Goods and Services Tax (GST) is a single tax on the supply of goods and services, right from the manufacturer to the consumer. After a 13-year tussle since it was first proposed, GST is now right around the corner, and its implementation brings many changes to the current tax regime.
One such change is in reverse and forward charge mechanisms.
Forward charge
Forward charge or direct charge is the mechanism where the supplier of goods/services is liable to pay tax.
For instance, if a chartered accountant provided a service to his client, the service tax will be payable by the chartered accountant.
Or for instance, if a car manufacturing company sold some auto parts to a trader and collected tax from the trader, the manufacturing company remits the tax.
Under the current tax system, most transactions are covered under the forward charge mechanism.
Reverse charge
In the case of a reverse charge, the receiver of services is liable to pay the tax. In the example of the chartered accountant (CA), the client would be liable, not the CA. Some services to which the reverse charge mechanism applies include goods transport agency services, legal services, rent-a-car services, manpower supply services, import of taxable services, security services, service portion in execution of works contract, sponsorship services, etc.
In India, currently, reverse charge is not applicable on goods except in a few states like Punjab, which has a purchase tax on certain goods. Now under GST, there will be a reverse charge on goods as well.
The purpose of applying reverse charge is twofold: to increase compliance by unorganized sectors, such as transport, and to increase tax revenues.
Differences between forward and reverse charge
| S.No. | Particulars | Forward charge | Reverse charge |
| 1. | Liability to pay tax | Supplier of goods/services | Receiver of goods/services |
| 2. | GST registration | Required once a supplier meets the threshold.
Threshold: Turnover in a financial year exceeds Rs. 20 lakhs (Rs. 10 lakhs for northeastern and hill states). | All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold. |
| 3. | Time of supply of goods/services | The time of supply shall be the earliest of the following dates.
Goods: · The date on which the supplier issues the invoice · The last date on which the supplier is required to issue the invoice with respect to the supply of goods. For supply of goods involving the movement goods, the invoice needs to be issued at the time of removal. In other cases, at the time of delivery of goods to the recipient · The date on which payment is received. The point of taxation, in this case, will be the earliest of the date on which payment is accounted for in the books of accounts of the recipient or the date on which payment is credited to his bank account Services: · The date on which the supplier issues the invoice · The last date on which the supplier is required to issue the invoice is 30 days from the date of supply of services. In case of a banking company, the invoice has to be issued within 45 days from the date of supply of services · The date on which payment is received. The earliest of the date on which the payment is accounted for in the books of accounts or the date on which the payment is credited to his bank account | The time of supply shall be the earliest of the following dates.
Goods: · The date of receipt of goods · The date on which payment is made. The earliest of the date on which the payment is accounted for in the books of accounts of the recipient or the date on which the payment is credited to his bank account · The date immediately after 30 days from the date of issue of invoice by the supplier Services: · The date of payment entered in the books of accounts or the date on which payment is credited to the bank account · In case payment is not made by the recipient to service providers within three months, the point of taxation will be the date immediately following the expiry of three months |
Overall, the steps taken by the government to bring goods into the ambit of reverse charge under GST is a wise move, as it will bring about an increase in tax revenue.
However, it might become cumbersome for the receivers of goods/services as they belong to the unorganized sectors, and it will increase the compliance requirements for them.
Avalara is an experienced application service provider (ASP) partnering with licensed GST Suvidha Providers (GSPs). To understand how Avalara India GST can help you with GST compliance automation, contact us through https://www.avalara.com/in/products/gst-returns-filing.
