Reverse Charge Mechanism under GST with Example | Tally Solutions

GST Reverse Charge


What is Reverse Charge in GST?

The reverse charge mechanism under GST means that the liability to pay by the recipient of supply of goods or services or both instead of supplier of such goods or services or both.

1. GST Reverse Charge: A Diagrammatic Learning Approach

gst reverse charge

2. GST Reverse Charge Scenarios: Services/Goods

GST Reverse Charge Scenario No. 1 Services :
  • Nature of supply and/or nature of supplier
  • this section is applicable whether the dealer is registered dealer under GST or not
  • Under this scenario notified supply of goods and services are covered in which specified recipient are liable to pay tax under reverse charge mechanism.
  • The Illustrative GST Reverse charge list here includes :
    • GTA Services;
    • Legal services by advocate;
    • any service supplied by any person who is located in a non-taxable territory to any person other than nontaxable online  recipient,
    • Services supplied by an arbitral tribunal to a business entity
    • Services provided by way of sponsorship to any corporate or partnership firm
    • Services supplied by the Central Government, State Government, Union territory or local authority to a business entity
    • Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the CGST Act
    • Services supplied by a director of a company or a body corporate to the said company or the body corporate
    • Services supplied by an insurance agent to any person carrying on insurance business
    • Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company
    • Services supplied by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India
    • Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright
    • Supply of services by the members of Overseeing Committee to Reserve Bank of India
      Goods : The Illustrative GST Reverse charge list here includes :
     
    • Cashew nuts, not shelled or peeled
    • Bidi wrapper leaves (tendu)
    • Tobacco leaves
    • Silk yarn
    • Raw cotton
    • Supply of lottery
    • Used vehicles, seized and confiscated goods, old and used goods, waste and scrap
GST Reverse Charge Scenario No. 2 Goods/Services
  • It covers the taxable supplies made by any unregistered person to a registered person
  • This scenario covers only those supplies where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day
  • The provisions of reverse charge under this scenario applies only for supplies made within the state
  •   Recent Amendments : This section of Reverse charge supply has been put on hold by the council ever since after September and it is now proposed to cancel this section of Reverse charge mechanism under GST in the recently concluded GST Council meeting.

3. Reverse Charge Mechannism : GST Examples

Example No.1: Mr. X, a registered supplier, engaged in profession of Advocacy, buys stationary worth Rs. 200/- for his office from ABC Stationery, which is not registered under GST.

Analysis :
  • This is the case falling under Scenario 2 discussed above
  • Services by an unregistered person (ABC Stationary) to a Registered person (Advocate Mr. X)
  • But the aggregate value on a given day (Rs.200/- not exceeding Rs. 5,000/- limit in a day)
Reasoning: Whether Mr. X or XYZ Stationery is liable to Reverse charge under GST?
  • Reverse charge mechanism under GST says recipient of supply should pay tax , in the given case Mr. X should pay GST Reverse charge but
  • Mr. X is not required to pay GST Reverse charge in the given case as the aggregate value of supplies on a given day has not exceeded Rs. 5,000/-

Example No. 2: XYZ Transport services, Tamil Nadu provides Goods Transport Agency services to Mr. X (an unregistered dealer of Calcutta. The value of service provided by XYZ Transport company is Rs. 1000/-. Whether MR. X or the transport company is liable to pay tax under reverse charge mechanism in GST?

Analysis :
  • This is the case falling under Scenario 1  discussed above
  • XYZ Transport company providing notified services from the GST Reverse charge list  (GTA Services in the given case)
  • The scenario says that whether the person providing service or the person receiving service is registered or not (in the given case it doesn’t matters whether XYZ or Mr. X is a registered person
  • The part of scenario further says that the specified person has to pay tax on all such notified supplies  (meaning if the person receiving the supply is unregistered person then the law says that he must get registered and pay tax under reverse charge in GST
Reasoning: Whether Mr. X or XYZ Transport Services is liable to Reverse charge under GST?
  • The specified recipient to pay tax (Mr. X in the given case)
  • But Mr. X Since is an unregistered person has to first get registered under GST by obtaining GSTIN and pay tax on reverse charge under GST for supplies received from XYZ Transport Services

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