The GST reverse charge mechanism is applied when the receiver of the goods becomes the party that is liable to pay the taxes. Under regular circumstances, the supplier of goods and services is liable to pay the Goods and Services Tax (GST).
The government has clearly spelled out a few instances in which the reverse charge mechanism is employed and understanding the same can help both businesses and individual customers understand their transactions in a more comprehensive manner.
Let’s take a look at the reverse charge mechanism, when it is implemented, and what self-invoicing is
Reverse charge mechanism in respect of an unregistered person
The GST in respect of the supply of goods or services or both by an unregistered supplier to a registered person (buyer) shall be paid by the buyer on a reverse charge basis. All the provisions of the GST Act shall apply to such a buyer as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
Let’s say that you own a small paper company that is registered under GST. However, one of your vendors that supplies glossy paper to your company is not registered under GST. In this case, the reverse charge applies. In this case, the paper company must pay the GST instead of the glossy paper vendor.
Also, it is important to note that the registered dealer must carry out self-invoicing, instead of the vendor sending the invoice to the company.
Reverse charge mechanism in respect of services through an e-commerce website
If an e-commerce website supplies any services, then the reverse charge becomes applicable to the e-commerce operator. For instance, if you use a brand that lists out service vendors, such as beauticians, then you must pay the GST on the bill, instead of the vendors paying the same to the brand.
Reverse charge mechanism in respect of the supply of specific goods listed by CBIC
If you supply certain goods that have been listed out by the Central Board of Indirect Taxes & Customs (CBIC), then the reverse charge is applicable. Some of these goods include cashew nuts, betel leaves, silk yarn, tobacco leaves, and so on.
Time of supply under reverse charge mechanism (RCM)
Under GST, time of supply means a particular point of time when the goods or services are supplied or provided. Using the time of supply, you can find the tax rate applicable on goods or services, the person liable to pay tax, and due dates for paying GST and filing returns. Under the reverse charge mechanism, the method to determine the time of supply is different for goods and services.
In the case of goods supplied under RCM, the time of supply will be the earliest of the following dates:
- Date of receipt of goods
- Date immediately after 30 days from the date of issue of an invoice by the supplier
If you are not able to determine the time of supply as per the aforementioned criteria, then the time of supply will be the date of entry in the recipient’s books of account.
In the case of services rendered under RCM, the time of supply will be the earliest of the following dates:
- Date of payment
- Date immediately after 60 days from the date of issue of invoice by the supplier
If you are unable to determine the time of supply under the given conditions, then the time of supply will be the date of entry in the books of account of the recipient.
Invoicing under Reverse Charge Mechanism
Under the reverse charge mechanism, the recipient or buyer of the goods or services issues an invoice on receipt of goods or services from the supplier. Further, they shall issue a payment voucher at the time of making payment to the supplier.
A registered recipient or the buyer can issue a consolidated invoice at the end of a month for supplies if the aggregate value of such supplies exceeds INR 5,000 in a day.
Manner of GST payment under reverse charge mechanism
According to the provisions of GST law, the person supplying the goods must mention in the tax invoice whether tax is payable under the reverse charge mechanism.
Here are some points to remember while making GST payment under reverse charge:
- A recipient of services can avail ITC on the tax amount paid under reverse charge on goods and services only if such goods or services are used for the purpose of business or furtherance of business.
- A composition dealer, falling under reverse charge, is ineligible to claim any credit of tax paid. Also, the dealer will have to pay tax at the normal rates and not at the composition rates.
- GST compensation cess will be applicable to the tax payable or paid under the reverse charge mechanism.
Input Tax Credit under Reverse Charge Mechanism
A supplier/seller cannot take an Input Tax Credit (ITC) of GST paid on goods & services supplied under the reverse charge mechanism (RCM).
The buyer/recipient can avail of ITC on GST amount paid under reverse charge on receipt of goods or services, only if such goods or services are used or will be used for business purposes.
