GST is a tax on supply. Normally the Government charges it from the supplier of goods or services. However the supplier collects the amount so paid from the customer by charging it on his invoice and the burden falls on the recipient. If the recipient has received the supply of goods or services for use in his business in a Business to Business (B2B) supply, he will get the credit of the amount paid towards tax and use it for paying tax on his further supply of goods or services. Thus GST actually gets paid on the value addition only. The final consumer is a recipient of a Business to Customer (B2C) supply, which is the final leg in a supply chain with some B2B supplies before. The whole impact of the GST charged on all the value additions before, falls on the final consumer.
However, the Government doesn’t always charge the GST from the supplier of Goods or Services. For the ease of administration, or for shifting of tax and compliance burden on a more suited person/ body, sometimes tax is charged from the recipient of the supply of goods or services, instead of from the supplier. This is called Reverse Charge.
[Section 2(98) of the CGST Act 2017 defines reverse charge as, “reverse charge means 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 or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act”].
Reverse Charge before the GST:
The Reverse Charge concept has been carried forward from the erstwhile Service Tax law. The transporters of goods viz. the truck owners and Truck operators’ Unions very strongly protested levy of Service Tax on the service of Transport of Goods with continuous nation-wide striking of work. The Government went into the depth of reasons for such a strong protest. It was realized that the bone of contention was not the service tax as such but more the trouble of compliance, as the owners/ operators of the day were simple semi-literate people who found it too much to keep record of transactions and to also complete legal formalities like submitting of returns.
The Government therefore decided to shift the levy and the compliance part to the person liable to pay the freight. The recipient of the service of ‘transport of goods by road’ was made liable to pay the service tax if it was a Partnership firm, a company or an association of persons or in individual already registered as a Dealer of Central Excise goods. Broadly speaking, a person or body engaged in some business activity was made liable to pay service tax on the transport of goods by road, under reverse charge. Proprietorship businesses were spared unless already registered under Central Excise.
Reverse charge exists in other nations and in other shapes too, sometime adopted in order to avert tax evasion and some time it is a variant of the Reverse Charge that we know. The ‘use tax’ in the US is a tax on the recipient of a tax-unpaid supply. Here the input tax credit is also not admissible to the recipient.
Reverse Charge in GST:
In GST, not only the Services but some specified Goods also have been charged to tax under reverse charge. The recipient of supply is entitled to take credit of the tax paid like a recipient of supplies which suffered tax under forward charge at the hands of the supplier.
Power to charge GST from a Recipient of supply:
The sub-Sections (3) and (4) of Sections 9 of the Central and the State GST Acts provide necessary power to levy reverse charge. Sub-Section (1) of these Sections empowers the Government to levy normal (forward) charge of GST on the supplier of the goods or services. Section 7 of the UT GST Act and Section 5 of the IGST Act empowers the Government to levy and collect respective GST viz. the UT-GST and Integrated GST
The Section 24 of CGST and SGST Acts makes provision for compulsory registration for the recipients made liable to pay GST under reverse charge under Sections 9, 7 and 5 ibid of respective Acts. The Section 24(1)(iii) makes the ‘Persons who are required to pay tax under reverse charge’ as the ‘persons required to be registered’.
Thus in GST, every person liable to pay the tax has to necessarily obtain a registration. For charging GST under Reverse Charge generally an entity engaged in business activity which is already registered is made liable to pay GST on the received supplies and will have to complete other compliance related formalities viz. filing of returns. This is called Reverse Charge Mechanism (RCM).
There are 2 types of Reverse Charge:
First type is where the Goods and Services are notified under reverse charge and the recipient of such goods and services shall pay Tax on these. Section 9(3) levies this kind of reverse charge and notification issued there under notify the goods or services for the applicability of this type of reverse charge.
Second type is where any Goods and Services are received by a registered person from an unregistered person viz. the one who is not required to register under the GST law and to pay tax. Section 9(4) of the CGST/SGST Acts empower the government for this kind of reverse charge and the notifications issued under this section specify the class of registered persons liable to pay GST under reverse charge and also the services and goods on which this is to be so paid.
