Fundamental of GST liability under reverse charge:
Introduction: under GST the liability to pay tax is generally the supplier of goods or services but in some of the cases recipient of supply of goods or services are held liable for payment of GST which is known as reverse charge. Similar mechanism was there under VAT/sales tax, where registered dealer was liable to pay tax on inward supply from unregistered supplier, under excise on purchase of molasses, custom duty on import to be paid by person importing goods and also in service tax where recipient in respect of certain supply of service was liable to pay service tax under section 68(2) of the Finance Act 1994 read with notification 30/2012. Now similar provision under GST with extension of more goods and services.
Meaning of reverse charge: As per Section 2(98) of the CGST Act “reverse charge” means the liability to pay tax by the recipient of supply of services or goods instead of supplier of such services or goods under sub-section (3) or sub-section (4) or under sub-section (3) or sub-section (4) of section 5 of IGST Act.
Levy of GST under reverse charge:
The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
Notification No 4/2017- CT(Rate) dated 28-06-2017 notified supply of goods for payment of tax under Section 9(3) of CGST Act.
Notification no 4/2017-integrated Tax (Rate), dated 28-6-2017 for RCM on certain supply of goods.
Notification No 13/2017 – Central Tax(Rate) dated 28-06-2017],
[Notification No 10/2017 – Integrated Tax(Rate) dated 28-06-2017] and
Notification No 13/2017 – Union territory Tax(Rate)
The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.
Notification No. 7/2019-Central Tax (Rate), dated 29-3-2019 AS AMENDED BY NOTIFICATION NO. 24/2019-CENTRAL TAX (RATE), DATED 30-9-2019
Notified registered persons Builders who shall pay tax on reverse charge basis on certain specified supplies of goods or services or both received from an unregistered supplier.
Benefits of RCM levy:
Easy collection of tax and easy tax administration
Huge amount of tax can be collected from few big taxable person
Easy Tax collection from person in the territorial jurisdiction of tax administration in the taxable territory.
Less leakage of tax revenue
minimise the tax loss due to threshold limit
Easy to avail credit of input tax on payment of tax paid under RCM
No need of any reconciliation with GSTR-2A by the Recipient of supply in every taxable period.
No needs to ensure the payment of tax by the supplier of goods or services to satisfy the conditions of section 16
Essentials of liability under reverse charge:
There must be inward supply of goods or services
There should not be any transaction or activity which is excluded from the definition of supply by way of mentioning in schedule -III or notification issued thereunder excluding such activities or transaction from the definition of supply. In other words no RCM liability in the case of no supply. For example payment to directors is notified under RCM but if the payment is for employment, the supply of service by director to the company is excluded from the definition of supply itself because of employer-employee relationship and therefore there is no question of any tax liability under RCM. Recently Hon’ble Allahabad cestate has passed order in the case of Birkan Engg. Industries Private Limited Service Tax Appeal No.70694 of 2017-Division Bench which was represented by me only. Similar favoured order in the case of M/s Allied Blenders and Distillers Pvt. Ltd. Also by Mumbai cestate.
The supply of service should not be exempt. In other words if the supply is exempt there is no question of any tax liability whether under forward charge or reverse charge. So no GST under RCM if supply is exempt. For example in the business of food grains if services of GTA availed for transportation of goods there is no tax lability under RCM
No RCM liability if a person is not liable to obtain registration under GST. For that we have to refer to section 23 of the CGST Act and notifications issued thereunder. In this section as per section 23(1) following persons shall not be liable to registration, namely:—
(a) any person engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under this Act or under the Integrated Goods and Services Tax Act;
(b) an agriculturist, to the extent of supply of produce out of cultivation of land.
(2) The Government may, on the recommendations of the Council, by notification, specify the category of persons who may be exempted from obtaining registration under this Act.
It is important to note that section 24 has overriding effect to section 22(1) only. Section 22(1) is pertaining to the registration requirement based on threshold limit. Therefore if a person is engaged exclusively in exempt supply or supply of goods or services not liable to GST then there is no question of obtaining any registration and therefore no question of any RCM liability.
Payment of RCM liability: We can pay RCM liability only in cash and not from ITC balance because the definition of output tax has excluded the liability under RCM and input tax credit can be utilised only for payment of output tax and that too on self-assessment basis. ‘Output tax’ in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis;[section 2(82) ]
Input tax credit of RCM: A registered person under GST can avail the input tax credit of tax paid under RCM because payment of RCM liability is within the meaning of input tax under section 2(62) if it is not a type of supply which is restricted under block credit under section 17(5) and other conditions for availing credit satisfied. It is important to note that the conditions of payment within 180 days is not relevant here.
Issuance of Invoice: The recipient of supply had to issue invoice in respect of in wired supply covered under RCM if the supplier has not issued tax invoice. Further recipient must ensure the reporting of those series of invoices in GSTR- 1 reporting. The recipient of supply must ensure to prepare those invoices before payment of tax under RCM and availing credit of input tax pertaining to those RCM invoice and kept those invoice so that the same would be produce before the authority for verification whenever directed.
Payment Voucher: A registered person who is liable to pay tax under RCM u/s 9(3) or 9(4) shall issue a payment voucher at the time of making payment to the supplier. [u/s 31(3)(f)]+R-52]
Records: Every registered person shall keep and maintain an account, containing the details of tax payable including tax payable in accordance with RCM provisions, tax collected and paid, input tax, input tax credit claimed, together with a register of tax invoice, credit notes, debit notes, delivery challan issued or received during any tax period.
If supplier has collected tax and paid to government for supply covered under RCM , whether recipient have to pay tax again under RCM? No, this matter was examined time and again in service tax regime, where it was decided against revenue.
“Service tax of Rs. 51,385/- stands confirmed against the appellant who are availing the goods transport agency services, for the period January, 2005 to September, 2006. It is on record that the service tax on the said services stands paid by the transporters. The Revenue’s contention is that it was the liability of the appellant to pay the tax and the service tax paid by the transporter providing services cannot be treated as a valid payment. However, the Revenue has not refunded the service tax paid by the transporter to them. Once tax already paid on the services, it was not open to the Department to confirm the same against the appellant, in respect of the same services. I accordingly set aside the impugned order and allow the appeal with consequential relief to the appellant. “ Smt. Archana Wadhwa, Member (Judicial). NAVYUG ALLOYS PVT. LTD. Versus CCE & C, VADODARA-II.
Applicability of RCM to composition taxpayer: yes, section 9(3)/9(4) applicable to recipient and no distinction here whether regular or composition. Loss of ITC in such case to composition taxpayer.
Time of supply:
(A)in respect of service under section 13(3) as under:
In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely:—
(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(b) the date immediately following 60 days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:
Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:
(B) in respect of good under section 12(3) as under: In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely:—
(a) the date of the receipt of goods; or
(b) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(c) the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:
Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.
Conclusion: must ensure the compliance of discharge of tax liability under RCM to avoid any dispute and also avail credit of input tax to minimise the burden of tax..