Reverse charge helps the government capture tax on
transactions where the supplier may be out of reach of the tax net, ensuring
better tax compliance and reducing tax evasion. It also places the onus on
organized businesses to remit tax on behalf of unregistered suppliers, adding a
layer of accountability to the GST regime.
The Reverse Charge Mechanism (RCM) is a tax
collection method where the liability to pay GST shifts from the supplier to
the recipient of goods or services. Unlike the regular GST regime, where
the supplier collects and remits the tax, reverse charge requires the buyer to
directly pay GST to the government. This mechanism is applied in specific cases
as stipulated under the Central Goods and Services Tax (CGST) Act, 2017.
Key Aspects of Reverse Charge in GST:
- Applicability
of Reverse Charge:
- Notified
Goods and Services: RCM applies to certain goods and services that
the government has notified, such as the supply of services by a goods transport
agency (GTA), legal services provided by an advocate, or sponsorship
services.
- Supply
from an Unregistered Supplier: If a registered recipient purchases
goods or services from an unregistered supplier, RCM is applicable in
certain circumstances (Section 9(4) of the CGST Act). However, this
provision has been limited to specific cases for certain goods and
services, based on government notification.
- Interstate
and Intrastate Supplies:
- For
intrastate transactions, the recipient pays CGST and SGST under
reverse charge.
- For
interstate transactions, the recipient pays IGST under reverse
charge.
- Documentation
and Compliance:
- Self-Invoicing:
The recipient of goods or services must issue a self-invoice when reverse
charge applies, as the supplier is not liable to collect and remit the
tax.
- Payment
and Input Tax Credit: The recipient can claim input tax credit (ITC)
on GST paid under reverse charge, provided the goods or services are used
for business purposes.
- Common
Examples of Reverse Charge:
- Services
provided by a goods transport agency (GTA).
- Legal
services provided by an individual advocate or firm.
- Import
of services, where a business entity receives services from a
supplier located outside India.
- Services
by an insurance agent to an insurance company, and services
provided by a director of a company to the company itself.
- Accounting
and Record-Keeping:
- Recipients
are required to account for reverse charge transactions separately, with
specific details included in their GST returns.