What is Reverse Charge Mechanism?
Usually, the tax on Goods manufactured and Services rendered is paid by the Supplier of goods or the person who is providing the service. However, under the Reverse Charge Mechanism, the recipient of goods or services is liable to pay the tax in respect of notified categories of supply.
Types of liability under Reverse Charge Mechanism:
There are 2 types of reverse charge liability under the Goods and Service Tax law:
Under the first category, as per section 9(3) of the CGST/SGST Act, specified recipients are liable to pay GST on notified goods and services.
In the second category, as per section 9(4) of the CGST/SGST Act, a person registered under GST is required to pay tax on taxable services or goods provided by an unregistered supplier.
List of services covered under Reverse Charge Mechanism:
Currently, as per the recommendation made by the GST Council, with effect from 1st October 2019, in all of the below-mentioned services, the recipient of service is liable to pay GST on the service received.
Services where the recipient is a business entity or any taxable person:
- Services provided by an E-commerce Operator.
- Services provided by a Goods Transport Agency, individual advocate, or an arbitral tribunal.
- Sponsorship Services.
- Government Services.
- Transfer of development rights or Floor Space Index and long term lease of land for the purpose of construction of a project by a promoter.
- Services supplied by the director of a company or a body corporate.
- Services provided by an insurance agent to the person carrying on insurance business.
Services where the recipient is a banking company / financial institution/ a non-banking financial company.
- Services provided by a recovery agent.
- Services rendered by the members of Overseeing Committee constituted by the Reserve Bank of India.
- Services supplied by individual Direct Selling Agents.
- Services provided by the business facilitator.
- Services of transfer or permitting the use of copyright of original contents by a music composer, photographer, artist or the like.
- Supply of services by an author to a publisher regarding transfer or permitting the use of a copyright relating to original literary works.
- Services provided by an agent of business correspondent to such business correspondent.
- Security services rendered by any person.
- Services of renting a motor vehicle to a body corporate.
- Services of lending of securities of SEBI (Securities and Exchange Board of India) by a lender to a borrower.
Common key points to be considered in relation to the above services:
- The recipient of the above services must be located in the taxable territory.
- The recipient under Reverse Charge Mechanism is required to pay a 100% tax. The partial reverse charge is not admissible.
- The amount of GST must be submitted to the government on or before the 20th day of every succeeding month.
- Any person who is eligible to pay the tax under the Reverse Charge Mechanism is mandatory required to be registered under GST.