Complete Reverse Charge Mechanism under GST

Reverse charge mechanism under GST and implications of exemption upto Rs. 5000 per day

Let’s look at the critical provisions of the GST law which have enabled reverse charge mechanism :-

Compulsory Reverse Charge even if the supplier is registered –

Sec 9(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

The above section primarily covers services availed from Goods Transport Agency, Lawyer, government, corporate sponsorships, director etc.

Reverse Charge if the supplier is unregistered –

Sec 9(4) The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Central Government had come up with an exemption to the small miscellaneous transactions from unregistered persons.

Notification No. 8/2017- Central Tax (Rate) dt 28.06.2017 issued by Central Government has exempted intra-State supplies of goods or services or both received by a registered person from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017)

The said exemption shall not be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day.

To sum up, the supply should be intra state supply (within the state) and can be for goods as well as services or both. Moreover the supply should be received by the registered person from an unregistered dealer only and upto a daily limit of Rs. 5000/-

Example:-

Mr. X  purchased following items from unregistered dealer, all are dated 01.07.2017 as under:

1st bill – From Ram: Stationery = 2000/-
2nd bill – From Shyam: Lunch = 1000/-
3rd bill – From Madhu : Books = 3000/-

In this case, The bills of Mr. X will not get covered under this notification as aggregate value of all supplies exceeds 5000/- on a single date (01.07.2017)

Exemption would have been available if,:

1) Bill dates are different (So that it will come under 5000/- day limit, say bill date of Ram is 02.07.2017)
2) Any of the bills are 1000/- less than the mentioned value(Say Bill of Madhu is Rs 2000/-
3) If the one of the bills in the same of other person (say, one of the bill is in the name of Mr. Y)

FAQ’s

Whether these 5000 limit be availed for those cases where compulsory tax is payable in RCM basis as per section 9(3) of CGST act?

Where Compulsory tax is to be paid under the Reverse Charge Mechanism under 9(3) of CGST Act, and as per Notification N0o. 13/2017- Central Tax (Rate) dt 28.06.2017 the benefit of this limit cannot be availed. Reason being these notification cover only cases of 9(4) and not 9(3).

Mr. X purchased following items from unregistered dealer, all are dated 01.07.2017 as under:

1st bill – From Ram: Stationery = 2000/-
2nd bill – From Shyam: Lunch = 1000/-
3rd bill – From Madhu: Goods Transport Agency = 3000/-

In this case, The bills from Mr Ram and Mr Shyam will get covered under this notification as aggregate value of all supplies does not exceed 5000/- on a single date (01.07.2017). For the Third bill from Madhu Reverse charge is payable u/s 9(3) without any exemption threshold.

Whether this daily limit benefits would be available if the goods/services received from persons covered under 9(4) are blocked credits?

The benefit of daily limit would be available. Output Tax under reverse charge would be payable if it crosses the daily limit even though they are covered under blocked credits.

What if the limit crosses 5000 in a day, is GST payable over and above the value or from rupee 1?

If the value of taxable supplies exceeds Rs5000 per day for all suppliers, then GST would be payable on the Total value of the supplies received from unregistered persons.

Is this limit applicable to all supplies?

The limit is applicable to only taxable supply of goods or services or both. Exempt supplies are out of the preview of this notification.

Mr. X purchased following items from unregistered dealer, all are dated 01.07.2017 as under:

1st bill – From Ram: Stationery = 2000/-
2nd bill – From Shyam: Hotel Room = 1000/-
3rd bill – From Madhu: Books = 3000/-

In this case, the bills of Mr. X will not get covered under this notification as aggregate value of all supplies does not exceed 5000/- on a single date (01.07.2017) as the supplies from Shyam for Hotel room booking are exempt under Entry 14 of the exemption notification (12/2017).

What if the supplies are procured from Interstate supply from unregistered?

Benefit of this notification is available only for Intra State Purchase. If any transactions are done on an interstate basis the same are covered under the forward charge and in any case the reverse charge provisions are not applicable.

Goods and services both inclusive 5000 or separate?

Yes, the benefit is inclusive for all goods or services or both.

What rate GST should be payable then?

GST should be payable as per the schedules rate of the product/service.

What if procured from Composition persons?

Since Composition persons are registered person, reverse charge is not applicable on such supplies.

Can credit be availed for these taxes paid and on what basis, any invoice issue requirement?

Credits can be availed on payment of GST in cash. A consolidated monthly tax invoice can be raised if supplies are received from a single vendor. The Invoice shall be raised on the date of receipt of goods or services or both. Also a payment voucher needs to be issued on the date of making any advance payment as the time of supply is invoice of payment whichever is earlier.

