FORWARD AND REVERSE CHARGE MECHANISM

Abstract

The Goods and Services Tax (GST) is a tax on goods and services sold domestically for consumption. The tax amount shall be included in the final price and paid by consumers at point of sale and passed to the government by the seller. Forward charge mechanism and reverse charge mechanism are two important concepts in the field of Goods and Services Tax (GST) in India. The abstract for these mechanisms would explore their differences, how they operate, and the scenarios under which they are applied. It would also cover the advantages and disadvantages of each mechanism, along with their impact on businesses and the economy as a whole. The abstract would provide an overview of the GST regime in India, including its objectives, structure, and implementation. It would also discuss the role of the GST Council in formulating policies and guidelines related to the tax system.

Keywords

Forward Charge Mechanism, Reverse Charge Mechanism, Goods and Services Tax (GST), Indirect Tax, Supplier, Recipient.

Forward Charge Mechanism

The Goods and Services Tax (GST) is an Indirect tax that is levied on the supply of goods and services in India. The GST system in India follows a Forward Charge Mechanism, which means that the person who is making the supply of goods or services is liable to pay the tax.

Forward charge or direct charge is the mechanism where the supplier of goods or services is liable to pay tax to the government which he collects from the recipient[1] i.e., the buyer.¹   Under the forward charge mechanism, the Supplier (Seller) of goods or services collects the GST from the Recipient (Buyer) of the supply and deposits it with the government. The supplier can claim the input tax credit for the GST paid on the purchases made for the supply of goods or services. This helps in avoiding the cascading effect of taxes, where the same tax is levied at each stage of the supply chain, leading to an increase in the cost of the final product.

The GST system in India has a dual structure, where both the Central Government and the State Governments levy taxes on the supply of goods and services. The GST levied by the central government is called Central GST (CGST), while the GST levied by the State Governments/Union Territory is called State GST (SGST)/ Union Territory GST (UTGST). In addition, there is an Integrated GST (IGST) that is levied on the supply of goods and services between different states in India. Under the Forward Charge Mechanism, the supplier of goods or services is required to register under the GST system if their turnover exceeds the threshold limit. They must collect GST on the supply of goods or services and deposit it with the government within the specified time limit. Failure for such can result in penalties and legal action by the tax authorities.

Reverse Charge Mechanism

Reverse charge mechanism is where the recipient of the goods or services is liable to pay Goods and Services Tax (GST) instead of the supplier.[2]Under reverse charge mechanism, the recipient of goods or services is liable to pay the tax, i.e., the chargeability gets reversed.
The objective of shifting the burden of GST payments to the recipient is to widen the scope of levy of tax on various unorganized sectors, to exempt specific classes of suppliers, and to tax the import of services (because the supplier is based outside India).

When Reverse Charge is Applicable?
Section 9(3), 9(4) and 9(5) of Central GST (CGST) and State GST (SGST) Acts govern the reverse charge scenario for intra-state transactions. Sections 5(3), 5(4) and 5(5) of the Integrated GST Act govern the reverse charge scenarios for inter-state transactions (IGST).

Section 9(3) – It states that the CBIC has issued a list of goods and services on which the reverse charge mechanism is applicable.

Section 9(4) – Section 9(4) of the CGST Act states that if a seller is not registered under GST supplies goods to a person registered under the GST, then reverse charge would apply.   

Section 9(5) – Section 9(5) of the CGST Act states that if a service provider uses an e-commerce operator to provide specified services, the reverse charge will apply to the e-commerce operator and he will be liable to pay GST. This section covers the services such as:

1. Transportation services to passengers by a radio-taxi, motor cab, maxi cab and motorcycle. (Ola, Uber)
   
2.  Accommodation services in hotels, inns, guest houses, clubs, campsites, or other commercial places meant for residential or lodging purposes, except where the person supplying such service through electronic commerce operator is liable for registration due to turnover exceeding the threshold limit.
   
3.  Housekeeping services-If the e-commerce operator does not have a physical presence in the taxable territory, in such case, person representing such an electronic commerce operator will be liable to pay tax for any purpose. If there is no representative, the operator will have to appoint a representative who will be held liable to pay GST in India.[3]

Examples for Forward Charge Mechanism and Reverse Charge Mechanism

Forward Charge Mechanism: –

1. Registered Vendor selling goods.
2. Sale of Services (Exceptions are there)
3. Most of the transactions are covered under forward charge.

Reverse Charge Mechanism: –

1. Legal services by Advocates.
2. Purchasing goods from Unregistered Vendor (Seller).
3. Services offered by an e-commerce operator.
4. GTA Services.
5. Services supplied by an Arbitral Tribunal to a business entity.
6. Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company.[4]

Conclusion

The Forward Charge Mechanism of GST in India places the responsibility of collecting and depositing taxes on the supplier of goods or services. This helps in creating a transparent and efficient tax system that avoids the cascading effect of taxes and promotes economic growth.

The Reverse Charge Mechanism in India is an important tool for tax administration that helps to ensure that all parties involved in a transaction pay their share of taxes to the government. It is important for businesses and taxpayers to understand and comply with the rules of the reverse charge mechanism to avoid penalties and legal consequences.

This article is written by Yash Tated from Adhia College of Law (3 years) during his Internship at LeDroit India.

[1] https://www.avalara.com/blog/en/apac/2017/06/reverse-forward-charge-mechanisms-gst.html

[2] https://cleartax.in/s/reverse-charge-gst

[3] https://cleartax.in/s/reverse-charge-gst

[4] https://www.wbcomtax.gov.in/GST/GST_FAQ/Reverse_Charge_Mechanism_under_GST.pdf