The new Goods and Services Tax (GST) regime has brought with it several reforms to the indirect tax system, which affect firms doing business in our nation. One such change or transformation pertains to the introduction of the Reverse Charge Mechanism, and the taxation on import of services via Reverse Charge Mechanism (RCM).
The following topics have been discussed in this article:
Usually, the registered supplier of goods and services is required to pay GST to the government after collecting the same from the recipient. RCM is actually a procedure used in cases where the supply of goods or services is made by an unregistered supplier.
In such transactions, the recipient is required to directly pay GST to the government instead of any other unregistered supplier. It is vital to note that in all cases subject to RCM, the recipient must be registered under GST.
Import of services under GST has been defined as the supply of any service where the supplier is situated outside India, the recipient is located in India, and the place of supply of services is in India. In accordance to be taxable under GST, the import of services must be taken under consideration, irrespective of whether it is used for the purpose of business or not.
E-Commerce firms providing services through the aggregator model will also have to pay tax via RCM. In such scenarios, the registered e-commerce operator will be responsible for paying GST to the government instead of service providers such as electricians, carpenters, plumbers, among others. If the e-commerce operator does not live in India, then the operator must appoint a registered representative for the purpose of paying GST.
In transactions which involve import of services, the recipient often contractually agrees to compensate the supplier of the income tax payable by him for the services rendered in India. In effect, the recipient ultimately pays the consideration for income tax payable by the supplier as well as the services. In this specific scenario, the question that arises is whether the tax paid by the recipient on behalf of the supplier forms a part of the total transaction value.
Firms engaged in importing services into our nation are required to be more cautious regarding multiple overhead compensation clauses in their contracts with service providers. This is because the introduction of GST could significantly increase their tax liability by inflating the transaction value.
The GST framework particularly clarifies that in such cases, any amount payable by the supplier, but which is incurred by the recipient and not included in the actual consideration for services, will be included while computing the entire transaction value. Therefore, in case of RCM, the recipient has to pay GST on the transaction value, that is, the consideration amount plus tax paid on behalf of the supplier.
The RCM acts as a self-policing tool under the framework of GST and aims to curb tax evasion by inspiring firms to register themselves under GST and pay taxes. Since customers are typically averse to the concept of paying taxes directly to the government and undertaking all the associated paperwork and compliances, they will naturally prefer dealing exclusively with suppliers who are registered under GST.