Reverse Charge Mechanism Under GST: Why and When Explained
Under reverse charge in GST, the tax liability for supplies lies in the hands of purchaser. But in the normal case when Reverse charge under GST mechanism is not applied, the person who purchases Goods or Services would be liable to pay taxes. When the reverse charge in GST is applied, liability to pay taxes is transferred from the person who gets Goods or Services or both of them; to the seller. When a person sells his good or Service, he would pay taxes instead of purchaser.
Reverse Charge in GST
You can refer the graphical representation of the reverse charge mechanism to get a clear tax structure idea about reverse charge in GST.
- Reverse Charge in GST
This concept is not new in India. It has roots in previous service tax. It expanded to GST so to increase total tax revenue. This makes more players from unorganised and semi-unorganised sector to fall under GST regime. Earlier, Goods were exempt from reverse charge.
As we have discussed above, the recipient of goods or service is liable to pay taxes to the goods and services tax network when reverse charges applied. Below is the list circumstances when the receiver is liable for tax levy or when to apply reverse charge in gst.
Reverse charge in GST is applied when Purchase of goods or service or both of them are from an unregistered dealer –
When goods or services supplier receives from an unregistered dealer, the receiver of the goods or services is liable to pay taxes. The current tax system is designed in such a way as to create a chain of suppliers. This will track from the beginning till the end. It is maintained but when a registered person makes his purchases from an unregistered dealer by applying reverse charge mechanism, he will break the chain as the unregistered supplier of goods or service is not liable to file GST Returns. Hence the law requires the purchaser to pay taxes on behalf of the seller to avail tax credit. This means to avail ITC, the person who makes purchase should pay taxes on behalf of unregistered dealer.
For example; Mr. Khanna is an unregistered dealer. He is engaged in supply of goods. He sells his goods to Mrs Johnson who is registered under GST regime. As Mr. Khanna is an unregistered dealer he is not liable to pay taxes or file returns instead filing of returns and payment of taxes is to be done by Mrs. Johnson under reverse charge mechanism.
Reverse charge in GST is Applied when Purchase of supplies made from non-taxable territory –
When the destination based Tax system is interrupted due to the transaction between taxable and non-taxable territories, the purchaser or recipient of goods/services or both is liable to deposit taxes to GSTN. This works as an equaliser, to make no difference between products or services produced within the country and the same imported from outside the country. This makes both imported and goods or services produced within the country have similar tax rates.
Reverse charge mechanism is applied for Supplies of E-commerce Operator –
All the services of an E-commerce operator will attract reverse charges. Non-Physical presence of an e-commerce Operator is also subject to Reverse Charge. When E-commerce player has no registered office in taxable area, he should appoint a person to pay taxes on behalf of him.
For example; UrbanClap is a provider of plumbers, teachers, electricians etc. They are liable to pay GST and collect it from customers instead of registered providers of services.
Reverse charge levy on unorganised sector –
Bringing the unorganised sector under the tax bracket is difficult sometimes. In such a case reverse charge maybe useful. People who engage in unorganised sectors usually of huge numbers but their aggregate turnover would be very less. In such a case it would be difficult to get them registered under GST. Even though goods and services supplied are B2B, it would be difficult to collect taxes from them. Here reverse charge mechanism makes the administering tax revenue little more cost effective.
Reverse Charge of GST Supplies notified by the Central Government –
The Central Government has made certain supplies liable to pay reverse charges.