What is reverse charge mechanism under GST and its applicability

Reverse charge mechanism is a new concept introduced in GST. As per GST law, the supplier of goods or services is liable to pay tax. However, under reverse charge mechanism, the recipient of goods and/or services shall be required to pay CGST and SGST/UTGST on intra-state sales or IGST on inter-state sales if following conditions are fulfilled-

  • Goods or services or both as notified by the Government on the recommendations of GST council are supplied
  • Supply is from an unregistered person to a registered person. This means the supplier is not registered but the recipient is registered.

Reverse charge mechanism is applicable to the recipient of goods as if he is the person liable for paying the tax in relation to the supply of goods and/or services.

Which means, if the reverse charge mechanism is applicable then, the liability to pay tax is sifted from the supplier to recipient of goods and/or services. As tax is payable by the recipient, the supplier in this case will not be liable for any compliance under GST law.

Goods and services notified under reverse charge mechanism

Following supplies of goods taxable under reverse charge;

  • Cashewnuts
  • Bidi wrapper leaves
  • Tobacco leaves
  • Lottery
  • Silk yarn
  • Used vehicles
  • Seized and confiscated goods
  • Old and used goods
  • Waste and scrap
  • Raw cotton

Supply of services taxable under reverse charge

Goods transport agency 

Supply of services by a goods transport agency (GTA) in respect of transportation of goods by road to following recipients are covered if such goods transport agency has not charged CGST @ 6% and SGST @6% or IGST @12%.

  • Any factory registered under or governed by the Factories Act, 1948; or
  • Any society registered under the Societies Registration Act, 1860; or under any other law for the time being in force in any part of india
  • Any co-operative society established by or under any law; or
  • Any person registered under the CGST Act or the IGST Act or the SGST Act or the UTGST Act; or
  • Any body corporate established, by or under any law; or
  • Any partnership firm whether registered or not under any law including association of person; or
  • Any casual taxable person

In above cases, tax has to be paid by the person who pays or liable to pay freight for the transportation of goods by road in goods carriage. However, reverse charge mechanism is not applicable to services provided by a GTA, by way of transport of goods in a goods carriage by road to-

  • A department or establishment of the central government or state government or union territory; or
  • Local authorities; or
  • Government agencies

Which has taken registration under the CGST Act, 2017 only for the purpose of deducting tax U/s 52 and not making a taxable supply of goods and/or services.

Advocates

Services supplied by an individual advocate including senior advocates or firm of advocates by way of legal service, directly or indirectly to any business entity located in the taxable territory are covered under reverse charge mechanism.

Legal service means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.

Other listed services covered under reverse charge mechanism

Apart from goods transport agencies and advocates, we have certain other services which are covered under reverse charge mechanism. Here is the list;

  • Supply of services by arbitral tribunal to business entity
  • Services provided by way of sponsorship to any body corporate or partnership firm.
  • Service supplied by a director of a company or body corporate to the said company or body corporate.
  • An insurance agent to any person carrying on insurance businesses.
  • A recovery agent to a banking company or a financial institution or a non-banking financial company.
  • An author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered u/s 13(1)(a) of the copyright act, 1957 relating to original itenary, dramatic, musical or artistic work.
  • A publisher, music company, producer or the like
  • Members of overseeing committee to RBI
  • Individual direct selling agent other than a body corporate, partnership or LLP to bank or NBFC. Body corporate includes a company incorporated outside India but does not include cooperative society and any other body corporate notified by the central government.
  • Services supplied by central government, state government, Union territory or local authority to a business entity excluding,-
    • Renting of immovable property
    • Service by the department of post
    • Services in relation to an aircraft or vessel inside or outside the precincts of a port or an airport.
    • Transport of goods or passengers
  • Central government, state government, Union territory or local authority by way of renting immovable property to a person registered under CGST Act, 2017.
  • Services supplied by an agent of business correspondent to business correspondent.
  • Services provided by way of supply of security personnel by a person other than body corporate to a registered person. However it shall not apply to;
    • A department or establishment of the central government or state government or union territory; or
    • Local authority; or
    • Government agencies; which has taken registration under the CGST Act, 2017 only for the purpose of deducting tax u/s 51 of the said act and not for making a taxable supply of goods or services; or
    • A registered person paying tax under composition scheme.
  • Transfer of development rights or floor space index (including additional FSI) by a person for construction of a project to a promoter.
  • Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount ( called as premium, salami, cost price, development charges or by any other name) and/or periodic rent for construction of a project by a promoter.

In above cases, GST must be levied based on whether the supply is interstate or intrastate. In addition to above cases, in following supply of additional services reverse charge mechanism is applicable under 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.
  • 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.

Tax invoice when GST payable on reverse charge basis

A registered person who is liable to pay GST under reverse charge shall issue an invoice in respect of goods or services received by him on the date of receipt of goods or services from the supplier who is not registered under the act.

Please note, under the reverse charge mechanism, the recipient is required to pay tax when the supplier is not registered under GST. As such, the recipient is required to issue an invoice only when the supplier is not registered under GST.

If the value of such supplies exceeds Rs 5,000 a day from any or all suppliers, then the invoice can be issued on a monthly basis in consolidated form. However, it’s not applicable when GST is payable under reverse charge under section 9(3) of CGST Act and 5(3) of IGST act.

At the time of making payments to suppliers in respect of supplies to which reverse charge mechanism is applicable, a payment voucher is to be issued. This means, in case of reverse charge supplies received from an unregistered person, recipient liable to issue invoice and payment voucher.

The payment voucher should have following details;

  • Name, address and GSTIN of the supplier
  • Serial number not exceeding 16 characters
  • Date of its issue
  • Name, address and GSTIN of the recipient
  • Description of goods or services
  • Amount of advance taken
  • Rate of tax (CGST,SGST,IGST,UGST)
  • Amount of tax charged in respect of taxable goods or services (CGST,SGST,IGST,UGST).
  • Place of supply along with the name of state and its code
  • Whether the tax is payable on reverse charge basis
  • Signature or digital signature of the supplier or authorized representative

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.