ITC Reverse Charge Mechanism Applicability
Updated on : Jan. 30, 2023 - 7 p.m. 17 min read.
As a business owner, understanding the different tax mechanisms that apply to your operations is essential. The ITC Reverse Charge Mechanism is one such mechanism that applies to businesses in specific situations. This mechanism has been introduced under the Goods and Services Tax (GST) regime and has significant implications for businesses that fall under its purview. The ITC Reverse Charge Mechanism requires the recipient of goods or services to pay the tax instead of the supplier, which is the norm under the regular tax mechanism. This mechanism has been introduced to ensure better tax compliance and to curb tax evasion. In this article, we will delve deeper into the applicability of the ITC Reverse Charge Mechanism and its impact on businesses. We will explore the businesses that are required to comply with this mechanism, the benefits of compliance, and the challenges that businesses may face in implementing this mechanism. Read on to gain a better understanding of this critical tax mechanism.
What is the Reverse Charge Mechanism?
Reverse Charge Mechanism (RCM) is a provision under the Goods and Services Tax (GST) regime in India where the liability to pay tax shifts from the supplier of goods or services to the recipient. This mechanism is applicable in cases where the supplier is unregistered or in certain specified circumstances where the recipient is required to pay tax and can avail of Input Tax Credit (ITC) on the tax so paid.
For example, when an unregistered person supplies goods or services to a registered person, the registered person is liable to pay tax under RCM. In such cases, the recipient can claim the ITC on the tax paid under RCM.
The RCM provisions are detailed under the CGST (Central Goods and Services Tax) Act, 2017 and it is important for taxpayers to comply with the RCM provisions to avoid penalties and interest on unpaid tax.
Applicability of Reverse Charge Mechanism under GST
- Supplies made by an unregistered person to a registered person.
- Certain specified services are received from an unregistered person.
- Supplies made by an SEZ (Special Economic Zone) unit to a DTA (Domestic Tariff Area) unit.
- Supply of notified goods or services by a supplier, who is located in a foreign country, to a recipient located in India.
In such cases, the recipient of the goods or services is liable to pay tax under the RCM and can avail of Input Tax Credit (ITC) on the tax so paid. The RCM provisions are detailed under the CGST (Central Goods and Services Tax) Act, 2017.
Reverse charge on specified goods
A reverse charge is a mechanism in which the liability to pay tax is shifted from the supplier of goods or services to the recipient. In the case of specified goods, the reverse charge mechanism applies, and the recipient of the goods is responsible for paying the taxes instead of the supplier. This is usually done to ensure the proper collection of taxes and to prevent tax evasion.
Reverse charge on specified services
In the case of specified services, the reverse charge mechanism means that the recipient of the services is responsible for paying the tax instead of the supplier. This system is usually used in cases where it is difficult to collect tax from the supplier, such as in cross-border transactions.
Additional Services on which tax is payable by the recipient under IGST Act, 2017 on a Reverse charge basis under GST
Under the Integrated Goods and Services Tax (IGST) Act, 2017, the recipient of the following services is responsible for paying tax on a reverse charge basis:
- Services supplied by an individual advocate or a firm of advocates by way of legal services.
- Services supplied by an arbitral tribunal.
- Services supplied by a director to a company or a body corporate.
- Services supplied by an individual agent or a partnership firm of agents of a non-resident taxable person.
- Services supplied by an insurance agent to any person carrying on insurance business.
- Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company.
- Services supplied by a person responsible for paying royalty or fees for technical services to a non-resident person.
- Services supplied by a person who is located in non-taxable territory to a person located in a taxable territory.
- Services supplied by an author, music composer, photographer, etc. to a publishing company.
- Services supplied by a person in the taxable territory to an SEZ unit or a developer.
Note: This is not an exhaustive list and the reverse charge mechanism may apply to other services as well, as specified by the government from time to time.