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GST Reverse Charge


GST Reverse Charge

Under GST, reverse Charge means the liability to pay tax rests with the recipient of supply instead of the supplier. In a reverse change, the liability to pay GST becomes reversed. Hence, such transactions are called reverse charge. The aim of reverse charge was to increase the taxpayer base and bring more of the unorganised entities into the tax net. However, when the liability to pay taxes fell on the large enterprises when they dealt with many micro, small and medium enterprises without GST registration, they avoided purchasing from small enterprises. Hence, to boost the SME sector and promote small businesses, the GST reverse charge mechanism was suspended temporarily in the 22nd GST Council meeting.

Benefits of GST Reverse Charge

The GST Council implemented the Reverse charge mechanism under GST to increase the taxpayer base. Majority of the small businesses operating in India are unorganised and do not comply with tax regulation. Hence, the reverse charge mechanism aimed to remove the burden of tax compliance from small enterprises with limited resources and transfer it to large organisations with sufficient resources.

However, the above-expected benefit of reverse charge was not realised on implementation. Many large enterprises avoided purchasing from unregistered small businesses to avoid taking on the compliance burden. Hence, small businesses were either forced to obtain GSTIN or were avoided. Hence, the Government has temporarily suspended the provisions relating to reverse charge.

GST Compliance for Reverse Charge

Under reverse charge, the responsibility for compliance is shifted to the recipient of goods rather than the supplier. Hence, any person who is required to pay tax under reverse charge must obtain GST registration mandatorily.

Further, the recipient of supply on a reverse charge basis must invoice him/herself and pay the tax due on the transaction to the Government directly. GST paid on reverse charge basis shall apply for the input tax credit if such goods and/or services used or the taxpayer might use for business.

When is Reverse Charge Applicable?

Under GST for the following categories, the reverse charge has been prescribed:

Purchase from Unregistered Person

CGST/ SGST for supply by an unregistered supplier to a registered person must be paid by the registered person on reverse charge basis as the recipient as if he is the person liable for paying the tax.

However, the registered person becomes no longer liable to pay taxes under the following circumstances:

  • If the aggregate value of such intra-state supplies of goods or service or both from any or all the unregistered suppliers does not exceed five thousand rupees in a day.
  • Intra-State supplies of second-hand goods received by a registered person from an unregistered supplier.
  • For persons liable to register under TDS provisions.

Goods Attracting Reverse Charge

The GST on reverse charge applies when the buyer purchases the following types of goods from a certain category of persons:

  • Cashew nuts, not shelled or peeled when purchased from an agriculturist by any person having GST registration.
  • Bidi wrapper leaves (tendu) when purchased from an agriculturist by any person having GST registration.
  • Tobacco when purchased from an agriculturist by any person having GST registration.
  • Silk yarn when purchased from any person who manufactures silk yarn from raw silk or silkworm cocoons for the supply of silk yarn by a registered person under GST.
  • Supply of lottery – Lottery distributor or selling agent should pay tax on reverse charge basis.

Services Attracting Reverse Charge

Various services attract reverse charge under GST. The following is a brief list of services attracting reverse charge:

  • Legal Services provided by an Advocate to an entity – The business entity would be liable to pay GST on reverse charge basis.
  • Services provided by way of sponsorship to any body corporate or partnership firm – The body corporate or partnership firm would be liable to pay GST.
  • Services supplied by a director of a company or a body corporate – The company would be liable to pay GST.

List of all services attracting GST on reverse charge basis.