Applicability of Reverse charge on input services when outward supply is exempt from tax

Typically, taxes are collected by business owners on behalf of customers, who then pay the government. A reverse charge is when the buyer pays the tax directly to the government. The responsibility for the transfer of tax liability may rest either entirely with the buyer or, in certain special cases, it may be partially/jointly borne by both the buyer and the seller. Let us discuss the Reverse Charge Mechanism under GST.

What is a Reverse Charge Mechanism?

Supply tax is usually paid by the supplier of goods or services. As part of the mechanism of transfer of tax liability, the obligation to pay tax arises to the recipient of the goods or services, that is, the tax liability is reversed.

The aim of shifting the burden of GST payments to the recipient is to widen the scope of tax assessment in various unorganized sectors, exempt specific classes of suppliers, and tax the importation of services (as the supplier is established outside India).

Requirements within the mechanism of transfer of tax liability

• The recipient must have registered under GST.
• Every registered business owner should keep accurate records of supplies that would result in a transfer of tax liability.
• Wherever pass-through is applied, the supplier must clearly state on the invoice that the tax payable for that particular transaction is through pass-through. Similarly, the same should be mentioned on receipt vouchers and refund vouchers.
• Advance paid on supplies subject to reverse charge is taxable under GST. A taxpayer who pays an advance payment should pay tax based on the transfer of tax liability.

When is reverse charging applicable?

Deferral scenarios for domestic transactions are governed by Section 9(3), Section 9(4), and Section 9(5) of the Central GST and State GST Acts. Also, Sections 5(3), 5(4), and 5(5) of the Integrated GST Act regulate the reverse charge scenarios for interstate transactions. Let’s discuss these scenarios in detail:

• Supplies of certain goods and services specified by CBIC
  According to the powers conferred by Section 9(3) of the CGST Acts, the CBIC has issued a list of goods and services subject to reverse charge.
• Supply from a non-registered dealer to a registered dealer: Clause 9(4) of the CGST Act states that if the seller is not registered under GST, and supplies goods to a person registered under GST, pass-through will apply. This means that GST will have to be paid directly by the recipient instead of the supplier. A registered buyer who has to pay GST as part of the reverse charge must do their own invoicing for the purchases made.For domestic purchases, buyers have to pay CGST and SGST under the Reverse Charge Mechanism (RCM). Also, in the case of interstate purchases, the buyer has to pay IGST. The Government will from time to time notify the list of goods or services to which this provision is attracted.In the real estate sector, the government has announced that the proponent should purchase internal supplies to the extent of 80% from registered suppliers only. Assume purchases from registered dealers are less than 80%, then the applicant would have GST at 18% on remittance to the extent of less than 80% of incoming supplies. However, if the petitioner buys cement from an unregistered supplier, he has to pay a tax of 28%. This calculation needs to be done regardless of the 80% calculation.The proponent is liable to pay GST based on the transfer of tax liability based on TDR or Floor Area Index (FSI) supplied on or after 1st April 2019 such person is liable to GST to the submitter as it is deemed to be a supply of service under Section 7 of the CGST Act. Also in case of external supply of TDR by one developer to another, GST is applicable at 18% on transfer of tax liability.
• Provision of services through an e-commerce operator
  All types of businesses can use an e-commerce operator as an aggregator to sell products or provide services. Clause 9(5) of the CGST Act states that if a service provider uses an e-commerce operator to provide specified services, the transfer of tax liability to the e-commerce operator will apply and the latter will be required to pay GST. This section includes services such as:
  • Transport services for passengers by radio taxi, motor cab, maxi cab, and motorcycle. For example – Ola, and Uber.
  • Provision of accommodation services in hotels, inns, guesthouses, clubs, campsites, or other commercial places intended for living or accommodation, except in cases where the person providing this service through an e-commerce operator is required to register due to turnover exceeding the threshold value. For example – Oyo and MakeMyTrip.
  • Cleaning services such as plumbing and carpentry, except where a person providing such services through e-commerce operators is required to register due to turnover exceeding the threshold. For example, Urban Company provides services to plumbers, electricians, teachers, beauticians, etc. In this case, Urban Company is liable to pay GST and collect it from customers instead of registered service providers.

Time of delivery of goods and services within the scope of reverse charge

The point of delivery for a transaction is the date on which taxes are imposed on the supplies. The delivery time within the framework of the transfer of tax liability will be the earliest of the following dates:

• date of receipt of goods or
• payment date or
• the date immediately after 30 days from the date of the invoice for the goods and 60 days from the date of the invoice for the services.

Note: If none of the above applies, then this can also be the date of entry in the beneficiary’s books.

Rules of registration under RCM

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

Who should pay GST under RCM?

The recipient of goods/services should pay GST as per RCM. However, as per the provisions of the GST Act, the person supplying the goods must state in the tax document whether the tax is payable under the RCM.

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

• A recipient of goods or services can avail ITC on the amount of tax paid under RCM only if such goods or services are used for business or in furtherance of business.
• A compounding trader should pay tax at normal rates and not at compounding rates when fulfilling an obligation under the RCM. They are also not entitled to any rebate on input tax paid.
• Tax payable or paid under the RCM may be subject to GST compensation.

Input Tax Credit (ITC) under RCM

The supplier cannot treat GST paid under RCM as ITC. The recipient can avail ITC on the amount of GST paid under the RCM on receipt of goods or services only if such goods or services are or will be used for business purposes.

The recipient cannot use ITC to pay output GST on goods or services under reverse charge and should be paid in cash only.

Self-invoicing

Under the reverse charge mechanism, self-invoicing is done when a business owner purchases supply from an unregistered supplier. This happens because an unregistered supplier cannot issue an invoice.

Exemptions within the framework of reverse charge

A registered business owner is exempted from paying GST through a reverse charge on domestic purchases from unregistered sellers if the total value of supply received in a day is less than or equal to Rs.5,000.

Final words

RCM liability affects the cost of a company’s products, RCM liability should be kept in mind when calculating product costs, for especially companies whose liability is within RCM and whose external supplies are exempt.