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CHANAKYA NATIONAL LAW UNIVERSITY

TOPIC- REVERSE CHARGE UNDER GST ACT

SUBMITTED TO: DR. GP PANDEY


SUBMITTED BY: SHASHANK KAPOOR
EIGHTH SEMESTER
ROLL NUMBER-1232

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ACKNOWLEDGEMENT
I would like to thank my faculty Dr. G.P. Pandey without the kind and support of whom the
completion of the project would have been a herculean task for me. He took out time from his
busy schedule to help me to complete this project and suggested me from where and how to
collect data.
Acknowledges are also due to my friends who gave their valuable and meticulous advice
which was very useful in writing the project.
I would also like to express my gratitude towards the library staff for working long hours to
facilitate us with required material going a long way in quenching our thirst for education.
I would also like to express my gratitude towards my parents and all those unseen hands who
helped me out at every stage of my project.

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RESEARCH METHODOLOGY

In this project Doctrinal Method of Research is used. Doctrinal Methods refer to Library
research, research or processes done upon some texts writings or Documents, legal
propositions and Doctrines, Articles, Books as well as Online Research and Journals relating
to the subject. This project is an intensive one so this method is sufficient to address the
findings and to arrive at concrete conclusions.

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INTRODUCTION
GOODS AND SERVICES TAX(GST)- MEANING

In simple terms GST is a destination based consumption tax meaning thereby that GST will
be levied on goods/services in the State in which it is consumed.1
GST a biggest indirect tax reform of India will change the manner of doing business. After
implementation of GST various indirect taxes will be subsumed under GST:-
1. Central Excise Duty.
2. Duties of Excise (Medicinal and Toilet Preparations ).
3. Additional Duties of Excise (Goods of Special Importance).
4. Additional Duties of Customs.
5. Special Additional Duty of Customs.
6. Service Tax.
7. Central Surcharges and Cesses so far as they relate to supply of goods and services.
8. State VAT.
9. Central Sales Tax.
10. Luxury Tax.
11. Entry tax.
12. Entertainment and Amusement Tax (except when levied by the local bodies).
13. Taxes on Advertisements.
14. Purchase Tax.
15. Taxes on lotteries, betting and gambling.
16. State Surcharges and cesses so far as they relate to supply of goods and services.
GST is a dual tax structure based tax in which both Centre and State has authority to levy
and collect tax and is a single rate tax meaning thereby that a particular GST rate on a
product/ service is same in the whole India. Till date Government has finalized different rates
for different Goods/Services 3%, 5%, 12%, 18% and 28% and export will be zero rated.2
GST is leviable on supply of goods/ services between taxable persons at such rate as may be
notified by Government and collected in the manner prescribed. It is clear that GST would be
applicable on “SUPPLY” of goods or services as against the present concept of tax on the
manufacture of goods or on sale of goods or on provision of services.

1
Reverse Charge Mechanism- Major Change Under GST, Manish Jain, ICSI.
2
Ibid.

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BENEFITS OF GST3
(a) Simpler tax regime with fewer exemptions.
(b) Reductions in the multiplicity of taxes that are at present governing our indirect tax
system leading to simplification and uniformity.
(c) Reduction in compliance costs - No multiple record keeping for a variety of taxes–
so lesser investment of resources and manpower in maintaining records.
(d) Simplified and automated procedures for various processes such as registration,
returns, refunds, tax payments, etc.
(e) All interaction to be through the common GSTN portal- so less public interface
between the taxpayer and the tax administration.
(f) Will improve environment of compliance as all returns to be filed online, input
credits to be verified online.
(g) Final price of goods is expected to be lower due to seamless flow of input tax
credit between the manufacturer, retailer and service supplier.
(h) Refund procedures under GST are convenient and time bound.
(i) Single Tax Structure across Country will make boundary less business comfortable.
(j) GST will make Indian Economy from unorganized to organized economy which
will help in overall Development of Country.