We have compiled the daily expenses which would be liable to GST if procured from unregistered supplier as below:-

Sr.No.Nature of ExpensesGST RateGST IMPACT/ OTHER REMARKS
Supplies from UR (RCM Applicable)

No GST / NIL GST or EXEMPTED :-

1Electricity Charges0%Out of GST

2Water Charges0%Out of GST

3Bank Interest0%Out of GST

4Professional Tax0%Tax levied by local body / other association out of GST

5License renewal like Pollution, Factories & Boilers & Local Bodies0%Tax levied by local body / other association out of GST

6Building or Property Tax0%Tax levied by local body / other association out of GST

7Rent Deposits0%If adjusted with rent or forfeited – GST applicable

8Other Deposits0%If adjusted with other expenses or forfeited – GST applicable

9Petrol Expense0%Petrol & Diesel out of GST

10Salary0%Out of GST

11Staff Amenities0%Out of GST if in lieu of salary.

12Gifts to Staff0%Gifts by employer of value above Rs. 50000/- shall be liable to GST as outward supply.

13Staff Mediclaim Contribution0%Out of GST if in lieu of salary

14Allowance & incentive to employees0%Out of GST if in lieu of salary

15Stamp & Registration Fees0%If only a pure agent service – ensure GL balance Nil

16Provision for Doubtful Debts0%No credit / deduction shall be allowed

17Bad Debts Written Off0%No credit / deduction shall be allowed

18Warranty Labour Charges0%If there is no supply element & no consideration

19Donation0%If there is no supply element & no consideration

20Labour Welfare Fund Contribution0%Out of GST

21Staff Medical Expenses0%Employee service without any margin

22Fine & Penalties by Government0%Out of GST

23Discounts – shown in bill0%GST applicable is after all discount
– if shown in the bill

24Free Gifts, Gold Coin to Customers0%

25Interest on Service Tax/ TDS0%

26Interest on Vehicle Loan0%

27Interest Others0%

28Local Conveyance0%

29Transportation Charges – Non GTA / Trucks0%

GST Applicable & No ITC :-

28Food Expense12% /No ITC

29Travel claims – Radio Taxi (Rent-a-cab)5%No ITC

30Transportation Charges – GTA5%No ITC

31Club & Membership fees18%No ITC

32Life Insurance Exps for Employees18%No ITC

33Work Contract Services – Construction of Building18%No ITC if not supplied for outward works contract services

GST Applicable / RCM supply of URD :-

34Advertisement Charges18%

35Advertisement in Magazine,18%

36Advertisement in Media18%

37Discounts – after issue of invoice (Post supply discount)GST ImpactCredit note has to be issued, liability will be reduced to extent of GST on discount.

38Annual Maintenance Charges18%

39Bank Charges – Service charges recovered18%

40Broker Fee & Charges18%

41Call Centre Expense18%

42Customer Schemes by MSIL18%

43Construction Work18%GST amount – no ITC – for immovable property (Building)

44Consumables Paint material
& Other Consumables
28%

45Customer Welfare expense18%Food charges – No ITC

46Contract Labour Expense18%

47Extended Warranty Cancellation Charges18%

48Free Service Camp Expense18%If any third party bill comes

49House Keeping Charges18%

50Insurance Charges18%

51Legal charges to advocate18%Advocate raise bill without GST component – RCM to us

52Loading & unloading Charges18%

53Local Conveyance5%
/ 12%

54Mediclaim Policy Premium Contribution A/ c18%

55Mobile Allowance18%Pure Agent Service / If margin then GST applicable

56Other Training Expense18%

57Postage and Courier Charges18%Subject to certain exemptions

58Printing & Stationery(Flex Printing, Broad Printing, Notice Printing)18%

59Rates and TaxesActualsDepends on case to case basis

60Recruitment Expenses18%

61Rent Paid18%

62Rent Paid for Mess (Employees)18%

63Repair and Maintenance – Building / Electrical / P& M
/ Others

18%

64RTO Expenses18% or
28%

65Sales Promotion – Others / SSI / Display18%

66Sponsorship services18%Reverse Charge to Service Receiver
– ITC can be availed

67Security Charges18%

68Staff Recruitment18%

69Staff Training Expenses18%

70Staff Uniform Expenses18%If a third party bill comes

71Stationery Expenses18%

72Subscription & periodicals18%

73Telephone Charges18%

74Transportation Charges – GTA5%

75Travelling Expenses Interstate5%/18%Services from Tour operators / Agencies

76Travelling Expenses International28%

Note: The above expense heads are for illustrative purpose only. The applicability of GST on a particular expense has to be checked on case to case basis.