REVERSE CHARGE MECHANISM & COMPENSATION CESS
SECTION 9(3) AND SECTION 9(4) – LEVY UNDER REVERSE CHARGE
INTRODUCTION
Reverse charge, where the recipient is liable to pay tax, is common to many countries like Canada where it is applicable on imports of services and intangible properties. Normally, under GST the supplier is liable to pay the tax on supply. In certain cases, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed which is why it is called reverse charge.
The purpose of this charge is to increase tax compliance and tax revenues. Earlier, the Government was unable to collect service tax from various unorganized sectors like goods transport. Compliances and tax collections will therefore be increased through reverse charge mechanism (RCM).
The concept of reverse charge mechanism was - already present in service tax. In GST regime, reverse charge is - applicable for both services as well as goods.
REVERSE CHARGE UNDER GST
Reverse charge as discussed above means, the liability to pay tax is on the recipient of goods/services instead of the supplier. Reverse charge is applicable for both services as well as goods.
Situations where reverse charge will apply
1. RCM on Specified goods or services
The recipient of specified category of goods or services or both, as notified by the Government , shall be liable to pay tax on reverse charge basis. The recipient may or may not be a registered person. [Section 9(3) of CGST Act]
2. RCM on Purchases from Unregistered person
Specified class of registered persons, as notified by Government, shall be liable to pay tax on reverse charge basis in respect of supply of specified categories of goods or services or both, received from an unregistered supplier. [Section 9(4) of CGST Act].
3. Services through an e-commerce operator
If a person offers his services through an e-commerce operator, then reverse charge will apply on the e-commerce operator. Thereby the e-commerce operator will be liable to pay GST.
For example, Urban Clap provides services of plumbers, electricians, teachers, beauticians etc. Urban Clap is liable to pay GST and collect it from the customers instead of the registered service providers.
If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.
4. Other categories of supplies applicable for reverse charge will be notified by the Centre or State Government
In case a person being a recipient is made liable to pay tax under reverse charge, he shall step into the shoes of a supplier and all the provisions of this Act that applies to a supplier shall be applicable to him also.
CURRENT SCENARIO
At present, below is the list of specified goods or services to which Reverse Charge applies under Section 9(3)—
GST REVERSE CHARGE MECHANISM ON GOODS
Sr. | Tariff Item, sub-heading, heading or Chapter | Description of Goods | Supplier of goods | Recipient of supply |
1 | 0801 | Cashew nuts, not shelled or peeled | Agriculturist | Any registered person |
2 | 1404 90 10 | Bidi wrapper leaves (tendu) | Agriculturist | Any registered person |
3 | 2401 | Tobacco leaves | Agriculturist | Any registered person |
4 | 5004 to 5006 | Silk Yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn | Any registered person |
4A | 5201 | Raw Cotton | Agriculturist | Any registered person |
5 | — | Supply of lottery | State Government, Union Territory or any local authority | Lottery Distributor or selling agent |
6 | Any Chapter | Used vehicles, seized and confiscated goods, old and used goods, waste and scrap | Central Government, State Government, Union Territory or a local authority | Any registered person |
7 | Any Chapter | Priority Sector Lending Certificate | Any registered person | Any registered person |
GST REVERSE CHARGE MECHANISM ON SERVICES
Sr | Category of Supply of Services | Supplier of Service | Recipient of Service |
1 | Supply of services by a Goods Transport Agency (GTA), in respect of transportation of goods by road, to—
Provided that nothing contained in above entry shall apply to services provided by a GTA, by way of transport of goods to,—
which has taken registration under the Central GST Act, 2017 only for the purpose of deducting tax under Section 51 and not for making a taxable supply of goods or services. | Goods Transport Agency (GTA) who has not paid Integrated Tax (IGST) @ 12%/ Central tax (CGST) @ 6% |
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2 | Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly. | An individual advocate including a senior advocate or firm of advocates | Any business entity located in the taxable territory. |
3 | Services supplied by an arbitral tribunal to a business entity. | An arbitral tribunal | Any business entity located in the taxable territory. |
4 | Services provided by way of sponsorship to any body or partnership firm. | Any person | Any body corporate or partnership firm located in the taxable territory. |
5 | Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, —
