What is reverse charge mechanism under GST?

A year after the PM Modi-led government rolled out the Goods and Service Tax (GST), several changes have been proposed to smoothen the transition as well as widen government's tax base.

Proposals to improve GST implementation include a reverse charge mechanism to enhance tax compliance and coverage across organised, partly organised and unorganised sector in India.

What is a reverse charge mechanism? 

Normally, the supplier of goods or services pays the tax on supply. In the case of a reverse charge, the receiver becomes liable to pay the tax.

Under the reverse charge mechanism, if entities registered under GST purchase goods from small unregistered dealers they will have to pay a tax on behalf of the latter. Thus, the registered entity will have to bear an additional tax burden of the unregistered dealer with whom they trade.

The mechanism is aimed at demotivating registered dealers to purchase goods or avail services from unregistered dealers, who do not pay taxes. This would also increase government's revenue collections.

When is reverse charge applicable? 

> When an unregistered dealer supplies goods to a registered dealer.

> A reverse charge will also be applicable to an e-commerce operator supplying services.

For instance, as UrbanClap providing services of plumbers, electricians, teachers, beauticians, the home servicing platform is liable to pay GST and collect it from the customers instead of the registered service providers.

> Supply of certain goods and services specified by Central Board of Excise and Customs (CBEC) attract a reverse charge. You can see the list of services on which a reverse charge is applicable here.

The government, however, is unlikely to implement the reverse charge mechanism as the move may adversely impact small businesses and not yield revenue gains, reported Mint.

With less than a year remaining for the PM Narendra Modi government to go for the 2019 polls, the government may try to avoid upsetting small traders, who have already been affected by the initial chaos following the implementation of GST last year.