We all know that India has adapted with new tax system called GST (Goods & Services Tax) from 1st July, 2017. This is a consolidated tax system where Indian Government combine many of their Central and State tax on products and services. India has accepted this new tax system because it has many advantages. It will cause the product/service prices to reduce. Thus Indian consumer will be benefited. Not only that India will be more competitive in International market for cost reduction nature of the new system. One question comes in mind how GST will reduce products/services cost? Well, before GST there are many tax on products/services that had been levied by State as well as Central Government. And also there was not any credit mechanism of already paid tax. Thus it may happen that one product/service has been levied for more than once by State or Center. So it increase the cost. In GST, business entities can take the credit of tax they have already paid. So product/service prices are remaining low.
Now come to the topic of this post. What is Reverse Charge Mechanism? We can not directly jump to the topic without mentioning some rules and regulation of GST. In GST system any business entity having annual turnover of more than Rs 20 lakh have to register in GSTN. After registration they will have GSTIN. GSTIN is a 15 digits number comprising state code, PAN number, entity code and a check sum digit. GSTIN is the key by which Government will identify the business entities all over India. Through GSTIN Government can identify the business entity and collect tax. But what about the business whose annual turnover is less than Rs 20 lakh. In India this kind on entity is huge and they participate approximately half of the national GDP. So a huge number of entity will be outside of the GST system. Thus Government will loss an huge amount of tax revenue. To collect tax from those entities Indian Government thoughts a way and Reverse Charge Mechanism comes in.
Then what is the concept of RCM. At this point any transaction between two registered entity have to pay GST. But when a transaction happening between a registered entity and an unregistered entity where unregistered entity is the vendor, instead of paying GST to the vendor the registered entity by itself will be liable to pay GST of itself to Government. That means The registered entity will collect GST from itself as a vendor and pay to Government. In this kind of transaction the liability of GST payment is being reverse to the registered customer. So we call it reverse charge mechanism. Here we need to mention an important thing and that is the registered customer who pay GST in reverse charge can also take credit of it. As every other inword transaction the customer needs to mention it in GSTR-2 and after filing GSTR-3 can take input tax credit of this transaction. One condition to treat a transaction in reverse charge mechanism is that the vendor must be unregistered and the customer must be registered. Indian Government have fixed 12 services that should be treat in reverse charge mechanism no mater if the vendor is registered or not. But in case of goods if vendor is unregistered reverse charge will apply. In the tax invoice of reverse charge transactions it needs to be mentioned that this transaction is under reverse charge.
Services that are under Reverse Charge Mechanism –
- Taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non-assessee online recipient(OIDAR).
- Services provided or agreed to be provided by a goods transport agency(GTA) in respect of transportation of goods by road.
- Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly.
- Services provided or agreed to be provided by an arbitral tribunal.
- Sponsorship services.
- Services provided or agreed to be provided by Government or local authority excluding
A. renting of immovable property, and
B. services specified below-
> services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government;
> services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
> transport of goods or passengers;
- Services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate.
- Services provided or agreed to be provided by an insurance agent to any person carrying on insurance business.
- Services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company.
- Services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.
- Transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works.
- Radio taxi or Passenger Transport Services provided through electronic commerce operator.