Reverse charge is a mechanism under which the recipient of the goods or services is liable to pay the tax instead of the provider of the goods and services. Under the normal taxation regime, supplier collects the tax from the buyer and deposits the same after adjusting the output tax liability with the input tax credit available. But under reverse charge mechanism, liability to pay tax shifts from supplier to recipient.
Concept of reverse charge
The concept of charging tax on a reverse charge basis is not new. Reverse charge mechanism existed in the previous service tax regime. However, the concept of reverse charge on the supply of goods is new.
In the normal course of business, the supplier of goods or services is liable to pay tax on supply, but in the case of reverse charge, the receiver becomes liable to pay tax instead. Thus, if a supplier who is not registered under GST supplies goods to a person who is registered under GST, the receiver pays GST directly to the government.
By way of an earlier notice dated 13 Oct. 2017, the government suspended the applicability of reverse charges on purchases made by registered persons from unregistered persons until 31 March 2018. This implies that a registered person can avail intrastate supplies of goods and/or services from unregistered persons without any daily ceiling, which was previously capped at Rs. 5000.
It is mandatory to register under GST to those liable to pay tax under Reverse Charge Mechanism irrespective of the threshold limit of 20 lakhs and 10 lakhs (North eastern States).