Reverse charge in GST

What is reverse charge in GST?

Although the end consumer bears the final burden of the tax, the supplier must first file the tax. However, a situation where the recipient pays the tax directly to the government is termed reverse charge. This implies that the liability to pay tax on the supply of goods and services falls on the receiver instead of the supplier of such goods or services.

Reverse charge was expanded under the newly introduced GST structure. It is now applicable to goods supplied instead of only service provided. The main reason for putting in place the reverse charge mechanism is to ensure compliance to the GST laws and increase tax revenues of the government. As there are small businesses that are exempted from GST registrations, large businesses that purchase goods or services from these businesses that enjoy tax relief will file the tax in their stead.

When to Apply Reverse Charge

  • In the case where an unregistered dealer under GST supplies goods to a registered dealer, reverse charge is applicable. To pay this tax, the registered dealer has to do self-invoicing for the purchases. On the invoice, it must be clearly stated that a reverse charge was incurred on the purchases and a thorough and accurate record must be kept. To simplify this process, the recipient should make use of GST accounting software.
  • Purchase of items below Rs.5000 per day does not attract reverse charge even if you are buying from an unregistered dealer in intra-state transactions.
  • In the case of e-commerce operators, the tax burden on the services provided by them will fall on them. A representative of the e-commerce firm shall be appointed to be paying the tax on behalf of the company.
  • The purchase of agricultural products, like cashew nuts and tobacco leaves, and the supply of lottery attract reverse charge.
  • Services such as those provided by a non-taxable person, a person in a non-taxable territory, sponsorship service, and service of an insurance agent among others also carry reverse charge. This implies that the receiver of such goods or service will pay the GST to the government.

Time of Supply under Reverse Charge

The time of supply shall be the earliest of any of the following dates:

  • The date of receipt of goods
  • The date immediately after 30 days from the date of issue of an invoice by the supplier.

If the time of supply cannot be determined even with the aforementioned dates, the time of supply shall be the date of entry in the books of account of the recipient. You can use your online accounting software for easy generation of self-invoice, as the unregistered supplier cannot provide GST recognized invoice.

Other Points to Note on Reverse Charge

  • Buyers who use the goods or service they pay reverse charge for can claim Input tax credit on such payment. However, if the goods is for personal consumption there is no ITC on reverse charge.
  • Taxpayers under composition scheme are not eligible for reverse charge.

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