Reverse Charge under GST for Service Provider

MEANING

The GST has to be normally paid by the supplier of goods and services. But in some cases, the liability to pay the tax falls on the buyer. This is known as reverse charge.

Under present scenario, the reverse charge is there in Service Tax and is applicable to only services and not goods. Under service tax, generally, service providers are liable to collect and deposit tax. Although the incidence of the tax is placed on consumers ultimately, it is the duty of the supplier to deposit the tax.

Currently, similar provisions of Reverse Charge are available in Service Tax for various services like-

  • Insurance agent
  • Services of a director to a company
  • Goods Transport Agencies
  • Non-resident service providers
  • Any service involving aggregators
  • Manpower supply

Before GST, there was no reverse charge mechanism in supply of goods. But GST has implemented the same.

APPLICABILITY

This reverse charge is, however, applicable only under certain circumstances. The most usual instance is when a business buys goods or services from a supplier who is unregistered to pay GST.

Let’s assume a business A, which is GST-compliant. The business buys goods worth Rs.100 from business B that is not registered to pay GST. Assume the GST on the goods supplied to be Rs.12, then business A, instead of business B, will be liable to pay Rs.12 to the Government. Business A can, however, claim input tax credit of the GST payment of Rs.12, when it sells the said goods to its client.

Besides purchases from a supplier that is not registered, the reverse charge kicks in in other circumstances as well, including:-

  1. Services supplied by an Electronic Commerce Operator will draw reverse charge and they will be liable to pay GST. If the assessee has no physical presence in the taxable area, then the representative of said e-commerce operator will be liable to pay tax. If there is no representative, then the assessee has to appoint one, and he will be liable to pay GST. For Example: UrbanClap supplies services of a plumber, a beautician, an electrician, etc. hence, instead of these registered service providers, UrbanClapwill have to pay GST and collect from customers.
  2. Government departments making payments to vendors above a specified limit – Rs. 2.5 lakh under one contract, are required to deduct tax (TDS).
  3. Some categories of supplies notified by Central or State government that will fall under reverse charge include :-

 

Service Provider Service Receiver GST to be paid by
Goods Transport Agency Casual Taxable person, body corporate, partnership firm, any society, factory, any person registered under CGST, SGST, UTGST Act. Service recipient.
Recovery Agent Banking Company, NBFC or any financial institution. Service recipient.
A director of a company or a corporate body A company or a corporate body Service recipient.
An individual advocate or firm of advocates , An arbitral tribunal Any business entity. Service recipient.
Taxi driver or Rent a cab operator ( if service provided by e-commerce operator) Any person E-commerce Operator
 An insurance agent Any person carrying on insurance business Service recipient.
Any person providing sponsorship services Anybody corporate or partnership firm. Service recipient.
A person located in non-taxable territory to a person located in non-taxable territory Importer Service recipient.
Author or music composer, photographer, artist, etc Publisher, Music company, Producer Service recipient.
Any person who is located in a non-taxable territory Any person located in the taxable territory other than non-assessee online recipient (Business Recipient) Service recipient.

 

IMPORTANCE

The paramount benefit of GST is its self-policing mechanism. The Government is trying to check tax evasion and enlarge the tax net through number of clauses in GST. First, continuous flow of input tax credit is possible only when all the suppliers of a business pay GST. So each business will ensure that its suppliers have remunerated the GST so that they can yield input tax credit.

Reverse charge is an additional check. By placing the burden of paying the tax on the buyer, in cases where the supplier does not pay GST, the Government is gently pressing all traders to sign up for GST.

REGISTRATION

All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold of turnover in a financial year exceeds Rs 20lakhs (Rs 10 lakhs for North eastern and hill states).

INPUT TAX CREDIT

The service recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services. The lone condition is that the goods and services are used or will be used in future for business or furtherance of business. Unfortunately, ITC cannot be used to pay output tax, which implies that payment mode is only through cash under reverse charge.

TAX INVOICE

The supplier has to compulsorily mention in his tax invoice that the tax is payable on reverse charge.



Author: CA Parul Gupta
Parul Gupta qualified the CA Exams from the Institute of Chartered Accountants of India. She has dealt with many Startups, companies, partnership and proprietorship firms relating to formation and compliance services.

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