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FAQ on the GST in India

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Reverse Charge

Basics

What is reverse charge?

Typically, business owners collect tax on behalf of the customers and then pay it to the government. Reverse charge is when the buyer pays the tax directly to the government. 

The responsibility of reverse charge usually rests completely on the buyer, but in certain special cases, it can be jointly borne by the buyer and the seller. 

When is reverse charge applicable?

Reverse charge is applicable on both goods and services, in the following situations: 

  • A registered business owner receiving goods or services from an unregistered vendor through an inter-state transaction.
  • Services offered by an aggregator or e-commerce operator.
  • Transactions involving the list of goods or services specified by Central Board of Excise and Customs (CBEC).
What are the prerequisites for the reverse charge mechanism?
  • The recipient of goods/services must be registered under GST.
  • Every registered business owner should maintain accurate records of their supplies that would incur reverse charge.
  • The supplier must clearly mention on all invoices, receipt vouchers, and refund vouchers if the tax payable for that specific transaction is through reverse charge.
  • Advances paid on supplies that incur reverse charge are taxable under GST. The taxpayer making the advance payment must pay the tax on a reverse charge basis.
What is self-invoicing under the reverse charge mechanism and when is it necessary?

When a business owner makes a purchase from an unregistered supplier, the supplier cannot issue a valid tax invoice. The business owner will need to self-invoice and pay tax by reverse charge.

Time of supply for goods and services

How is the time of supply determined under the reverse charge mechanism?

The time of supply under reverse charge will be the earliest of the following dates:

  • Date of receipt of goods
  • Date of payment or
  • The day immediately after 30 days from the invoice date for goods and 60 days from the invoice date for services. Note: If none of the above applies, use the date of entry in the receiver’s books.
Show me some examples of how to calculate the time of supply for goods and services.

  • Goods: A business owner purchases goods from an unregistered vendor on 28 October 2017. The goods are delivered to their workplace on 29 October 2017, and they complete the payment on 1 November 2017. In this case, the time of supply would be 29 October 2017, which is the date that the goods were received.

  • Services: The owner of a Goods Transportation Agency (GTA) provides services to a client on 28 October 2017 and issues an invoice the same day. The client pays them on 5 November 2017. The services provided by Goods Transportation Agencies incur reverse charge, so the tax is paid by the client. In this case, the time of supply would be 5 November 2017, which is the date when the client paid. If the client did not pay the business owner within 60 days, the time of supply would be 60 days from the date of invoice, that is the 28th of December.

Claiming input tax credit

Can I claim ITC on the goods and services I purchase on a reverse charge basis?

Yes, a buyer can claim input tax credit as long as they use the goods and services they bought on a reverse charge basis for business purposes only.

Can I claim ITC on input goods/services that I used to manufacture supplies that incur reverse charge?

No, a supplier cannot claim ITC on the tax paid on goods and services that were used to make supplies that incur reverse charge.

Miscellaneous 

Does my aggregate turnover include the tax I pay through reverse charge on the value of outward supplies?

Yes, the tax you pay through reverse charge on your outward supplies will be included in your aggregate turnover.

I am a manufacturer of supplies that incur reverse charge. Should I register under GST?

No, manufacturers of supplies on which the recipient should pay taxes under GST are exempted from registration. 

If I have recently migrated to the composition scheme, will I be liable to pay taxes under the reverse charge mechanism when I purchase goods from an unregistered supplier?

Yes, you must pay taxes under the reverse charge mechanism if you purchase supplies from an unregistered vendor.

Do I need to pay tax through reverse charge even on small purchases? ?

You do not need to pay GST through reverse charge on intra-state purchases from unregistered sellers, as long as the total value of the supply received per day is less than or equal to Rs.5,000/-.

Latest updates

Is there a new rule about reverse charge and intra-state transactions?

According to the press release notification on October 13, 2017, registered dealers will be temporarily exempt from paying tax under the reverse charge mechanism when making intra-state purchases from unregistered dealers. This dispensation will be available from October 13, 2017 until March 31, 2018.

Thanks to this move, businesses can now buy from unregistered dealers without having their compliance rating lowered.

Does the temporary suspension of the reverse charge mechanism include bills for labour charges received from unregistered suppliers?

Yes, reverse charge provisions for unregistered suppliers have been postponed until March 31, 2018. Until then, there’s no need to pay taxes for labour charges billed by unregistered suppliers.

When does the suspension of the reverse charge mechanism take effect?

Indirect tax notifications become applicable on the date they are published. The council’s declaration suspending the reverse charge mechanism is applicable as of 6 October 2017.

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