Goods and Service tax, popularly known, as GST is the new tax regime that will replace many of the current indirect taxes and will remove the complexities of it. The Finance Ministry department has set the target date of 1 July 2017, to get GST implemented to the whole nation.
The GST enrollment procedure for migration has already started for the proposed tax regime. While in India, the current tax system is origin-based, GST will be a destination-based tax system. It will replace a total of 17 taxes such as Service Tax, VAT, Excise Duty, Counter Veiling Duty (CVD), SAD, Entry Tax, Purchase Tax etc. Central Government has enacted 4 GST Bills until now,
- CGST (Central GST)
- IGST (Integrated GST)
- UTGST (Union territory GST)
- Bill to compensate states.
A well-designed GST will not only eliminate cascading effect and double taxation but will also smoothen the functioning of the business. It is projected that India will have an increased growth by 2% and will boost revenues for the government because it will affect both manufacturing and service sector.
India is a country where there are organized, partly organized and unorganized sectors, which require continuous monitoring for better tax compliance and coverage. To carry out this function smoothly, the government had introduced REVERSE CHARGE MECHANISM.
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.
However, in certain cases, charge ability gets reversed from supplier to the recipient which is why it is called reverse charge. There are 15 services in which reverse charge is applicable under service tax such as Insurance agent, Manpower supply, Goods Transport Agency etc.
What is Reverse Charge in GST?
It is a new concept that is introduced in GST in India, to increase tax revenues, coverage and compliance from partly or unorganized sectors.
Earlier goods were exempt from this scheme, now the collection of GST will increase tremendously.
In GST, the supplier will be liable to collect tax on goods and services provided. But the central government has the power to notify categories of supplies against which service recipient has to discharge the tax liability. Hence, all the provisions of the Act will now be applicable to the recipient of such goods or services as if he is the supplier of such goods or services.
When a person becomes liable to pay tax on the reverse charge, certain provisions like threshold exemption, time of supply, availing of input credit changes. There is a threshold limit for turnover aggregating to Rs.20 Lakhs for registration for normal tax payers but under reverse charge, there is no such limit. The person has to be registered under GST irrespective of the aggregate limit.
Also read about GST composition scheme.
Situations Where The Reverse Charge Will Apply
- Services supplied by an Electronic Commerce Operator will attract 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 such e-commerce operator will be liable to pay tax. If there is no representative, then the assessee has to appoint one who will be liable to pay GST.For Example: UrbanClap supplies services of a plumber, a beautician, an electrician, etc. hence, instead of registered service providers, UrbanClap have to pay GST and collect from customers.
- If the registered dealer is buying goods or services from an unregistered dealer then, the registered dealer will be liable to pay tax on supply.
- All other categories of supplies will be notified by Central or State government that will fall under reverse charge.
Time Of Supply For Goods Under Reverse Charge
Provisions are different under reverse charge than normal scenario. Time of supply will be the earliest of the below dates:
- When the goods are received i.e. the date of receipt.
- When the amount is paid i.e. the date of payment.
- Date of payment shall be earliest of ‘The date on which payment has been debited from supplier’s bank account’ Or ‘When the recipient records the payment in his books of account’
- The date immediately after 30 days from the date the supplier issues invoice.
If the assesse fails to determine the time of supply from the above-mentioned clauses, then the time of supply shall be the date on which recipient enters in his books of account.
Date of receipt of goods – 16th May 2017
Date of Payment – 16th July 2017
Date of Invoice – 1st June 2017
Date of Entry in books by recipient – 18th May 2017
Thus, Time of supply will be – 16th May 2017. If by any chance time of supply could not be determined under mentioned clauses then it will be 18th May 2017, i.e. Date of entry.
Time of Supply for Services Under Reverse Charge
Similarly, provisions are different for services under reverse charge. Time of supply will be the earliest of the below dates:
- When the amount is paid i.e. the date of payment OR
- Date of payment shall be earliest of – ‘The date on which payment has been debited from supplier’s bank account’ Or ‘When the recipient records the payment in his books of account’.
- The date immediately after 30 days from the date the supplier issues invoice.
If the assesse fails to determine the time of supply from the above-mentioned clauses, then the time of supply shall be the date on which recipient of service enters in his books of account.
Date of Payment – 16th June 2017
Date of Invoice – 1st July 2017
Date of Entry in books by recipient – 18th June 2017
Thus, Time of supply will be – 16th June 2017. If by any chance, time of supply could not be determined under mentioned clauses then it will be 18th June 2017, i.e. Date of entry.
If the supplier is located outside India, then the time of supply shall be the earliest of – ‘When the amount is paid i.e. the date of payment’ OR ‘When the recipient records the payment in his books of account’.
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 only condition is that the goods and services are used or will be used for business or furtherance of business. Unfortunately, ITC cannot be used to pay output tax, which means that payment mode is only through cash under reverse charge.
The supplier has to mention in his tax invoice that the tax is payable on reverse charge.
Miscellaneous Points for Attention:
- If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim any credit of tax paid. Along with the dealer is liable to pay tax at normal rates applicable to such supply and not the rate applicable for composition scheme.
- Even advance payments are subject to Reverse charge mechanism.
- Unlike Service Tax, there is no concept of partial reverse charge. The recipient has to pay 100% tax on the supply.
- As per the proposed Bill, GST compensation cess will be levied and collected at a date which will be notified by the government at a later date.
Now after the brief discussion on GST reverse charge mechanism, GST council has suggested few goods and services on which reverse charge is applicable.
|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 body corporate||A company or a body corporate||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.|
# the above table is illustrative in nature and is given for self-explanation.
GST is a completely new revolution to tax regime and has already taken India by storm. With many new concepts such as Reverse Charge Mechanism, Composition Scheme, Mixed supply, it will be definitely challenging for every individual or body corporate. The transition of business and application of GST is the next big thing that every person has to be ready for.
How Can You Comply Better With GST
Even if you have a CA to look after your financial accounting, its advisable to implement a good GST compliant accounting software which should simplify the whole process.
ProfitBooks is one such accounting software which not only helps you create GST invoices, track purchases, manage inventory but also helps you to file GST returns online with just few clicks.
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