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 charge.

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.