Reverse Charge GST

The term "reverse charge" refers to a liability in which the recipient of a supply of goods or services rather than the provider of such goods or services is responsible for making tax payments to recognized categories of collection.

The onus of making GST payments will be placed squarely on the shoulders of the recipient to accomplish the goals of broadening the scope of taxation to include a variety of unorganized sectors, exempting some categories of vendors, and taxing the importation of services (since the supplier is based outside India).

When is Reverse Charge Applicable?

The scenarios for intrastate transactions that involve a reverse charge are governed by Section 9(3), 9(4), and 9(5) of both the Central GST and State GST Acts. In addition, the scenarios for inter-state transactions that involve a reverse charge are governed by sections 5(3), 5(4), and 5(5) of the Integrated GST Act. Let's have a thorough conversation about the following potential outcomes:

The scenarios for intrastate transactions that involve a reverse charge are governed by Section 9(3), 9(4), and 9(5) of both the Central GST and State GST Acts. In addition, the scenarios for inter-state transactions that involve a reverse charge are governed by sections 5(3), 5(4), and 5(5) of the Integrated GST Act. Let's have a thorough conversation about the following potential outcomes:

A. The provision of particular goods and services that have been specified by the CBIC. The Central Board of Indirect Taxes and Customs (CBIC) has published a list of goods and services for which reverse charge is applicable in accordance with the authority granted to it in Section 9(3) of the Central Goods and Services Tax Acts.

B. The sale of a product by an, a vendor is subject to a reverse charge if they supply products to a person who is registered for the GST, but the vendor themselves are not registered for the GST. This indicates that the recipient, rather than the supplier, will be responsible for making direct payment of the GST. Under the reverse charge system, the registered buyer obligated to pay GST must perform self-invoicing for purchases. When making purchases within the same state, the purchaser is responsible for paying the CGST and SGST under the reverse charge mechanism (RCM). Additionally, in the case of purchases made between states, the IGST must be paid by the buyer. The government provides periodic updates to the list of products or services to which this provision applies and notifies those updates to the public.

Consider another scenario in which the company operating the online store does not have a physical presence in the area subject to taxation. In such a scenario, any individual representing an online business that engages in electronic commerce will be held accountable for paying any applicable taxes. If there isn't a representative, the operator will choose one for them, and that person will be responsible for paying GST on their behalf.

Budget 2025 Update: Input Tax Credit (ITC) Distribution for RCM

In the Budget 2025, a significant change has been introduced regarding the distribution of Input Tax Credit (ITC) in relation to Reverse Charge Mechanism (RCM) transactions. Specifically, provisions have been made to allow Input Service Distributors (ISDs) to distribute ITC for inter-state supplies where tax is paid under the reverse charge.

This change, effective from April 1, 2025, will streamline the process for businesses with multiple locations or branches. Previously, the distribution of ITC for RCM transactions could be complex, particularly in cases involving inter-state supplies. Now, ISDs will be able to efficiently allocate ITC related to these transactions, simplifying compliance and reducing administrative burdens.

This update is particularly relevant for businesses that frequently engage in RCM transactions and have multiple locations. It is recommended that businesses review their internal processes and accounting systems to ensure they are prepared to implement this change when it takes effect.