In the recent times, After the GST implementation, there is so much of
confusion over reverse charge mechanism of tax collection. Reverse charge means
the liability to pay tax lies with the recipient of services/supply. In normal
cases the burden to pay tax is upon the provider of the service/supply. In the
earlier regime there were a number of services like manpower supply, works
contract, GTA, legal etc. as notified by notification no. 30/2012, placed under
reverse charge mechanism either partial reverse charge or complete reverse
In the GST regime, there are two types of reverse charge taxation. One is
according to Section 9(3) of the CGST act 2017 which talks about reverse charge
taxation for specific supplies on the recommendations of GST council and to be
implemented by notification. Second is according to Section 9(4) of the CGST act
2017 which talks about reverse charge taxation upon dealings between registered
and non-registered persons. This is applicable since inception of the GST and
does not require any special notification or recommendation of GST council.
The idea of putting certain services under reverse charge mechanism was based
upon a concept similar to the maxim “Respondeat superior”. Which meant that the
superior/ bigger corporate should be made responsible for payment of tax as it
is not possible for the government to run after small/unregistered service
providers. Further, the reverse charge mechanism was also aimed to give relief
to small business entities who usually do business through
proprietorship/partnership firms or in individual constitution.
Though the idea of reverse charge was meant to encourage and facilitate the
small and micro enterprises yet it became a complex system leading to large
amount of revenue leakage and confusion among the business entities as well as
the tax administration. For example:- Works contract service fell under partial
reverse charge mechanism in which 50% liability lied with the provider of the
service and remaining 50% lied with the recipient of the service. In works
contract service, mostly the recipients are big business entities and providers
are small firms. It became very difficult for the government to realize the 50%
revenue from small firms who turned out to be mostly non-compliant.
Further, the benefit which was thought out for MSME sector could also not be
materialized. When the tax is under reverse charge mechanism it has been found
that the big entities, body corporate prefer not to deal with
proprietorship/individual firms. In such cases they prefer dealing with body
corporates who does not fall under the ambit of reverse charge taxation. Their
preference suits their business interests as nobody wants un- necessary
complexity and tax burden.
In GST regime, the reverse charge mechanism is active in dealings between
registered and unregistered persons but for specific services this was initially
put on hold and then it was implemented vide a specific notification in may 2018
and has been again put on hold vide another notification in October 2018. This
uncertain policy situation has created a confusion in the trade circle.
In GST regime, the exemption limit has already been enhanced to Rs 40 lacs,
hence the small tax payers on whom "resopdeat superior" applies are already out
of the tax net. There is a scheme of composition as well for the benefit of all
the small tax payers. Further, GST is already under reverse charge mechanism in
cases of dealings between registered and non-registered parties. Hence, the
system of reverse charge should be done away on specific supplies as it makes
things complex and defies the very purpose of good and simple tax.