When the taxed individual who provides products and services is entitled to pay GST, although, there are some situations like imports as well as other kinds of products where the purchaser of goods and services is entitled to pay GST rather than the manufacturer. In other terms, the responsibility for paying GST changes from the provider to the receiver of the products and services, this is referred to as Reverse Charge under GST.
Reverse Charge Mechanism: What Is It Exactly?
Reverse Charge Mechanism means that the responsibility for paying GST is on the receiver rather than the products & services provider. This is contrary to the standard GST policy, where the provider of products and services is obliged to pay GST for the deliveries made. Furthermore, this implies that all the legal provisions will apply to a receiver as if he were the individual responsible for paying the tax in relation to the provision of products or services. In the event that the receiver cannot pay the tax under the reverse charge mechanism, the supplier is not responsible for paying it.
Reverse Charge Mechanism: When Is It Applicable?
If an e-commerce service provider, provides services then the e-commerce provider will be subjected to the reverse charge mechanism, meaning, he is responsible for paying GST. For instance, if a service provider provides services of electricians, plumbers, teachers, etc. then he is responsible for paying GST and receiving money from the consumers rather than the licensed service providers.
If the e-commerce service provider cannot be physically present in the taxable jurisdiction, then an individual representing such a provider in e-commerce would be responsible for paying taxes for any reason. If no delegate is available, the provider must nominate a candidate who will be kept accountable for paying GST.
Distribution To A Registered Dealer From An Unregistered Dealer
When a seller who is not enrolled under GST, sells products to an individual enrolled under GST, then Reverse Charge will apply. The GST would have to be transferred directly to the state and not to the supplier, by the recipient. For the products purchased, the dealer registered under GST, who pays the GST under the reverse charge mechanism is required to do the self-invoicing. The consumer will have to pay IGST for Inter-state transactions and for intra-state purchases, the buyer must pay SGST and CGST under Reverse Charge Mechanism.
Distribution Of Goods And Services Listed By CBIC
There are certain goods and services that CBIC has listed under the Reverse Charge Mechanism with the mention of the supplier and the recipient. You can go through this list on the official CBIC website.
What Do Refer To As Self-Invoicing?
Self-invoicing should be executed once you have acquired products or services from an unauthorized supplier and such acquisition is subjected to reverse charge. It is because the manufacturer cannot give you a GST compliant receipt and therefore you are obligated to pay taxes for them. This is why, in this situation, self-invoicing becomes essential.
Section 31 of the CGST Act, 2017 it states that an authorized purchaser is subjected to the reverse charge mechanism and he is obligated to provide an invoice for the same. That invoice is for the products and services procured by the receiver. Therefore, on the day of procurement of the products and services such a retailer is not licensed under GST.
In addition, the enrolled individual who is responsible for paying GST under the reverse charge scheme is also expected to provide a payment voucher to the manufacturer of these products and services at the time of transacting.
Input Credit Tax Under Reverse Charge Mechanism
The provider of products & services will not demand an Input Tax Credit (ITC) for the products and services provided to the receiver under the reverse charge mechanism. This is because the receiver is responsible for paying GST for products and services provided under the reverse charge mechanism and for these products he can demand an input tax credit. These resources however should be utilized as business inputs. In simpler terms, taxes charged on a reverse charge basis would be eligible for ITC if it is used for business purposes and the recipient is the one who is eligible to avail ITC.