Types of recipient persons specified against the Goods and Services notified for Reverse Charge:
The respective notifications under Section 9(3), while specifying the particular goods and services attracting reverse charge, also specify the recipient of the supply who shall be liable to pay GST under the reverse charge. In almost all goods and in several services, as discussed later in this Chapter, the recipient has to be ‘Any Registered Person’ to pay tax under reverse charge. In other cases, the recipients specified for paying GST under reverse charge are as enlisted below:
- Persons carrying out certain businesses,
- Associations of Persons,
- Registered Societies,
- Banking Companies,
- Financial Institutions and the
- Reserve Bank Of India
The persons enlisted above shall have to take registration and to pay GST under reverse charge as they are not already registered.
Reverse charge on the Goods and Services notified for the purpose (Section 9(3) of the CGST and SGST Acts, and Notifications there under):
The Goods and the Services on which the GST is to be paid by the recipient under Reverse Charge, have been notified vide Notifications 4/2017-CT(R) and 13/2017-CT(R) respectively. These have been issued under sub-Section (3) of Section 9 and have been amended from time to time.
Goods attracting Reverse Charge:
Cashew nuts, Bidi wrapper tendu leaves, Tobacco leaves, Raw cotton, Silk yarn, Lottery and Priority Sector Landing Certificates are the 7 goods attracting the Reverse Charge. The person specified under respective notification will have to take registration and pay GST on the received supplies of any of the said goods, to the Government.
[Notification 4/2017-CT(R) dated 28.06.2017 (as amended)]
The Notification 4/2017-CT(R) specifies the following as the ‘Recipient of Supply’ against each notified good:
- ‘Any Registered Person’ in r/o Cashew nuts, Bidi wrapper tendu leaves, Tobacco leaves and Raw cotton, if the supplier is an Agriculturist.
- ‘Any Registered Person’ in r/o Silk yarn received from a supplier manufacturer of Silk yarn who manufactures it from Raw silk or Worm cocoons.
- ‘A lottery distributor or a selling agent’ in r/o Lottery, if the supplier is a State/UT Government or a Local authority.
- ‘Any Registered Person’ in r/o Priority sector lending certificate, if the supplier is already a registered persons.
[Notification 04/2017-CT (R) dated 28.06.2017
as amended till 11/2018-CT (R) dated 28.05.2018].
Thus, a recipient of supply of such goods is not required to obtain registration merely due the fact he deals in such goods. But, as discussed in details in the Chapter on MSMEs and on Registration, if his aggregate turnover has fallen beyond the threshold limits in the preceding financial year, he will have to obtain registration and to pay GST. Also, if the recipient of said Goods is already registered under GST, the tax will have to be paid by him.
Services attracting Reverse Charge:
Following are the Services (total 20) for which the Reverse Charge would apply on the recipient. As one may see in the notification, it notifies the recipient of service in Col. 4 of the Notification, as the person liable to pay GST under reverse charge. This recipient is invariably the same as given under Column 2 of the notification and has been mentioned below as the person to whom the service has been provided.
[Notification 13/2017-CT(R) dated 28.06.2017]
- Supply of Services by a goods transport agency (GTA) who has not paid central tax at the rate of 6%, in respect of transportation of goods by road to –
(a) any factory registered under or governed by the Factories Act, 1948(63 of 1948); or
(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or
(c) any co-operative society established by or under any law; or
(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or
(e) any body-corporate, established by or under any law; or
[A ‘Body Corporate’ broadly means a company
incorporated under the Companies Act, 2013]
(f) any partnership firm whether registered or not under any law including association of persons; or
(g) any casual taxable person.
Provided that nothing contained in this entry shall apply to services provided by a goods transport agency, by way of transport of goods in a goods carriage by road, to, –
(a) a Department or Establishment of the Central Government or State Government or Union territory; or
(b) local authority; or
(c) Governmental agencies, which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 and not for making a taxable supply of goods or services.
- Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly.
Explanation.- “legal service” means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority
- Services supplied by an arbitral tribunal to a business entity.
- Services provided by way of sponsorship to a body-corporate or partnership firm.
- Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, –
(1) Renting of immovable property, and
(2) Services specified below-
(i) 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 Central Government, State Government or Union territory or local authority;
(ii) Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
(iii) Transport of goods or passengers.
5A. Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017 (12 of 2017).
5B. Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter. (Recipient : Promoter).
5C. Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount (called as premium, salami, cost, price, development charges or by any other name) and/or periodic rent for construction of a project by a promoter. (Recipient : Promoter).
- Services supplied by a director of a company or a body corporate to the said company or the body corporate.
- Services supplied by an insurance agent to any person carrying on insurance business in the taxable territory.
- Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company in the taxable territory.
- Supply of services by a music composer, photographer, artist or the like by way of 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 dramatic, musical or artistic works to a music company, producer or the like.
9A. Supply of services by an author by way of 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 works to a publisher.
However, an author is allowed to pay the tax as a forward charge on his service supplied to a publisher. The service in this case is transfer of copyrights of an original literary work. For this an author will have to exercise an option in the current year, for the following financial year in the format prescribed for this purpose.
While exercising the option in the relevant Format, the Author needs to make the following declaration at the end (in the Format):
“I have taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017), and I hereby exercise the option to pay central tax on the service specified against serial No. 9A in column (2) of the Table in the notification No. 13/2017 – Central Tax (Rate), dated the 28th June, 2017, supplied by me, under forward charge in accordance with section 9 (1) of CGST Act, and to comply with all the provisions of CGST Act, 2017 (12 of 2017) as they apply to a person liable for paying the tax in relation to the supply of any goods or services or both;
I understand that this option, once exercised, shall not be allowed to be changed within a period of 1 year from the date of exercising the option and shall be valid, at least, till the end of Financial Year following the year in which it is made.”
The relevant text of the Notification 13/2017-CE(R) as amended vide 22/2019-CT(R) dated 30.09.2019 is being reproduced for ready reference:-
“Provided that nothing contained in this entry shall apply where, –
- the author has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017), and filed a declaration, in the form at Annexure I, within the time limit prescribed therein, with the jurisdictional CGST or SGST commissioner, as the case may be, that he exercises the option to pay central tax on the service specified in column (2), under forward charge in accordance with Section 9 (1) of the Central Goods and Service Tax Act, 2017 under forward charge, and to comply with all the provisions of Central Goods and Service Tax Act, 2017 (12 of 2017) as they apply to a person liable for paying the tax in relation to the supply of any goods or services or both and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option
- the author makes a declaration, as prescribed in Annexure II on the invoice issued by him in Form GST Inv-I to the publisher
(The Annexure-1 and Annexure-II are given in the Notification 22.2019-CT(R) – dated 30.09.2019).
- Supply of services by the members of Overseeing Committee to Reserve Bank of India
- Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs)
- Services provided by business facilitator (BF) to a banking company
- Services provided by an agent of business correspondent (BC) to business correspondent (BC).
- Security services (services provided by way of supply of security personnel) provided to a registered person:
Provided that nothing contained in this entry shall apply to, –
(i) (a) a Department or Establishment of the Central Government or State Government or Union territory; or
(b) local authority; or
(c) Governmental agencies;
which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services; or
(ii) a registered person paying tax under section 10 of the said Act.
- Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, to a body corporate.
- Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”), as amended by Lender i.e. a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the Scheme of SEBI.
The recipient in this case is a person who borrows the securities under the Scheme through an approved intermediary of SEBI. Thus, the Service Tax is to be paid by the Borrower.
In all the above mentioned Services, the Notification has added necessary explanations for interpreting certain words and phrases in the notification.
