How will Reverse Charge under GST impact exempted sectors like Healthcare

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Reverse Charge Meaning- Section 2(98) of CGST Act, 2017

“Reverse Charge” means the liability to pay tax by the recipient of the supply of goods or services or both instead of the supplier of such goods or services or both instead of the supplier of such goods or services or both under sub section (3) or sub section (4) of section 9 .

Back Ground

Reverse charge, where the recipient is liable to pay tax, is common to many countries like Canada where it is applicable on imports of services and intangible properties. Normally, the supplier pays the tax on supply. In certain cases, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed which is why it is called reverse charge.

In India, this is a partly new concept introduced under GST.  The purpose of this charge is to increase tax compliance and tax revenues. Earlier, the government was unable to collect service tax from various unorganized sectors like goods transport. Compliances and tax collections will therefore be increased through reverse charge mechanism.

Reverse Charge under Service Tax ( Old Regime)

The concept of reverse charge mechanism was already present in service tax ( old regime). In GST regime, reverse charge is applicable for both services as well as goods.

Reverse Charge concept for goods is a new concept(except Purchase Tax in few goods in few states).

Some of services, where Reverse Charge was there under Service Tax  Regime ( old) are :

  • Insurance agent
  • Services of a director to a company
  • Manpower supply
  • Goods Transport Agencies
  • Non-resident service providers
  • Any service involving aggregators

Reverse Charge under GST – Section 9(3) of CGST Act, 2017

The Government may on the recommendations of the Council, by notification, specify categories of supply of goods or services or both , the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.  

Reverse charge under GST on 12 services on which tax shall be paid by the recipient on 100% reverse charge basis:

  • Non-resident service provider, Goods Transport Agencies
  • Legal service by an Advocate/ Firm of Advocates, Arbitral Tribunal
  • Sponsorship Services
  • Specified Services provided by Government or Local Authority to Business entity
  • Services of a director to a company
  • Insurance agent, Recovery Agent of Bank/FI/ NBFC
  • Transportation Services on Import
  • Permitting use of Copyright
  • Radio Taxi services to E-commerce aggregator (eg: Ola, Uber, etc.)

Reverse Charge under GST – Section 9(4) of CGST Act, 2017

GST in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Exemption to section 9(4) of CGST:- As per section 11(1) of the CGST Act,  if the Government is satisfied that it is in interest of the public to exempt some goods or services or both, either fully or partly of  the tax leviable thereon.  On using this power, Government has issued notification No. 8/2017- Central Tax (Rate) which shall be in force from July 1, 2017.

As per the notification, exemption shall be applicable where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the suppliers, who is or are not registered, is upto five thousand rupees in a day.

Important points to note WRT Reverse Charge

  • Exemption upto Rs. 5000 is on intra state taxable supply

  • There is a limit of transaction value of Rs. 5,000/- per day:- means in case of supply more than Rs. 5,000/- per day, whole of such supply shall be taxable under reverse charge 9(4).
  • Limit is in respect of all suppliers:- This should be noted that the limit is not respect  to one supplier.
  • All persons who are required to pay tax under reverse charge have to register for GST irrespective of the threshold
  • A business required to pay GST under Reverse charge under section 9 (3), even if not engaged in the taxable supply, for instance a health care unit, would automatically need to comply with section 9(4 ) wrt to supply by unregistered dealer to a registered dealers.

     

    Take example of Apollo Hospitals, now if they take services of an advocate, they need to pay GST under RCM as per provisions of section 9 (3),  now since they are a registered entity under GST, provisions relating to 9 (4) automatically gets triggered, which means even if they are not engaged in supply of taxable goods /services under GST, since they have to pay GST on all inward supply of goods / services from unregistered dealers above daily limit of Rs. 5K.

    • Compliances in case Reverse Charge – Taking discussion forward, even if you are required to pay GST under section 9(3) or section 9 (4), you are required to show total turnover ( including exempt also) in returns, file all returns mandatorily, this to my mind is little harsh and may not be the objective of the law.

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