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Reverse Charge Under GST Mechanism in India

In case when GST is paid by the recipient of the goods or services instead of the supplier, it is a reverse charge mechanism. It is applicable in case of purchase from unregistered dealers, imports, and Goods & services supply.

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How does GST registration work for you?

Any business offering sale of goods with annual turn over of 40 lacs or service with annual turn over of 20 lacs would require the registration for GST and have a valid GST Number.

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Reverse Charge Under GST Mechanism in India

Usually, the supplier of goods or services registered under GST pay the tax to the government. But, in reverse charge GST mechanism, the suppliers of the service or goods will not be charging GST but the recipient itself will pay the GST on his own. This method of tax collection aims at reducing tax evasion, especially in the organized sector.

Cases, where this reverse charge will be applicable, are listed below. If your organization is receiving any of the following services, then as a recipient you are liable to pay GST under reverse charge to the government.

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When reverse charge should be paid?

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

1. The date of receipt of goods

2. The date of payment

3. The date immediately after 30 days from the date of issue of an invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

Reverse charge in case of services

Particulars of servicesWho is liable to pay reverse charge
Purchases of goods and services from an unregistered supplierIf the receiver is a registered entity – they should be paying the reverse charge on the same.
(However, this provision is on hold because of complications involved in it. The government will notify a future date from when it will be applicable)
Services by way of sponsorship to any body corporate or partnershipAny body corporate or partnership firm located in taxable territory
Supply of services by a Goods Transport agency – who has not charged GST @ 12% in invoiceFactory, society, Any registered GST entity, any body corporate, partnership firm.
Services provided by director of the company to the body corporate.The company or body corporate located in taxable territory
Services provided by an individual advocate or firm of advocatesAny business entity located in taxable territory
Services provided by a person in non-taxable territory to the person in taxable territoryAny person located in the taxable territory other than non-taxable online recipient.
Services by an arbitrary tribunal to a business entityAny business entity located in taxable territory
Services provided by the Central government or Union territory or state governmentAny business entity located in the taxable territory.
Services provided by an insurance agent to Insurance companyInsurance company will be liable
Services provided by recovery agents to the banksBanks will be liable
Services provided by an author, music composer, writer, artist, etc.Publisher or producer will be liable
Services provided by members of RBI to RBIRBI is liable

Important points to remember:

  • The composite dealers under reverse charge mechanism are ineligible to claim credit for the tax paid. The dealers are liable to pay taxes under normal rates applicable to the supply and not the rate for composition scheme.
  • Advance payments are subject to reverse charge mechanism.
  • No partial reverse charge exists as in service tax and the recipient has to pay the full tax amount.
  • GST compensation cess will be levied and collected at specific dates which will be notified by the government.

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