The ITC cannot be used by the recipient towards payment of output GST on goods or services under reverse charge. The payment of GST under reverse charge will only be paid in cash.
Important points of remember under reverse charge mechanism
- Any person paying tax under the reverse charge mechanism will have to compulsorily register himself under GST even if the turnover has not exceeded the threshold
- The GST applicable under reverse charge must be deposited to the government on every 20th of the next month
- The reverse charge mechanism will only be applicable to intrastate transactions
- Any advance payment made for the reverse charge supplies is also chargeable to GST. The person making the advances has to pay tax on the reverse charge basis
What does self-invoicing mean?
Self-invoicing is a commercial arrangement in which the customer creates and then sends the invoice to the vendor or supplier of goods every month.
Of course, this does not mean that the vendor needs to pay the amount on the invoice. The customer still pays it, however, since the customer has the GST registered business, they are the ones who must include their GST number on the invoice.
Additionally, it is important to note that it is not illegal for your vendor to not have a GST number.
Under the current tax laws in India, businesses having turnover from the sale of goods of less than INR 40 lakh are not required to register themselves for GST. However, the limit remains at INR 20 lakh for service providers. This is an exemption created by the Government of India in order to help newer businesses and startups flourish.
Do note that the threshold for GST registration in India was Rs 20 lakh prior to the 31st of March 2019. This limit remains the same for Kerala and Telangana states.
Thus, if you are working with a vendor that does not have a GST number, you do not have to worry about whether it is illegal or not.
Also, be sure you know what tax rate you’re subject to for your goods and services. Get GST inclusive and exclusive prices for your goods with a GST calculator.
How can you create your invoices with total ease?
A great way to create GST-compliant invoices is by using Razorpay Invoices. The platform is extremely easy to use and you can create comprehensive, detailed invoices at the click of a few buttons
By using Razorpay’s highly intuitive dashboard, you can create invoices, share them, and even update them (manually or through API).
All you need to do is get onto the Dashboard and click on create invoice. This will take you to a page where you must add a new customer (or select an existing one) and then proceed to enter all the pertinent details related to the customer.
You can also add the 8 character HSN code or SAC to the invoice, following which the GST breakdown will be applied to the invoice automatically. This completely eliminates the possibility of human error, making it much simpler for you to have a billing process that is smooth and quick!
These GST-compliant invoices can be saved as templates so that you do not have to keep punching in the same details over and over again. This further saves time and manpower.
Once the invoices are created, you can share them as a link through an email or SMS (or both) with your customer. This facilitates quick and easy payments like no other mode of transaction.
Your customers can also download the invoices and save them on their systems for any future reference, making the process transparent for all parties involved.
Another huge benefit of using Razorpay Invoices is that onboarding a new client is quite simple. You do not have to wait for days for the customer’s ID to be verified and added. Once the onboarding is completed, just create the invoice, add the customer to the receiver’s section and you’re good to go!
Frequently Asked Questions
What is a reverse charge mechanism with an example?
An individual who is registered under GST takes the services of the Goods Transport Agency (GTA) for INR 10,000. As this service is listed under the reverse charge list, the person has to pay a tax of 18% on INR 10,000 on Reverse Charge Mechanism (RCM).
How is RCM calculated?
The calculation of RCM is not constant. It varies for a long list of supplies of goods under RCM.
Where is reverse charge applicable?
If a person who has not registered under GST supplies goods and services to a person who has registered under GST, then RCM is applicable under Section 9(4) of the CGST Act. The GST amount will have to be paid directly by the receiver instead of the supplier.
What is the GST rate under RCM?
A GST rate of 5% or 12% is applicable on the basis of admissibility of Input Tax Credit (ITC) by service provider i.e. the Goods Transport Agency (GTA).
What is the purpose of the reverse charge?
The purpose of the reverse charge mechanism is to collect indirect tax easily and conveniently from the recipient and to increase tax revenues more effectively in case the supplier of particular goods or services is situated in non-taxable territories or not well versed with the tax laws.