What is Reverse Charge Mechanism?

Usually, the supplier of goods or services pays customs duties. In the reverse billing process, the recipient of the goods or services is taxed. The tax obligation will be canceled. The purpose of transferring the burden of GST payments to recipients is to extend the scope of tax collection to various non-organizational sectors,  exempt certain classes of providers, and tax the import of services (providers are based outside India) 

The reverse charge scenario for intrastate transactions complies with Sections 9 (3), 9 (4), and 9 (5) of the Central GST and State GST Act. The reverse charge scenario for interstate transactions also complies with Sections 5 (3), 5 (4), and 5 (5) of the Integrated GST Act.

When Is Reverse Charge Applicable? 

Sections 9 (3), 9 (4), and 9 (5) of the Central GST and State GST Act provide for reverse charge scenarios for intrastate transactions. In addition, Sections 5 (3), 5 (4), and 5 (5) of the Integrated GST Act provide for reverse charge scenarios for interstate transactions. Let’s elaborate on these scenarios.  

A. Delivery Of Specific Goods And Services Specified By CBIC 

In accordance with the authority granted by Section 9 (3) of the CGST Act, CBIC has issued a list of goods and services to which the reverse charge applies. 

B. Delivery From Unregistered Dealers To Registered Dealers 

Section 9 (4) of the CGST Act states that if a vendor who is not registered with GST supplies goods to a person who is registered with GST,  the opposite will be charged. That is, GST must be paid directly by the recipient, not the supplier. Registered buyers who need to pay GST under a reverse charge must self-charge for the purchases made.

For intra-state purchases, CGST and SGST must be paid by the purchaser under the Reverse Charge Scheme (RCM). Buyers are still required to pay IGST for purchases on interstate highways. The Government shall keep you informed of the list of goods or services to which this provision applies. 

In the real estate sector, the government said promoters should buy 80% of their arrivals only from registered bidders. Assuming an 80% shortage of purchases from registered retailers, if 80% of the arrivals are inadequate, the promoter will have to charge an 18% GST  on the reverse charge. However, if the promoter purchases cement from an unregistered supplier, he will have to pay a 28% tax. This calculation is performed separately from the 80% calculation. 

Promoters are required to reverse bill GST based on TDR or floor space index (FSI) provided after  April 1, 2019. Such a person of the promoter shall be responsible for GST. This is because it is a  service based on Section 7 CGST Act. Also, if the  TDR is shipped from one developer to another, GST will be applied with an 18%  reverse charge. 

C. Providing Services By E-commerce Operators 

All types of businesses can use their e-commerce operators as aggregators to sell or service their products. Section 9 (5) of the CGST Act states that if a service provider uses an e-commerce operator to provide a particular service, a reverse charge applies to the e-commerce operator and is obliged to pay GST. This section includes services such as: 

Transportation service for passengers using radio taxi, motor-taxi, maxi taxi, and motorcycle. Example – Ola, Uber. Providing accommodation services at hotels, inns, boarding houses, clubs, campgrounds, or other commercial places for residential or accommodation purposes. Unless the person providing this service through an e-commerce operator is based on sales that exceed the threshold.  Restrictions and registration are required. Example – Oyo and MakeMyTrip.

Home Services such as plumbing and carpentry. However, unless those who provide such services through an e-commerce operator are eligible for registration due to sales exceeding the threshold. For example, the Urban Company provides services such as plumbers, electricians, teachers, and beauticians. In this case, the Urban Company is obliged to pay and collect GST from the customer, not the registered service provider. 

Suppose the e-commerce operator is not physically present in the taxable area. In this case, the person representing such an e-commerce business will be taxed for any purpose. If there is no representative, the operator appoints a representative for GST. 

What is Self-Invoicing? 

GST Reverse Charge

Self-invoicing must be done when purchasing from an unregistered supplier, and the purchase of such goods or services will be charged in reverse. Indeed, your supplier cannot issue you a GST-compliant invoice and therefore you are responsible for paying taxes on their behalf. Therefore, self-invoicing, in this case, becomes necessary. In addition, Section 31(3)(g) provides that a payee subject to Section 9(3) or 9(4) must present proof of payment at the time of payment to the supplier.