Forward Charge Mechanism vs Reverse Charge Mechanism, Inverted duty structure (IDS)

 

                    

Forward Charge Mechanism :

• In Forward Charge Mechanism, the  supplier of the goods is liable  for collecting taxes and remitting it to the government
• Receiver of the goods is not involved in the direct tax payment though the ultimate  Tax implication is upon the recipient .
• Forward Charge Mechanism is being followed in GST regime.

Reverse Charge Mechanism:

• In the normal economic transactions, Forward charge mechanism is to be followed in which the supplier of goods or services is liable to pay GST.
• In Reverse charge Mechanism , the liability to pay tax rests on the recipient of  goods or services rather than that of the supplier.

 Reverse charge Mechanism is applicable:

1.if the supplier is not registered with GST like goods purchased from any foreigner and the foreigner who is a s supplier is not registered with GST.

2.In certain goods as specified in the list by Central Board of Indirect Taxes and Customs (CBIC) in line with powers conferred in section 9(3) of CGST Acts.

• In case of Reverse Charge Mechanism, the seller can not claim Input Tax Credit.
• The buyer has to claim the Input Tax Credit (Understanding Economy from basics to an expert perspective from a Guide ,Teacher and Practitioner: INPUT TAX, Input Tax Credit) in Reverse Charge Mechanism.
• The buyer can avail of Input Tax Credit under RCM if and only if such goods or services are used for business purposes.
• As buyer has to claim Input Tax Credit, Self Invoicing is to be done by the buyer to claim Input Tax Credit.

Inverted duty structure under GST (IDS):

Inverted duty structure (IDS) refers to Tax structure where the tax rate on purchased  goods is more than the tax rate on finished goods . For Example :

                   Distributor of LPG cylinder pays 18 % on  purchase of  LPG 

                                                           While 

                   Domestic consumer has to pay 5 % on purchase of  LPG cylinder .

So, Tax rate on raw material ie LPG is more than the sale of the Good ie LPG sale to the consumer ,a case of Inverted duty structure (IDS).

The Inverted duty structure (IDS) creates  administrative problems in the sense that:

(1) There is accumulation of credits in the form of refund claims in the name of tax payer (distributor in the example).

(2) Inverted duty structure (IDS) is a revenue loss for the government as it has to refund the tax already paid (in inputs).

(3) Under GST, the inverted duty structure is identified for goods and not for services.