The GST Law employs two methods for collection of tax. The first and the primary method is the forward charge mechanism. When A sells goods to B, the tax on such sale will be collected by the supplier, that is A, from the recipient, that is B. It will then be paid by A to the Government.
The second method of collection of tax is the reverse charge mechanism. Under this method, the recipient is liable to pay the tax directly to the Government, instead of routing it through the supplier.
Under Section 9 of the CGST Act and Section 5 of the IGST Act as well as the charging provisions of the various SGST laws, liability to pay tax on reverse charge basis will arise in two situations:
a) Where supplies are notified by Government as being subject to the reverse charge mechanism;
b) Where any supply is received or acquired by a registered person from an unregistered person.
In the first category, a supply will be reverse charged only if a notification is issued. Whether the supplier is registered or unregistered is not in issue in such cases.
Following notifications contain the list of reverse charged supplies under the CGST and the IGST Act:
a) Notification No. 4/2017 – Central Tax (Rate)
b) Notification No. 13/2017 – Central Tax (Rate)
c) Notification No. 4/2017 – Integrated Tax (Rate)
d) Notification No. 10/2017 – Integrated Tax (Rate)
In the second category, no notification is required. All supplies are subject to the reverse charge mechanism if a supplier is an unregistered person and the recipient is a registered person.
Thus, as supply from a registered person to a registered person or a supply from an unregistered person to an unregistered person will invite liability on reverse charge only if the supply is notified as being liable for reverse charge taxation. A supply from an unregistered person to a registered person is taxable on reverse charge basis as such.
Payment only in Cash
Reverse charge tax can be discharged only through the electronic cash ledger. Utilization of credit for the same is impermissible in law. Credit is available only towards payment of ‘output tax’ which is defined in a rather restrictive way in Section 2(83) to exclude tax payable on reverse charge basis.
Input Tax Credit
A person who pays tax on reverse charge basis is allowed to take input tax credit of the same. In order to find GST tax rates of goods and services, Taxmann is offering a powerful tool named GST Rate Finder tool.
Registration
A person who is liable to pay tax on reverse charge basis must get registered. And once registered, his other outward supplies get dragged into the tax net.