| Central Government, State Government, Union territory or local authority | Any business entity located in the taxable territory. |
5A | Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the CGST Act. | Central or State Government, Union territory or local authority | Any person registered under the Central Goods and Services Tax Act, 2017. |
5B | Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter. | Any person | Promoter |
5C | 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. | Any person | Promoter |
6 | Services supplied by a director of a company or a body corporate to the said company or the body corporate. | A director of a company or a body corporate~ | The company or a body corporate located in the taxable territory. |
7 | Services supplied by an insurance agent to any person carrying on insurance business | An insurance agent | Any person carrying on insurance business, located in the taxable territory. |
8 | Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company. | A recovery agent | A banking company or a financial institution or a non-banking financial company, located in the taxable territory. |
9 | Supply of services by a music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original dramatic, musical or artistic works to a music company, producer or the like. | Music composer, photographer, artist, or the like | Music company, producer or the like, located in the taxable territory. |
9A | Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher. | Author | Publisher located in the taxable territory: - Provided that nothing contained in this entry shall apply where: -
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10 | Supply of services by the members of Overseeing Committee to Reserve Bank of India | Members of Over - seeing Committee Constituted by Reserve Bank of India | Reserve Bank of India. |
11 | Services supplied by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the custom station of clearance in India | A person located in non-taxable territory | Importer |
12 | Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs). | Individual Direct Selling Agents other than body corporate, partnership or LLPs | A banking company or a non-banking financial company, located in the taxable territory |
13 | Services provided by business facilitator (BF) to a banking company | Business facilitator (BF) | A banking company, located in the taxable territory. |
14 | Services provided by an agent of business correspondent (BC) to business correspondent (BC) | An agent of business correspondent (BC) | A business correspondent, located in the taxable territory. |
15 | Security services (services provided by way of supply of security personnel) provided to a registered person: Provided that nothing contained in this entry shall apply to services provided to—
| Any person other than a body corporate | A registered person, located in the taxable territory. |
16 | Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate. | Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6 per cent. to the service recipient | Any body corporate located in the taxable territory. |
17 | Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”), as amended. | Lender | Borrower i.e. a person who borrows the securities under the Scheme through an approved intermediary of SEBI. |
18 | Import of services | Services by any person who is located in a non-taxable territory | Any person located in taxable territory other than non-taxable online recipient |
Additional Services on which tax is payable by recipient under IGST Act, 2017 on Reverse charge basis under GST
In addition to above cited services, the following two additional services has been notified by the Central Government vide Notification No. 10/2017-Integrated Tax(Rate) Dated 28-06-2017 wherein whole of the tax shall be payable by the recipient on services under Section 5(3) of IGST Act, 2017 on Reverse charge basis.
Sr. | Category of Supply of Services | Supplier of service | Recipient of Service | Relevant Notification |
1 | Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. | Any person located in a non- taxable territory | Any person located in the taxable territory other than non-taxable online recipient. | Entry No. 1 of Notification No. 10/2017- Integrated Tax (Rate) dated 28 June 2017. |
2 | 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. | A person located in non- taxable territory | Importer, as defined in clause (26) of section 2 of the Customs Act, 1962 (52 of 1962), located in the taxable territory. | Entry No. 10 of Notification No. 10/2017- Integrated Tax (Rate)dated 28 June 2017 |
Note : you can add services supplied to e-commerce operators under reverse charge basis under GST
RCM under Real Estate
In the present scenario Section 9(4) is only applicable for the “Promoters” who are engaged in receipt of the below mentioned supplies, without any exemption limit.