The texts of these are being given herein below, for ready reference: –
- The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.
- “Body Corporate” has the same meaning as assigned to it in clause (11) of section 2 of the Companies Act, 2013.
- the business entity located in the taxable territory who is litigant, applicant or petitioner, as the case may be, shall be treated as the person who receives the legal services for the purpose of this notification.
- the words and expressions used and not defined in this notification but defined in the Central Goods and Services Tax Act, the Integrated Goods and Services Tax Act, and the Union Territory Goods and Services Tax Act shall have the same meanings as assigned to them in those Acts. Limited Liability Partnership” formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (6 of 2009) shall also be considered as a partnership firm or a firm.
- A “Limited Liability Partnership” formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (6 of 2009) shall also be considered as a partnership firm or a firm.
- “insurance agent” shall have the same meaning as assigned to it in clause (10) of section 2 of the Insurance Act, 1938 (4 of 1938).
- “renting of immovable property” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property.
- provisions of this notification, in so far as they apply to the Central Government and State Governments, shall also apply to the Parliament and State Legislatures.
- The term “apartment” shall have the same meaning as assigned to it in clause (e) under section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2017).
- the term “promoter” shall have the same meaning as assigned to it in clause (zk) under section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2017).
- the term “project” shall mean a Real Estate Project (REP) or a Residential Real Estate Project (RREP);
- the term “Real Estate Project (REP)” shall have the same meaning as assigned to it in in clause (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016).
- The term “Residential Real Estate Project (RREP)” shall mean a REP in which the carpet area of the commercial apartments is not more than 15 per cent. of the total carpet area of all the apartments in the REP.
- “floor space index (FSI)” shall mean the ratio of a building’s total floor area (gross floor area) to the size of the piece of land upon which it is built.
[Notification 13/2017-CT(R) dated 28.06.2017
as amended till Notification 29/2019-CT (R) dated 31.12.2019]
A recipient of Services of renting of immovable property, received from the Central Government, State Government, Union territory or local authority, shall be liable under Reverse Charge if he is a person already Registered under GST.
[Notification 3/2018-CT(R) dated 25.01.2018]
- The other type of reverse charge is on notified class of registered taxpayers receiving specified goods or services from unregistered suppliers. Section 9(4) of the Central and State GST Act, Section 7(4) of the UT GST Act and Section 5(4) of the IGST Act apply here.
Notification 07/2019-CT(R) dated 29.03.2019 notifies the registered (under GST) Promoter as the Person liable to pay GST under reverse charge on the following Goods and Services purchased from an unregistered suppliers:
- Those purchased for construction of project in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier), by which these had fallen short of 80% of total value of Goods & Services needed for construction to be necessarily purchased from GST Registered persons.
- Capital Goods.
Initially, on Cement also, the tax under reverse charge was required to be paid only on the value by which it fell short of the 80% of total value of Goods and Services required to be purchased from GST registered suppliers. But vide Notification 24/2019-CT(R) dated 30.09.2019 the Cement purchased from unregistered suppliers was made the specified good for tax payment thereon under reverse charge by a registered Promoter.
[Notification 07/2019-CT(R) dated 29.03.2019
as amended till Notification 24/2019-CT(R) dated 30.09.2019]
The Reverse Charge is applicable only where there is no exemption from GST.
For example, an advocate’s (also Senior Advocate’s/ A firm of Advocates’) legal services are exempt if provided to a business entity which has turnover within threshold limits prescribed for registration, viz. Rs.20 Lakhs (Rs. 10 Lakhs in special category states).
Therefore the Reverse Charge on the legal services availed by a business entity from an Advocate/ Senior Advocate/ A firm of Advocates is applicable only if the Business Entity has turnover beyond threshold limit prescribed for registration (and payment of GST) viz. Rs.20 Lakhs (Rs. 10 Lakhs in special category states).
Thus to be sure as to the applicability of GST under Reverse Charge necessary exemption notifications need to be consulted.