Understanding Implementation of Reverse Charge Mechanism in GST

In regular circumstances, any supplier of goods and services is liable to pay the Goods and Services Tax (GST). However, when the reverse charge mechanism is applied, the receiver of the goods becomes the party that is liable to pay the taxes.

The government has clearly spelt out a few instances in which the reverse charge mechanism is employed and understanding the same can help both businesses and individual customers understand their transactions in a more comprehensive manner.

Let’s take a look at the reverse charge mechanism, when it is implemented, and what self-invoicing is!

When is reverse charge implemented?

Reverse charge is generally applicable in three main situations. These include the following:

Supply from an unregistered dealer to a registered dealer- 

Let’s say that you own a small paper company that is registered under GST. However, one of your vendors that supplies glossy paper to your company is not registered under GST. In this case, the reverse charge applies. In this case, the paper company must pay the GST instead of the glossy paper vendor.

Also, it is important to note that the registered dealer in this case must carry out self-invoicing, instead of the vendor sending the invoice to the company.

Services through an e-commerce website-

If an e-commerce website supplies any services, then the reverse charge becomes applicable to the e-commerce operator. For instance, if you use a brand that lists out service vendors, such as beauticians, then you must pay the GST on the bill, instead of the vendors paying the same to the brand.