The value goods and services [other than services by way of grant of development rights, long term lease of or FSI (including additional FSI)] purchased by a Promoter which constitutes shortfall in respect of the minimum value of goods or services or both required to be purchased from a registered person for construction of project.
Value of cement purchased by a Promoter from an unregistered person would be liable to GST in his hands under RCM irrespective of the threshold limit. Promoter shall pay tax under RCM at the applicable GST Rate. At present GST Rate of Tax for cement is 28%. This tax will be paid under RCM in the same month of purchase. Example for (1) & (2) above:
(a) | Threshold purchases from registered person Promoter is required to achieve | 80% |
(b) | Purchases from registered supplier | 55% |
(c) | Cement purchases on which tax paid under RCM | 15% |
(d) | Other purchases from unregistered person | 30% |
(e) | Shortfall on which liability to pay under RCM [a-(b+c)] | 10% |
Notes:
In the above example, even if purchases from registered supplier is 80%, promoter would still be liable to pay GST on RCM to the extent of shortfall on purchase of cement i.e. 15%.
Inputs and input services on which tax is paid by promoter under reverse charge under Section 9(3) shall be deemed to have been procured from registered person
Input & input services from composition dealer shall be considered as purchase from registered person
Inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating threshold of 80%
For Shortfall GST Rate is 18% even if the actual rate of GST in case of some of inputs or input services is lower than 18%
- The calculations are to be done financial year-wise. The excess percentage of purchased from registered suppliers in a year cannot be adjusted in a next financial year.
Promoter is also liable to pay GST under reverse charge on Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) supplied to promoter by unregistered person for construction of a project.
VARIOUS OTHER GST RELATED ASPECTS TO BE KEPT IN MIND
- Registration All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold.
- Time of Supply of Goods under Reverse Charge
In case of reverse charge, the time of supply shall be the earliest of the following dates—
- the date of receipt of goods OR
- the date of payment OR
- the date immediately after THIRTY days from the date of issue of invoice by the supplier
If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply shall be the date of entry in the books of account of the recipient.
For clause (b) — the date of payment shall be earlier of —- The date on which the recipient entered the payment in his books
OR - . The date on which the payment is debited from his bank account
- Time of Supply of Services under Reverse Charge
In case of reverse charge, the time of supply shall be the earliest of the following dates—
- The date of payment OR
- The date immediately after SIXTY days from the date of issue of invoice by the supplier (30 days for goods) If it is not possible to determine the time of supply under (a) or (b), the time of supply shall be the date of entry in the books of account of the receiver of service.
For clause (a)— the date of payment shall be earlier of— - The date on which the recipient entered the payment in his books
OR - The date on which the payment is debited from his bank account
When supplier is located outside India In case of ‘associated enterprises’, where the supplier of service is located outside India, the time of supply shall be— the date of entry in the books of account of the receiver OR the date of payment — whichever is earlier
- Input tax credit on reverse charge
Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business.
The recipient (i.e., who pays tax under reverse charge mechanism) can avail input tax credit. - Tax Invoice
The supplier must mention in his tax invoice whether the tax is payable on reverse charge.
Where the reverse charge is on the recipient by virtue of Section 9(4), the invoice pertaining to those suppliers needs to be generated and issued by the recipient only. - GST Compensation Cess
GST Compensation Cess will also be applicable on reverse charge.
GST Compensation Cess will be levied and collected at the rate as notified. This will apply on all supplies of goods and services, including imports and reverse charge supplies. The purpose is to compensate States for loss of revenue on implementation of GST. This will be applicable for 5 years from the date GST gets implemented or for such period as prescribed.
GST Compensation Cess shall not be leviable on supplies made by a taxable person who opt for composition scheme.
Note : Refer section 31(3)(f)/(g) – like self invoice and payment voucher needs to be prepared, section 49(4) read with section 2(82) etc.- Like payment of cm needs to be made in cash and it cannot be adjusted against ITC.
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