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GST BENEFITS- Advantages and Disadvantages of GST, Clear Tax, https://cleartax.in/s/benefits-of-gst-
advantages-disadvantages (Last Visited 25th April,2018)

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REVERSE CHARGE MEACHANISHM
GST will be collected by the supplier of goods/services from the person/entity to whom the
taxable supply of Goods or Services made and deposit to Government account. This is the
General Rule of Business. But if the liability of tax deposit lies with the recipient of
goods/services then this mechanism is called “REVERSE CHARGE MECHANISM”. 4All of
us are already familiar with this mechanism under Service Tax. Services covered under
reverse charge in old regime are:
(1) Services by an insurance agent to any person carrying on insurance business.
(2) Services by a recovery agent to a banking company or a financial institution or a non-
banking financial company.
(3) Services by a goods transport agency in respect of transportation of goods by road.
(4) Services by way of sponsorship and.
(5) others.
Reverse charge mechanism (RCM) refers to payment of taxes by recipient of goods or
services rather than supplier of goods or services. According to Section 9(4) of CGST
Act2017, GST in respect of taxable supplies by unregistered to a registered person should be
paid by such registered recipient. Section 9(3) provides for GST levy under reverse charge on
specified goods or services. Such specified services or goods could be even from registered
persons. Electronic commerce operator would be made liable for GST under RCM on
specified categories of services (not on goods) provided within the state. Such levy is
applicable only when specified services are supplied through electronic commerce operator.
The list of goods or services which are always liable for GST under RCM are yet to be
notified. Normally the areas where there is not much organised activity or where the suppliers
would be uneducated and may not comply or will not comply are areas where RCM is
imposed.5 It is also imposed on suppliers who cannot be reached like those who are located
outside India on whom India would not have any jurisdiction. The services like goods
transportation agency services could still continue to be under RCM.
Now under GST regime Reverse Charge will be applicable to both Goods and Services.
The major change is that reverse charge mechanism applies to goods also. The goods and
services on which reverse charge mechanism applies will be notified by the GST Council.

4
Reverse Charge under GST, Jayesh Sanghrajka & Co. LLP, Batgach and Affiliates.
5
Reverse Charge Mechanism on Goods and Services under GST, Tax Guru, January 8 2018,
https://taxguru.in/goods-and-service-tax/reverse-charge-mechanism-on-goods-and-services-under-gst.html
(Last Visited 25th April, 2018)

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Till date no Goods are notified but 12 services are notified in GST Council meeting on
19.05.2017 on which reverse Charge applies.
As per Section 9(3) of IGST, the Government may, on the recommendations of the Council,
by notification, specify categories of supply of goods or services or both, the tax on which
shall be paid on reverse charge basis by the recipient of such goods or services or both and all
the provisions of this Act shall apply to such recipient as if he is the person liable for paying
the tax in relation to the supply of such goods or services or both.
It is very much clear that there is no concept of partial reverse charge under GST law which
is present in Service Tax Law.6
Reverse charge mechanism is not a new concept for indirect tax assesses. Most Indian State
VAT laws provides for levy of VAT on procurement of taxable goods from unregistered
persons. Even in service tax, there are specified categories of services such as manpower
supply services, rent-a-cab services, road transport service etc. which are liable for tax unde
reverse charge basis. Services from outside the Country are also liable on RCM. Under
central excise law, where molasses are produced in a Khandsari sugar factory, the person
who procures such molasses for use in manufacture of any commodity should pay the excise
duty.

FORWARD CHARGE
Forward charge or direct charge is the mechanism where the supplier of goods/services is
liable to pay tax.
For instance, if a chartered accountant provided a service to his client, the service tax will be
payable by the chartered accountant.
Or for instance, if a car manufacturing company sold some auto parts to a trader and collected
tax from the trader, the manufacturing company remits the tax.
Under the current tax system, most transactions are covered under the forward charge
mechanism.7
DIFFERENCES BETWEEN FORWARD AND REVERSE CHARGE

S.No. Particulars Forward charge Reverse charge

6
Ibid
7
Reverse and forward charge mechanisms under GST India, Nayan Rijhwani, June 6, 2017,
https://www1.avalara.com/in/en/blog/2017/06/reverse-forward-charge-mechanisms-gst.html (Last Visited
April 25, 2018)

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1. Liability to pay tax Supplier of goods/services Receiver of goods/services

2. GST registration Required once a supplier meets the All persons who are required to
threshold. pay tax under reverse charge
Threshold: Turnover in a financial have to register for
year exceeds Rs. 20 lakhs (Rs. 10 GST irrespective of the
lakhs for northeastern and hill threshold.
states).

