GST is an indirect tax, whereby seller recovers tax on goods / services supplied to the buyer, and then
deposits the tax so recovered to the Government of India. While this is the primary way tax is collected
and paid, there is an exception to this mode, namely reverse charge mechanism.
Under reverse charge mechanism, the buyer of goods / services is required to deposit GST directly to the
tax authorities, and the seller need not collect the tax, nor undertake any related compliances.
These principles can be understood in detail when you join GST classes at Super 20 Training Institute.
However, a brief is provided below to get you started.
History and Genesis
Following the normal process (also referred to as the forward charge) may still leave some
transactions untaxed. In a country as vast as India, with unorganized businesses, reverse charge acts
as an effective mechanism to plug the loopholes and implement the law.
Reverse charge mechanism existed in the pre-GST era as well, i.e. in the service tax regime.
Applicability
Liability to pay tax on the buyer / recipient of goods and services arises under the reverse charge
mechanism under the following scenarios:
(i) Based on nature of goods / services supplied, or nature of supplier
Some examples are:
– supply of a service by a non-resident to any person in India
– supply of legal services by an advocate to any business in India
– supply of services by a director of a company to the company in India
(ii) Where a taxable supply is made by an unregistered dealer to a registered dealer [applicability
deferred to 30 September 2019]
When a registered dealer procures a taxable good or service from an unregistered dealer, the
liability to pay GST shifts to him under reverse charge mechanism and he is required to pay GST,
instead of the unregistered supplier. The exception to these cases is when the total procurements
by the registered dealer in a day do not exceed Rs 5,000 (whether from one or all unregistered
suppliers).
The above list is only indicative and not exhaustive. You could learn more at Super 20’s GST classes.
Further, where reverse charge mechanism is applicable, GST would need to be deposited on any
advances paid to the supplier too.
Compliances required / Other aspects
A recipient required to pay GST under reverse charge mechanism must obtain GST registration and
undertake all compliances like any other registered dealer.
GST under reverse charge mechanism needs to be paid in cash, and input tax credit cannot be used to
pay the same. However, once paid, input tax credit can be claimed against GST so paid. The exception to this is the case of a GST composition dealer who is generally not allowed to claim input tax credit,
and therefore cannot claim credit of taxes paid under reverse charge mechanism either. Further,
when a composition dealer has to pay GST under reverse charge mechanism, he must pay at full rates
(and not at lower rates applicable to him).
One more important aspect is the Time of Supply – the point when GST is payable. This differs under
reverse charge mechanism from the usual principles under forward charge.
Of course, there are many more technicalities to these provisions. If you have any queries, do reach out
to us and we could guide you further with the right set of GST training that you should opt for,
considering your background, experience and future plans. Super 20 Training Institute offers the best
tax course and would be just the right choice for this purpose.
