Reverse charge is a way for the person who gets the goods or services to pay the Goods and Services Tax (GST) instead of the person who gave them to them.

What is Reverse Charge Mechanism?

Most of the time, the person who sells the good or service pays the tax on supply. Under the reverse charge system, the person who gets the things or services is the one who has to pay the tax. This means that the chargeability changes.

The goal of putting the burden of GST payments on the recipient is to tax more unorganized sectors, exempt certain types of suppliers, and tax the import of services from outside India, since the provider is based outside India.

The reverse charge mechanism only applies to certain kinds of business companies. Using the GST search tool, you can find out what kind of business any GST number belongs to.

When is Reverse Charge Applicable?

Sections 9(3), 9(4), and 9(5) of the Central GST and State GST Acts tell us what to do when there is a reverse charge for activities within the same state. Also, sections 5(3), 5(4), and 5(5) of the Integrated GST Act tell us what to do when there is a reverse charge for deals between states. Let’s talk in depth about the following situations:

A. The sale of certain things and services that the CBIC names

Section 9(3) of the CGST Acts gives the CBIC the right to make a list of goods and services that are subject to reverse charge.

B. Supply from a dealer who isn’t registered to a dealer who is registered

Section 9(4) of the CGST Act says that reverse charge would be used if a seller who is not registered for GST gives things to a person who is registered for GST. This means that the GST will have to be paid directly by the person who gets the goods, not by the person who sells them. The registered buyer who has to pay GST because of reverse charge has to bill themselves for the things they bought.

Under the reverse charge method (RCM), the person buying something must pay the CGST and SGST. Also, the buyer has to pay the IGST when they buy something from another state. From time to time, the government sends out a list of the things or services that fall under this rule.

In the real estate business, the government told promoters that 80% of their supplies should only come from registered sellers. If the sales from registered dealers are less than 80%, the promoter should pay 18% GST on the reverse charge for the amount that is less than 80% of the total inward supplies. But if the marketer buys cement from a company that isn’t registered, he has to pay tax at 28%. No matter what the 80% figure says, this calculation must be done.

On TDR or floor space index (FSI) sold on or after April 1, 2019, the producer has to pay GST on a “reverse charge” basis. Even if a landowner doesn’t run a regular business dealing with land, he or she still has to pay GST when transferring building rights to a promoter. This is because section 7 of the CGST Act considers this to be a service. Also, if a developer sells TDRs to another developer, this is called a “reverse charge,” and GST is charged at 18%.

C. Service delivery through an online business operator

E-commerce operators can be used by any kind of business to sell goods or offer services. Section 9(5) of the CGST Act says that if a service provider uses an e-commerce operator to provide certain services, the e-commerce operator will have to pay GST because of the reverse charge. This part talks about things like:

• Passengers can get rides in a radio-taxi, motor cab, maxi cab, or motorbike. For example, Ola or Uber.
• Providing accommodation services in hotels, inns, guest houses, clubs, campsites, or other commercial places meant for living or sleeping, unless the person providing the service through an e-commerce operator is required to register because their turnover is higher than the threshold limit. One example is Oyo and MakeMyTrip.
• Housekeeping services, such as plumbing and carpentry, unless the person providing these services through an e-commerce operator is required to be registered because their sales exceed the cutoff limit. For example, Urban Company offers the services of builders, electricians, teachers, beauticians, etc. In this case, Urban Company has to pay GST and receive it from the customers instead of the registered service providers.

Also, let’s say that the person who runs the online business doesn’t have a physical location in the taxable area. If that happens, anyone who works for such an online business will have to pay tax for any reason. If there isn’t one, the operator will choose one, and that person will be responsible for paying GST.

Time of Supply Under RCM

A. Time of delivery for goods

In case of reverse charge, the time of supply for goods shall be the earliest of the following dates:

• the date of receipt of goods
• the date of payment*
• the date immediately after 30 days from the date of issue of an invoice by the supplier
• If it’s not possible to figure out when the goods were given, the date of writing in the recipient’s books of account will be used instead.

Illustration:

• Date of receipt of goods 15th May 2021
• Date of invoice 1st June 2021
• Date of entry in books of receiver 18th May 2021

B. Time of supply in case of services

In case of reverse charge, the time of supply shall be the earliest of the following dates:
The date of payment
The date immediately after 60 days from the date of issue of invoice by the supplier
If it’s not possible to figure out the time of supply, the date of writing in the recipient’s books of account will be the time of supply.

Registration Rules Under RCM

Section 24 of the CGST Act, 2017 states that a person liable to pay GST under the reverse charge mechanism have to compulsorily register under GST. The threshold limits of Rs.20 lakh or Rs.40 lakh, as the case may be, will not apply to them.

Who Should Pay GST Under RCM?

Under RCM, the person who gets the goods or services should pay the GST. But according to GST law, the person who sells the things must write on the tax invoice whether or not tax is due under RCM.

The following points should be kept in mind while making GST payments under RCM:

• The ITC on the tax paid under RCM can only be used by the person who gets the goods or services if those goods or services are used for business or to help their business.
• When paying tax under RCM, a composition dealer should pay tax at the normal rates, not the composition rates. Also, they can’t get a return for any tax they already paid.
• The tax due or paid under the RCM can be affected by the GST reimbursement cess.

Input Tax Credit (ITC) Under RCM

A seller can’t get an ITC for the GST they paid under the RCM. The person who gets the goods or services can get an ITC on the GST amount paid under RCM, but only if the goods or services are used or will be used for company.

The person who receives the goods or services can’t use the ITC to pay the output GST on those goods or services. Instead, they should be paid in cash.

What is Self Invoicing?

When you buy something from a supplier who isn’t listed, you have to send yourself an invoice. This is called reverse charge. This is because your seller can’t send you an invoice that meets GST requirements. Because of this, you have to pay taxes on their behalf. So, in this case, self-invoicing is required.

Also, section 31(3)(g) says that a recipient who is required to pay tax under sections 9(3) or 9(4) must give a payment voucher to the seller when paying the supplier.

How ClearTax Helps With Self Invoicing?

With ClearTax GST software, it’s easy to make your own bills. You just need to do the following:

Step 1 – Login to ClearTax GST → ‘‘Create and View Invoices’ → ‘‘Choose a Business’’ → ‘Invoices’ → ‘‘Purchase’’ → then click on ‘‘+ New Purchase Invoice’’ to create a new invoice.

Step 2: As you can see, you need to fill out more than one area with information. Let’s look at each field in more depth:

• Put the bill’s serial number in the space that says “Invoice Serial Number.” Since your provider hasn’t given you an invoice and you’re making one for them, you need to add a serial number yourself. For easier billing, you can make and keep track of a set of serial numbers for reverse charge bills.
• Type in the ”Invoice Date”. The time of availability must be used to set this date.
• Enter any information, like the order number, in the “Reference Number” box.
• Under “Due Date,” you have to write the date by which you have to pay the seller for the item you bought (but you don’t have to write this date).
• Under “Vendor Name,” type the name of the vendor. Remember that this name can’t be your own, even if you’re self-billing under the reverse charge system. If the name of the seller is not already set, you can add a new one.
• Type in the information of the goods or services you bought.
• Under “Advanced Settings,” choose “Reverse Charge” from the drop-down menu.
• Now, fill out all the information on your computer.

Step 3 – After filling in all the other details, click on Save.