REVERSE CHARGE MECHANISM

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Accounting and Record-Keeping:
    • Recipients are required to account for reverse charge transactions separately, with specific details included in their GST returns.

Are you looking for a consultation?

Stop worrying about GST problems. Let us provide the support you deserve.

Book Appointment