GST on Reverse Charge Mechanism
The reverse charge mechanism is a procedure that needs the recipient of goods or services to pay Goods and Services Tax (GST) rather than the supplier. The goal of shifting the cost of GST payments to the recipient is to broaden the scope of taxation on various unorganized industries, exempt specified types of suppliers, and charge service imports (since the supplier is located outside India).
Where is Reverse Charge Mechanism Applicable?
There are only a few scenarios where the Reverse Charge Mechanism is applicable. These scenarios are mentioned below -
A. Supply to a certified dealer from an unauthorized dealer:
As per Section 9(4) of CGST Act, when a non-registered seller for GST provides products to a registered person for GST, then the reverse charges apply. In short, the recipient pays the GST in place of the supplier. Self-invoices for transactions made are done by the registered buyer who pays GST under reverse charge.
B. Supply of specific goods and services as determined by the CBIC:
The CBIC has produced a list of goods and services that are subject to reverse charge under the authority granted by section 9 (3) of the CGST Acts.
C. Service provision via an e-commerce operator:
As per Section 9(5) of the CGST Act, when a services provider uses any kind of e-commerce operator to deliver any specified services, the reverse charge will be applied to the e-commerce operator. Hence, the e-commerce operator will pay the GST -
- Online taxi services like Ola, Uber, etc.
- Services of housekeeping, for example carpentry and plumbing, unless the person who provides these services through electronic commerce operators is required to register owing to turnover above the threshold limit.
- Accommodation services provided in guest houses, inns, campgrounds, clubs, etc. That are intended for residential or lodging purposes. An electronic commerce operator is required to register due to a turnover threshold exceeding the limit.
Reverse Charge Mechanism Registration Rules
The CGST Act, 2017 section 24 mentions that people who are needed to pay GST with the reverse charge method should register for GST. They will be able to avoid the Rs.20 lakh to Rs.40 lakh threshold restriction that is applicable.
Points to Remember While Paying Under the RCM
One should remember the following points while paying under the RCM -
- When dismissing duty under RCM, a composition dealer shall pay tax at the regular rates, not the composition rates. They are also ineligible to claim any input tax credit for taxes paid.
- The ITC on the tax amount paid under RCM can be claimed by the recipient of goods or services only if such goods or services are utilized for business or furthering of business.
- The cess for GST compensation can also be applied to payable or paid RCM tax.
FAQs on Reverse Charge Mechanism under GST
- What if the recipient of goods or services is obligated to pay reverse charge tax but is not a registered dealer?
All taxpayers who are mandated to pay tax under reverse charge must register for GST, and the Rs.20 lakh or Rs.40 lakh threshold does not apply to them.
- When can an ITC of tax paid under RCM be claimed?
A person who paid RCM tax in a given month may claim it as ITC in the following month.
- What happens if an Input Service Distributor (ISD) gets supplies that are prone to reverse charging?
An ISD cannot make purchases that are subject to reverse charge. If the ISD wants to get such supplies and claim the reverse charge as ITC, it must register as a normal taxpayer.
- Is it possible to claim a refund on GST paid on reverse charge mechanism?
Yes, it is possible to claim a refund on GST paid on reverse charge mechanism.
- What happens if GST on reverse charge mechanism is not paid?
In case the GST on reverse charge mechanism is not paid, the person might be subjected to a penalty.
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