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.