Reverse Charge Under GST - When & to Whom Applicable

What is Reverse Charge?

GST is an indirect tax wherein the liability for tax payment to Government falls on the supplier of goods or services. However, there are some cases where liability for tax payment gets reversed and the same shall be paid by the recipient of goods or services.

Under reverse charge mechanism, the ‘Receiver’ of goods or services becomes liable to pay the tax to Government.
 

GST Payment Process – Under Normal Provision
 

GST Payment Process – Under Reverse Charge

Latest announcement relating to Reverse Charge

• Reverse Charge Mechanism (RCM) in case of supplies of goods/ services made by unregistered persons to registered persons gets deferred to 30^th September, 2019. Previously, this provision was applicable from 1^st October, 2018.
   
• List of items on which RCM is applicable gets updated to include Priority Sector Lending Certificate (PSLC) by a GST registered person to another GST registered person. Accordingly on PSLC, reverse charge is applicable.

Let's discuss in detail the above two announcements:
 

Supply by an unregistered dealer to a registered dealer

If a supplier who is not registered under GST made supply of goods/services to a registered person then in that case reverse charge is applicable. That means GST will have to be paid directly by the receiver to the Government instead of supplier.

Further, receiver (i.e., registered dealer) will have to do self-invoicing for the purchases made and required to pay IGST for inter-state purchases and CGST & SGST for intra-state purchases made by him.

However, Reverse Charge Mechanism (RCM) in case of supplies of goods/ services made by unregistered persons to registered persons gets deferred to 30^th September, 2019. Previously, this provision was applicable from 1^st October, 2018.

The provision of reverse charge in such case is applicable if the following conditions are met:-

• There should be supply of goods/services.
   
• The supply should be in respect of taxable goods/services (i.e., RCM not applicable on exempted goods/services).
   
• Supply should be made by an unregistered dealer.
   
• Supply should be made to a registered dealer.
   
• Supply should be an intra-state supply as compulsory registration is required for inter-state sales.
   

Important Points to be Considered:-

• Purchases upto Rs 5,000 per day from unregistered suppliers shall not attract GST. That means reverse charge shall be applicable on buying from unregistered supplier and making payment to such unregistered supplier exceeding Rs 5,000 per day.
   
• If amount paid exceeds Rs 5,000 per day (let say Rs 6,800) then GST shall be payable by registered dealer on reverse charge basis on the entire amount i.e., on Rs 6,800 instead of balance amount of Rs 1,800 (6,800- 5,000).
   
• As the limit for RCM applicability is Rs 5,000 per day, there is a loophole to avoid payment of tax on small amounts.
  
  For Instance: Purchaser is having a bill of Rs 800 and he realised that he made total purchase of Rs 5,400 from unregistered dealer, crossing the threshold limit of Rs 5,000 per day. In that case purchaser can do below mentioned things to avoid payment of tax on small amounts:-
  
  Either make payment the next day and enter bill for the next day; or
  
  Request the unregistered supplier to issue 2 bills for 2 days for Rs 400 each.
   

• The registered buyer needs to analyze his Profit & Loss account on regular basis to check whether any purchases/ transactions made by him fall under RCM and is exceeding Rs 5,000 per day.
   
• Registered buyers sometimes face difficulties in calculating and paying GST under RCM.
   
• If bill for purchases made is exclusive of GST

In such case buyer can simply calculate the amount of GST on total amount of bill received.

eg: If an unregistered dealer sends a bill for Rs. 7,200 without any GST and GST rate on such item is 12% then buyer shall be required to pay Rs 864 GST (i.e., Rs 7,200*12/100) to the government.

• If bill for purchases made is inclusive of GST

The complication in such cases arises when buyer is making payment at MRP (which includes GST) and in such case back calculation is required.

eg: If an unregistered supplier sends a bill at MRP for item purchased from him for Rs. 6,500 (inclusive of GST) and GST rate on such item is 12% then buyer needs to do back calculation. And buyer shall pay Rs 696.43 GST (i.e., Rs 6,500*12/112) to the government.

However, as per normal practice, one should calculate GST on total amount i.e., Rs 6,500, pay and claim the same as input tax credit.

eg: Pay Rs 780 GST (Rs 6,500*12/100) to the government and claim input tax credit for the same.
 

• The threshold limit of Rs 20 Lakhs is not applicable in case of registered buyer falling under RCM provision.
   
• Tax paid on reverse charge basis will be available as input tax credit if such goods/services are used or will be used for business. That means buyer who paid tax on reverse charge basis can avail input tax credit.

Priority Sector Lending Certificate (PSLC)

What are PSLCs?

The Priority Sector Lending Certificates (PSLCs) are tradable certificates issued by banks that have overreached their priority sector lending targets. Buyers of PSLCs are usually those banks who could not meet their priority sector lending targets.

The PSLCs can be traded using the RBI’s e-Kuber platform. The price of PSLCs will be determined on the basis of demand and supply that will be reflected in the auction under the RBI’s e-Kuber trading platform.

The Schedule Commercial Banks, Regional Rural Banks, Local Area Banks, Small Finance Banks and Urban Co-operative Banks who have originated priority sector lending eligible category loans are the sellers and buyers of PSLCs.

As per RBI, banks can issue four types of PSLCs:-

• PSLCs Agriculture
• PSLCs Small and Marginal farmers
• PSLCs Micro Enterprises
• PSLCs General
  ​

What is the purpose of PSLCs?

The purpose of PSLCs is to enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall and at the same time incentivize the surplus banks; thereby enhancing lending to the categories under priority sector.

Whether GST is applicable on PSLCs?

The leviability of GST attracts on the supply of goods or services or both. The government has clarified that PSLCs of banks are in the nature of goods, dealing in which has been notified as a permissible activity.

Under GST there is no exemption to trading in PSLCs. Thus, PSLCs are taxable as goods at a standard rate of 18% under entry no. – 453 of Schedule III of Notification No. 1/2017 of CGST.

Implication of Reverse Charge on PSLCs

The CBEC vide Notification No. 11/2018 central tax (rate), states that GST in case of the trading of PSLCs needs to be paid by the recipient of the certificate under reverse charge.

Therefore in case of all trading transactions of PSLCs, on or after 28.05.2018, the issuing bank need not charge and collect GST and instead the recipient bank need to suo motu pay GST to the credit of the central government under reverse charge and once paid the same shall be eligible as Input Tax credit.

We have discussed in detail the above-stated announcement; hope the same is useful for you. If your queries are still unresolved then contact us or email us at agam@hubco.in.  We have the team of GST experts and can solve all your worries relating to GST.

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