Reverse Charge Mechanism under GST with Example

https://gst.caknowledge.in/reverse-charge-gst/

1) under reverse charge mechanism only the buyer is the responsible person to pay the
GST tax because the registration was not taken from the department by the seller

2)Here the buyer should not claim any input tax credit on his purchase because he did not
paid it but GST will be collected from him on his sale
In reverse charge mechanism the buyer of the goods did not setoff any taxes from his
output tax because he did not paid any tax on his purchase.

The entire amount of output tax liability has to paid to the GST DEPARTMENT

Example Q) Ravi has purchased 10000 values of the goods from the dev and the GST rate
is 10% (SUPPOSE). But the DEV was not registered with the GST department and ravi is
selling these goods for 12000
Solution: ( under reverse charge mechanism)
Ravi did not paid any GST TAX that is 1000 (10000*10%) but from his sale he will collect
1200 GST TAX( 12000*10%)
Ravi should not claim any input tax of( 1000)because he did not paid it but he has to pay
total amount of 1200 to the GST department.

What is the reverse Charge mechanism under GST

Section 2 (98 ) of CGST Act 2017
the liability to pay tax by the recipient of supply of goods or services or both
instead of the supplier of such goods or services
GST REGISTRATION UNDER RCM
All persons who are required to pay tax under reverse charge have to register for GST
irrespective of the threshold

[Threshold:- turnover in a financial year exceeds Rs 20lakhs (Rs 10 lakhs for North
eastern and hill states)]

Situations Where the Reverse Charge Will Apply

Unregistered dealer selling to a registered dealer

Services through an e-commerce operator
CBEC has issued a list of services on which reverse charge is applicable
 Time 0f Supply for Goods under Reverse Charge

In case of reverse charge, the time of supply shall be the earliest of the following dates -:

(a) the date of receipt of goods OR

(b) the date of payment OR
(c) the date immediately after THIRTY days from the date of issue of invoice by the
supplier (60 days for services)
If it is not possible to determine the time of supply under (a), (b) or (c), the time of supply
shall be the date of entry in the books of account of the recipient

Example:

1. Date of receipt of goods 15th May 2018

2. Date of payment 15th July 2018
3. Date of invoice 1st June 2018
4. Date of entry in books of receiver 18th May 2018

Time of supply of goods 15th May 2018

If for some reason time of supply could not be determined supply under (1), (2) or (3) then
it would be 18th May 2018 i.e., date of entry
 Time of supply for services under reverse charge

In case of reverse charge, the time of supply shall be the earliest of the following dates

(a) The date of payment

OR
(b) The date immediately after SIXTY days from the date of issue of invoice by the supplier
(30 days for goods)
Example for reverse charge:

If it is not possible to determine the time of supply under (a) or (b), the time of supply shall
be the date of entry in the books of account of the receiver of service.

When supplier is located outside India

In case of associated enterprises, where the supplier of service is located outside India, the
time of supply shall be

the date of entry in the books of account of the receiver

OR
the date of payment
whichever is earlier

Example for reverse charge:

Date of payment 15th July 2018

Date of invoice 1st July 2018
Date of entry in books of receiver 18th July 2018
Time of supply of service 15th May 2018
If for some reason time of supply could not be determined supply under (a) or (b) then it
would be 18th July 2018 i.e., date of entry in books.
 Input Tax Credit under RCM

he 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.
More Details for Reverse Charge under GST

Reverse charge means the liability to pay tax by the recipient of supply of goods or
services instead of the supplier of such goods or services in respect of such categories of
supplies as notified under sub-section (3) of Section 8.
The concept of Reverse Charge existed earlier under the Service Tax provisions for services
like Works Contract, Manpower, Goods transport Agencies, Legal services etc., However,
under the GST, Reverse charge mechanism has been introduced both for Goods and
Services.
Section 12(3) talks about Time of supply of Goods, wherein for Reverse Charge
cases, the time of supply would be the earliest of the following dates,
(a) The date of the receipt of goods, or
(b) The date on which the payment is made, or
(c) The date immediately following thirty days from the date of issue of invoice by the
supplier:
While the above said concept is already prevalent under the Service Tax regulations, the
concept is altogether new under the Excise and especially VAT, where predominantly the
point of determinants were removal from factory and sale.

Section 13 (3) talks about Time of Supply of Services, wherein for Reverse Charge
cases, the time of supply would be the earliest of the following dates
(a) The date on which the payment is made, or
(b) The date immediately following sixty days from the date of issue of invoice by the
supplier
In case, it is not possible to determine the time of supply of services under the above said
options, the time of supply shall be the date of entry in the books of account of the
recipient of supply.
It has been further explained that for the purpose of clause (a), the date on which the
payment is made shall be the date on which the payment is entered in the books of
accounts of the recipient or the date on which the payment is debited in his bank
account, whichever is earlier.
In case of associated enterprises transactions of service nature attracting Reverse
Charge, the time of supply shall be the date of entry in the books of account of the
recipient of supply or the date of payment, whichever is earlier. For the purpose of GST
Act, associated enterprise shall have the meaning assigned to it in Section 92A of the
Income tax Act, 1961.
A person who is required to pay tax under Reverse Charge is required to
obtain registration under the GST Law, irrespective of the threshold limit.
As per the proposed Goods and services Tax (Compensation to the States for Loss of
Revenue) Bill, 2016, GST compensation cess at a prescribed rate on the value determined
under the CGST Act, would be leviable on supplies of goods and services, including supplies
on which reverse charge is payable under Section 7(3) of the CGST Act.