3. Time of supply The time of supply shall be The time of supply shall be
of goods/services the earliest of the following dates. the earliest of the following
Goods: dates.
Goods:
· The date on which the supplier
issues the invoice · The date of receipt of goods

· The last date on which the · The date on which payment is


supplier is required to issue the made. The earliest of the date on
invoice with respect to the supply which the payment is accounted
of goods. For supply of goods for in the books of accounts of
involving the movement goods, the the recipient or the date on which
invoice needs to be issued at the the payment is credited to his
time of removal. In other cases, at bank account
the time of delivery of goods to the
recipient · The date immediately
after 30 days from the date of
· The date on which payment is issue of invoice by the supplier
received. The point of taxation, in
this case, will be the earliest of the Services:
date on which payment is
· The date of payment entered in
accounted for in the books of
the books of accounts or the date
accounts of the recipient or the date
on which payment is credited to
on which payment is credited to his
the bank account
bank account

· In case payment is not made by


Services:
the recipient to service providers
· The date on which the supplier withinthree months, the point of
issues the invoice taxation will be the date
immediately following the expiry
· The last date on which the of three months

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supplier is required to issue the
invoice is 30 days from the date of
supply of services. In case of a
banking company, the invoice has
to be issued within 45 days from
the date of supply of services

· The date on which payment is


received. The earliest of the date on
which the payment is accounted for
in the books of accounts or the date
on which the payment is credited to
his bank account

PURPOSE OF REVERSE CHARGE


In India, this is a partly new concept introduced under GST. The purpose of this charge is to
increase tax compliance and tax revenues. Earlier, the government was unable to collect
service tax from various unorganized sectors like goods transport. Compliances and tax
collections will therefore be increased through reverse charge mechanism. 8

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Supra Note 4.

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TIME OF SUPPLY

FOR GOODS

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.
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.
For clause (b)- the date of payment shall be earlier of-
1. The date on which the recipient entered the payment in his books OR
2. The date on which the payment is debited from his bank account.9

FOR SERVICES
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.
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.
For clause (a)- the date of payment shall be earlier of-
1. The date on which the recipient entered the payment in his books OR
2. The date on which the payment is debited from his bank account 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-
1. the date of entry in the books of account of the receiver OR
2. the date of payment -whichever is earlier.10

9
Ibid.
10
What is meant by Reverse Charge Mechanism in GST?, Taxmann,
https://www.taxmann.com/blogpost/2000000045/what-is-meant-by-reverse-charge-mechanism-in-gst.aspx
(Last Visited April 25, 2018).

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APPLICABILITY of REVERSE CHARGE

 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. Let’s look at this example of reverse charge under GST in this case. For
Example: ABC supplies services of a plumber, a beautician, an electrician, etc. hence,
instead of registered service providers, ABC have to pay GST and collect from
customers.11
 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. However, purchases up to Rs
5,000 per day from unregistered suppliers will not attract GST. In other words, there
is a reverse charge on buying from unregistered dealers if you are dealing with
unregistered suppliers and making payments above Rs 5,000. Let’s understand this
with the help of an example. For Example: Suppose a registered company called XYZ
Ltd. has spent Rs 7,500 on purchases from an unregistered person. In this case, should
it pay GST via Reverse Charge Mechanism on the whole amount or the amount
exceeding the threshold limit? Once the limit of Rs 5,000 in a day is crossed, the GST
is payable on the entire amount of Rs 7,500 via reverse charge mechanism and not the
excess amount of Rs 2,500.
 All other categories of supplies will be notified by Central or State government that
will fall under reverse charge.

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All about Reverse Charge under GST, Clear Tax, https://cleartax.in/s/reverse-charge-gst (Last Visited April
25, 2018)

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CONCLUSION
Change is definitely never easy. The government is trying to smoothen the road to GST. It is
important to take a leaf from global economies that have implemented GST before us, and
who overcame the teething troubles to experience the advantages of having a unified tax
system and easy input credits.

The RCM can significantly increase the number of taxpayer base in India while it also
mentioned that purchases made from an unregistered dealer can prove expensive for the
registered dealer. This will be attracting reverse charges in case if any dealers make
transactions with an unregistered dealer.

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BIBLIOGRAPHY
 Central Goods and Services Act, 2017
 www.cbec.gov.in
 www.taxguru.com
 www.cleartax.com
 www.taxmann.com

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