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Comprehending Reverse Charge

Comprehending Reverse Charge

1. What is reverse charge in GST?

In normal circumstances the supplier of goods or services is liable to remit the applicable GST. However, this duty to remit the tax to the government, in certain circumstances, falls on the recipient of the supply. Such payment is called as reverse charge.

2. Which are the goods and services for which reverse charge is applicable?
  1. The Government shall notify the list of goods and services on which tax will be payable on reverse charge basis. The recipient is required to pay the full tax applicable and all the responsibilities related to compliance with the law is on him.
  2. The CGST Law itself states that where a supply is made by an unregistered person to a person who is registered under GST, then the registered person is required to pay GST on reverse charge basis. It may be noted that tax is paid in full by the registered recipient. This is different from TDS provisions in GST where tax is deductible at specified percentages by the recipient.

In the both the cases given above, the recipient is entitled to input tax credit of the tax so paid under reverse charge subject to fulfillment of conditions and restrictions applicable for input tax credit.

3. What are the reasons for bringing supply by an unregistered person to a registered person under reverse charge?

Some of the reasons are as follows:-

  1. When an agriculturist supplies his farm produce to a trader, the said supply is not subject to GST. However since the farm produce becomes an input in the value chain, the responsibility is cast on the registered trader to pay GST on reverse charge and claim input tax credit. If the agriculturist sells directly to a consumer, reverse charge would not be applicable.
  2. Another reason is to discourage purchases from unregistered persons and encourage persons in the value chain to become registered and remit GST.
4. When is the time of Supply in case of supply of goods for which tax is payable under reverse charge?

Earliest of:-

  1. date of receipt of goods
  2. Date of payment as entered in the books of accounts of the recipient or the date on which the payment is debited in his bank account whichever is earlier
  3. The date after expiry of 30 days from the date of invoice or any such document.

If the above test cannot be applied, the time of supply shall be the date of entry in the books of accounts of the recipient of supply.

5. When is the time of Supply in case of supply of services for which tax is payable under reverse charge?

Earliest of:-

  1. Date of payment as entered in the books of accounts of the recipient or date on which payment is credited in the bank account whoever is earlier
  2. (b) The date after expiry of 60 days from the date of invoice or any such document

If the above test cannot be applied, the time of supply shall be the date of entry in the books of accounts of the recipient of supply. In the case of associated enterprises with the supplier located outside India, the time of supply will be determined as the earlier of date of payment and the date of entry in the books of accounts of the recipient of supply.

6. What are the important implications of reverse charge mechanism?

Persons who are required to pay tax on reverse charge basis are required to get themselves registered irrespective of threshold limit. In other words, a trader whose annual turnover is less than Rs 20 lacs but procures goods that are notified for payment of GST under reverse charge is required to get himself registered. He is also required to file returns. Person paying tax under reverse charge is required to issue invoice.

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