to pay tax vests with Body corporate or Partnership firm located in taxable territory;
- Services provided by a director of a company or body corporate in such authority of Directorship, the company or body corporate is liable to pay GST;
- In case of services provided by an Insurance Agent, The Person running insurance business is liable to pay GST;
- Nonresident service provider, i.e. in case of imports, the reciepient of services in India would be required to pay such taxes.
Time of Supply – Goods under Reverse Charge
The time of Supply of Goods shall be the earliest of :
- The date of payment or;
- The date of Receipt of goods or;
- The day immediately after 30 days from the date of issue of invoice by the supplier
Time of Supply – Services under Reverse Charge
The time of Supply of services shall be the earliest of
- The date of payment or ;
- The date immediately after 60 days from the date of issue of invoice by the supplier
In the following circumstances, the reverse charge mechanism shall be exempt:
- On those Goods & Services which are exempt from GST ;
- Reverse Charge GST doesn’t arise in the case of an interstate supply made by the unregistered supplier (As Interstate supply needs GST registration) ;
- If the total supply of goods and services received from an unregistered person doesn’t exceed Rs.5000 a day.
Thus Reverse Charge Mechanism would boost the indirect tax revenue as well as propel buyers to buy from registered vendors to avoid litigation, disputes, and working capital issues.
We hope to have given you a clearer picture of Reverse Charge Mechanism. In case of any doubts, please put your comments herein or write to us at firstname.lastname@example.org