FAQ on Reverse Charge, where the recipient is liable to pay tax, is common to many countries like Canada where it is applicable on imports of services and intangible properties. Normally, the supplier pays the tax on supply. In certain cases, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed which is why it is called reverse charge.
FAQ on Reverse Charge
Q1. Is it lawful to collect tax from recipient of supply on reverse charge basis?
Ans. Yes, as long as the tax is on the subject of levy, Government is free to collect this tax from any person – either the supplier or the recipient or anyone else. Even a third party can be called upon to deposit the tax provided there is some nexus such as collection of payment for the supply between two other persons.
Q2. Should tax payable on reverse charge basis be reduced from the value of the supply?
Ans. Contractually if tax is not included in the price payable towards the supply, then tax payable on reverse charge basis cannot be reduced from the value of supply that is paid to the supplier. And if included, then due effect to this understanding must flow by making the deduction from the payment.
Q3. Can supplier demand full payment of invoice when reverse charge is applicable?
Ans. Yes, if the contract provides that the price charged does not include tax.
Q4. What is the effect of reverse charge on input tax credit?
Ans. As regards the recipient who pays tax on reverse charge basis, tax so paid would be available as credit subject to section 17. As regards the supplier whose tax is paid by the recipient, value of such supply will be treated as ‘exempt supply’ while applying section 17(2) of the CGST Act, 2017 on all the credits availed.
Q5. What is the difference between reverse charge u/s 9(3) and u/s 9(4)?
Ans. Government has notified a list of goods and services along with the type of recipient who is liable to pay tax on those supplies covered under reverse charge as per section 9(3). If the goods or the services are not listed or the recipient is not notified, then reverse charge does not apply. For example, tax in respect of services of advocate availed by a business entity is payable on reverse charge basis. If the recipient is a religious trust which means it is not a business entity, reverse charge is not applicable.
Whereas, every inward supply of a registered person from an unregistered person will be liable to payment of tax on reverse charge basis by such recipient – this is covered under reverse charge as per section 9(4). It is important to note that only a reasonable inquiry can be undertaken by the recipient as to why the supplier did not charge tax when it was chargeable. However, the supplies made by unregistered suppliers to a registered person are exempted if the aggregate value of such supplies does not exceed Rs. 5,000/- in a day per registered person. Therefore, if one is located in three states with one business vertical within one State, each of the States and business vertical would be eligible.
Q6. Does tax liability u/s 9(5) come within reverse charge?
Ans. No, definition of reverse charge given in section 2(98) refers only to section 9(3) and section 9(4). Tax payment by ecommerce operator in case of specified services under section 9(5) would not be a case of reverse charge but a new specie because the ecommerce operator facilitates the supply through the digital network and collects payment from recipient and passes it on to supplier.
Q7. Is reverse charge applicable after supply or on payment of advance?
Ans. Reverse charge is applicable when there is a supply and the time of supply is determined by section 12 or 13 of the CGST Act. Reverse charge is applicable at the time of advance even though actual supply is yet to take place. Rule 52 provides for the issuance of a Payment Voucher in cases where tax is to be paid on reverse charge basis.
Q8. Is reverse charge applicable on awarding contract or issuing Purchase Order (PO)?
Ans. Reverse charge is applicable only when there is a supply. Supply ‘agreed to be made’ is regarded as a supply only in case of supply under section 7(1)(a) and 7(1)(c). Even though actual supply is yet to take place, in the case of supplies covered by these two provisions, tax would be payable on award of contract or issue of PO because this itself amounts to supply. However, Table 4 of GSTR-2 requires reference to be made to invoice in respect of supplies liable to reverse charge but Rule 52 does not provide for issuance of invoice earlier than the time of payment. As such the absence of machinery provisions to pay tax at the time of contract / PO, it appears that the liability fails.
Q9. How can tax paid be recouped and adjusted in case of return of goods attracting reverse charge?
Ans. There is no provision in section 34 of the CGST Act or Rule 52 of the CGST Rules, 2017 regarding reversal of tax paid. Equity demands that relief be allowed to the recipient who has paid the tax so that the recipient may apply for refund under section 54 of the CGST Act and not issue credit note or revised invoice for which there is no provision. This relief to claim refund will be subject to credit not being availed by the recipient on the tax so paid.
Q10. What are implications if supplier charges GST on the invoice though reverse charge is applicable?
Ans. Recipient is free to reduce the GST charged from the value of invoice and pay only the net amount but liable to discharge the reverse charge obligation separately.
Q11. What are implications to supplier if recipient refuses to pay tax on reverse charge?
Ans. There is no recourse back to the supplier in case of default by recipient to discharge reverse charge liability.
Q12. In case supplier has paid GST, is recipient discharged from the liability to pay tax on reverse charge?
Ans. No, even if supplier has somehow paid tax, reverse charge liability must be discharged by the recipient. The recipient must not claim credit of tax paid by supplier.
Q13. Is GST wrongly paid by supplier available as Input Tax Credit (ITC) to recipient?
Ans. No, should be available to recipient. However as per provisions, supplier who has paid the tax erroneously is free to claim refund.
Q14. Is GST payable for both the components – CGST and SGST (or UTGST)?
