Reverse Charge in GST.

Question BankCategory: Goods & Service Tax (GST)Reverse Charge in GST.
Sachin asked 1 year ago

Explains all types of situations/cases covered under reverse charge in GST. Where GST is to be paid by buyer not seller. 

2 Answers
Aditya answered 1 year ago

Reverse Charge in GST (Goods and Services Tax) is a mechanism where the responsibility of paying the tax shifts from the supplier to the recipient of goods or services. This is a deviation from the usual norm where the supplier of goods or services is liable to pay GST. Here are some key points about the Reverse Charge Mechanism (RCM) in GST:

  1. Applicability: The reverse charge applies to specific goods and services as notified by the government. It’s commonly applicable in cases where the supplier is not registered under GST but the recipient is, or in certain specified transactions involving imports or services provided by unregistered businesses.
  2. Purpose: The main aim of the reverse charge is to increase tax compliance and tax revenues, especially in cases where suppliers are small vendors or unregistered entities. It also helps in regulating the informal sector and brings more transactions under the GST framework.
  3. Payment and Input Tax Credit: The recipient of goods or services who pays GST under reverse charge can usually claim it as an input tax credit if the goods or services are used for business purposes. This credit can be used to set off future GST liabilities.
  4. Compliance Requirements: Businesses under the reverse charge mechanism need to be diligent about compliance. They must accurately report these transactions in their GST returns and pay the applicable tax.
  5. Impact on Cash Flow: Since the recipient has to pay GST directly to the government, it can have an impact on the cash flow of the business, as they have to pay tax upfront and claim the input tax credit later.
  6. Registration Requirement: Even if a business falls below the threshold limit for GST registration, it has to compulsorily register under GST if it is liable to pay tax under the reverse charge mechanism.

The reverse charge mechanism is crucial for ensuring tax compliance from all parties involved in the supply chain, especially in cases where small or unregistered suppliers provide goods or services to larger, GST-registered businesses.
 
 
 
Under the Reverse Charge Mechanism (RCM) in the Goods and Services Tax (GST) system in India, certain goods and services require the recipient, rather than the supplier, to bear the tax liability. This mechanism applies to specific situations, as updated till August 20, 2023:

  1. Services under RCM:

    • Legal services provided by an advocate or an arbitral tribunal to a business entity.
    • Services offered by way of sponsorship to corporate bodies or partnership firms.
    • Services supplied by the government (excluding certain specified services) to business entities.
    • Director’s services provided to a company or a body corporate.
    • Services provided by an insurance agent, a recovery agent to financial institutions, and services provided by Goods Transport Agencies (GTA).
    • Certain services related to intellectual property rights like copyrights.
  2. Supply of Goods under RCM:

    • Agricultural products such as cashew nuts (not shelled or peeled) and raw cotton supplied by agriculturists to registered persons.
    • Silk yarn supplied by manufacturers to registered persons.
    • Specific categories of goods supplied by the government or local authorities, such as used vehicles, confiscated goods, and waste and scrap.
  3. Other Notable Situations:

    • Services provided by business facilitators or agents to banking companies.
    • Security services provided to registered persons.
    • Services related to renting motor vehicles to corporate bodies.
    • Lending of securities under the Securities Lending Scheme of SEBI.
  4. Reverse Charge in Imports:

    • In B2B (Business to Business) imports, whether goods or services, the recipient is responsible for paying the tax.
  5. Registration Liability Under RCM:

    • Any person paying taxes under RCM needs to register under GST irrespective of the threshold limit. This includes businesses involved in B2B transactions.
  6. Manner of Payment of GST under RCM:

    • The GST payment under RCM needs to be made through cash/bank transfer, and it cannot be offset against any input tax credit.
  7. Time of Supply:

    • The time of supply for goods and services under RCM varies and is determined based on factors like the date of receipt of goods, payment, and invoice issue date.

It’s important to note that there are no partial reverse charges under GST; 100% of the tax is to be paid by the recipient when RCM is applicable. Additionally, for businesses registered under GST, compliance with RCM provisions is mandatory, and failure to adhere to these regulations can result in penalties.

Siva answered 3 months ago

RCM (Reverse Charge Mechanism): Normally, the supplier of goods or services is liable to pay GST. However, in some cases like imports or specified services under the reverse charge mechanism, the recipient becomes liable to pay the tax directly to the government. This mechanism is aimed at increasing tax compliance and coverage.

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