Reverse Charge under GST explained with practical examples

Under the reverse charge mechanism, it becomes the responsibility of the buyer to pay GST to the government instead of the seller. When such situations arise, you will need to mention Reverse Charge as ‘Yes’ while creating a GST invoice.

What is Reverse Charge?

Usually, it’s the responsibility of the seller to collect GST from the buyer and deposit it to the government. But there are certain situations when it becomes the responsibility of the buyer instead of the seller to deposit the tax. This is called Reverse Charge Mechanism.

Reverse Charge Applicability: When it’s applicable?

Reverse charge is applicable in two scenarios:

1. On supply of goods and services specified by CBIC

Central Board of Indirect Taxes and Customs (CBIC) has specified a list of products and services on which the reverse charge mechanism will automatically apply. You can find the list in this document.

2. If the seller is not registered with GST

Suppose you are a GST-registered entity, but you are buying products/services from a person/firm not registered with GST. In such a scenario, the reverse charge mechanism will be applicable. Also, in this case, the buyer will need to raise an invoice on behalf of the seller. This process is called Self Invoicing. You can create this invoice using our GST invoice generator tool. Just ensure to select ‘Yes’ under the ‘Reverse Charge’ option.

3. If the service or product is delivered through e-commerce marketplace

If you are running an e-coomerce marketplace, where product and services are sold to customers by multiple vendors, your e-coomerce firm will charge GST from customers, but wouldn’t pay it to the vendors. Rather, it will pay GST to government under the reverse charge mechanism.

Examples of reverse charge

  • Shakti Enterprises pays rent for its factory premises to a landlord who is not registered under GST. In this case, Shakti Enterprises will raise an invoice to self on behalf of the landlord and pay GST to the government under the reverse charge mechanism.
  • Apple Enterprises hires a freelance developer to redesign its website. The freelancer is not registered under GST. In this case, Apple Enterprises will do self invoicing and pay GST to the government.
  • Aditi orders air conditioner repairing service from UrbanClap. UrbanClap assigns this order to a vendor called Arun Enterprises. Here, UrbanClap will pay GST directly to the government.

Determining Time of Supply under RCM

The menthod of determining time of supple under reverse charge mechanism is a bit different.

In the case of supply of goods under the reverse charge mechanism, time of supply will be the earliest of:

  • Date when the goods are received by the buyer
  • 30 days after the date when the invoice was issued
  • If the time of supply can not be determined by the above-mentioned criteria, then it should be the date of entry in the buyer’s account.

In the case of services delivered under the reverse charge mechanism, time of supply will be the earliest of:

  • Date when payment has been made to the seller
  • 60 days after the date when the invoice was issued
  • If the time of supply can not be determined by the above-mentioned criteria, then it should be the date of entry in the buyer’s account.

Reverse Charge Mechanism: Frequently asked questions

Is input tax credit applicable on GST paid via the reverse charge mechanism?

Yes. If as a buyer you have paid GST under the reverse charge mechanism, you can claim input on the same while filing your GST return.

Can I refuse to pay GST under reverse charge mechanism, since I would anyways claim back that amount via input tax credit?

No. As a buyer, you will need to pay the GST to the government if it falls under reverse charge mechnaism. Later, while filing the return, you can claim input tax credit for the same amount. Effectively, you are paying and getting back the same amount, but you have to pay first.

What if a type of supply falls under the reverse charge mechanism, but buyer is not a GST-registered entity?

It is compulsory for the buyer to register itself under GST if it is indulging into any transaction that falls under the reverse charge mechanism. The Rs 20 Lakhs threshold will not be applicable on them.

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