Ans. Yes, GST in India is a dual-tax and the provisions of the CGST Act are mirrored in SGST/UTGST Act.
Q15. Is GST on reverse charge basis payable on inter-State supply also?
Ans. Yes, provisions identical to section 9(3) and 9(4) of the CGST Act are available in section 5(3) and 5(4) of the IGST Act.
Q16. In case POS is in the supplier-State, is GST on reverse charge payable by recipient?
Ans. No, if POS is not in the State of the recipient, there is no occasion for the State of recipient to accept tax on reverse charge basis. In the absence of a specific provision in law, such supplies remain untaxed.
Q17. Is GST on reverse charge basis payable even if payment to supplier is not made?
Ans. Section 12 and 13 of the CGST Act provide that the time of supply in case of supplies liable to payment of GST on reverse charge basis is on actual payment to supplier. Hence, unless payment is made, reverse charge is not payable.
Q18. Is condition to pay supplier within 180 days applicable to supplies covered by reverse charge?
Ans. This condition is found in proviso to section 16(2) and applies where tax is charged by the supplier. There is no exception created in Rule 37 in respect of reverse charge. Hence, this condition would also apply to suppliers attracting Section 9(3) and 9(4).
Q19. Is reverse charge applicable on supply of goods also or is it only on supply of services?
Ans. Payment of tax on reverse charge is applicable on goods also, you may refer Notification no. 04/2017- Central Tax (Rate) and Integrated Tax (Rate) dated June 28, 2017.
Q20. Explain effect of section 23 in relating to reverse charge?
Ans. Persons specified in section 23 are excluded from registration. If such persons are receiving inward supplies liable to tax on reverse charge basis under section 9(3), they will be liable to register by section 24 and comply with other requirements of law. But, if such persons do not attract section 9(3), then they can remain unregistered and therefore not attract section 9(4) too.
Q21. In case supplier eligible to threshold exemption, is reverse charge applicable?
Ans. Supplier may not have paid tax due to threshold benefit but this does not excuse recipient from liability under section 9(4) which is attracted if ‘supplier is not registered’ without inquiring into the reasons for such non-registration.
Q22. In case supplier is under composition and no tax appears on invoice, is reverse charge attracted u/s 9(4)?
Ans. Though no tax appears on the invoice, the supplier is nevertheless registered. Hence, section 9(4) is not attracted.
Q23. Is reverse charge applicable if tax-paid supplies are purchased and resold by an unregistered person?
Ans. Yes, reverse charge under section 9(4) is attracted because inquiry into two or three level earlier is not permitted. At the first level if the supplier is unregistered, then section is attracted.
Q24. Is reverse charge u/s 9(4) applicable to all supplies where supplier unregistered or only if the supplier engaged in business of supply without lawfully being registered?
Ans. Press Release issued by Government states that tax under section 9(4) is not payable if the supplier is not in business but the recipient may not be in a position to accurately conduct this inquiry and reach a conclusion that is acceptable by the Government. Caution is advised while extending the interpretation provided in the press release to all other cases.
Q25. How to verify if supplier engaged in business or not engaged in business to decide applicability of reverse charge?
Ans. There is no procedure specified to verify this fact. Relying on GSTIN being disclosed by supplier is not sufficient.
Q26. Since registration is compulsory to supply inter-State, can reverse charge be held as not applicable?
Ans. Section 9(4) and 5(4), respectively do not provide any excuse to rely on supplier’s obligation to compulsorily obtain registration under section 24.
Q27. Why is supplier (operating under an ecommerce operator liable u/s 9(5)) not liable for compulsory registration u/s 24?
Ans. Since tax is payable by the ecommerce operator under section 9(5), the supplier no longer has any tax liability and insisting on registration will be of no effect.
Q28. Why is supplier operating under ecommerce operator (not liable u/s 9(5)) not allowed threshold benefit for registration purposes?
Ans. Due to the remote nature of the business undertaken, greater vigil is being exercise by the Government
Q29. Is supplier (operating under an ecommerce operator liable u/s 9(5)) exempt from GST in respect of non-ecommerce supplies also?
Ans. No, in respect of supplies directly by such a supplier, GST registration, tax payment and all other compliances are applicable. However, for purposes of threshold benefit, supplies through ecommerce operator would not be included.
Q30. How can there by an inter-State supply u/s 5(5) when supplies are covered u/s 9(5)?
Ans. An intra-State supply or inter-State supply must be determined based on the location of actual supplier and place of supply. Tax payment under these provisions merely require the ecommerce operator to deposit tax, but the nature of supply will still be determined based on the actual supplier.
Q31. Are there any exemptions in case of Reverse Charge mechanism?
Ans. Notification No. 08/2017- Central Tax (Rate) dated June 28, 2017, exempts the supplies made under Section 9(4) of the CGST Act where the supplies made are not exceeding ` 5,000/- per day.
Q32. If all the Supplies of a person are under Reverse charge mechanism, can such person not register under the Act although the aggregate turnover is exceeding the prescribed limit?
Ans. It is not necessary for the supplier to take registration since the Notification No. 05/2017- Central Tax dated June 19, 2017, provides for the same. For Example: – In case of an independent director providing services, and his only income is from independent directorship (or such other services covered under RCM) to the company, in this case the director won’t be required to take registration.
