Overview of GST Reverse Charge

In Budget 2018, two regimes to levy GST on imported services, are announced to be implemented from 1 January 2020 onwards, namely Reverse Charge regime for Business-to-Business (“B2B”) supplies and Overseas Vendor Registration regime for Business-to-Consumer (“B2C”) supplies.

Reverse Charge Regime subjects the B2B procurement of imported services to input tax or GST. The current GST rule only requires input taxes to be applied on services procured from local GST-registered persons. The Reverse Charge (RC) regime stipulates the transfer of GST obligation to the buyers of imported services intended for business use.

The advent of technological advancements initiated the influx of virtual business solutions. This offered an option for Singapore businesses to procure service from outside of the country. The goal of the changes is to level the GST treatment for services procured locally and those obtained overseas.

Example

Company A obtains payroll services in Singapore from Payroll Company who is based in Singapore, and marketing services from an online marketing solutions provider.

In the current GST rule, Payroll Company has to report the GST on the payroll services in its GST return, while no GST is chargeable for the marketing services.

With the RC regime, Payroll Company will shoulder the GST for the payroll services, while Company A will be accountable for the GST on the marketing services.

Who are subjected to RC?

The following are covered by the changes in the RC regime;

• A GST-registered entity who is

  1. A business not entitled to claim input tax in full;
  2. An organization who carries out non-business activities (such as charities or welfare groups who offer free or subsidised services, and investment holding companies which derive dividend income) and receives non-business receipts, is not entitled to claim input tax in full; or
  3. A fully taxable person who chooses to apply RC.

• A Non-GST registered business

  1. Whose total value of imported services, procured within a 12-month period, exceeds the S$1 million threshold; and
  2. Who is not entitled to claim input tax in full even if it was GST-registered.

Exceptions to the Rule

By announcing these changes in the announcement in Budget 2018, this move gave the affected businesses about 22 months, providing ample time to prepare. Once the law takes into effect, no extension will be granted to anyone who might attempt to request for leniency. However, there are exceptions to the rule:

1. Businesses that create and provide non-taxable goods and services may qualify for partial GST claims. Products and services include but not limited to:
   • Tax-exempt supplies under the 4th Schedule of the GST Act.
   • Zero-rating supplies under Section 21(3) of the GST Act.
   • Non-taxable government services under the Non-Taxable Government Supplies Order of the GST Act.
2. Businesses that provide free or subsidized products and services.
3. Regulations 28 of the GST General Regulations or the De Minimis Rule is not satisfied.
4. RC is not applicable to supplies that have been previously taxed in Singapore.

Example

Singapore Corporation engages Foreign Services to conduct a market research for $20,000. Foreign Services will outsource the job to Local Research Firm for $15,000. After the completion of the project, GST computation is as follows;

Local Research Firm will bill Foreign Services $15,000 plus the 7% GST of $1,050 to get a total of $16,050.

Foreign Services will bill Singapore Corporation $20,000. Singapore Corporation will account for 7% GST on $5,000 as the $15,000 has already been taxed. GST charged to Singapore Corporation for this transaction is $350.

Which transactions are affected?

Although the law was announced as early as 2018, the blanket implementation of the rule is on 1 January 2020. RC will apply to all transactions of the affected services paid or delivered, whichever is earlier, on or after the implementation date.

1. General Rule – The earlier of when the invoice in respect of the supply is issued and when the payment is made.
2. Consistent Application – Businesses may also account for RC at the earlier of when the invoice in respect of the supply is posted and when the payment is made, if all GST returns are prepared on the same basis.
3. RC Business Applying RC At The End of Longer Periods – The day immediately after the last day of the longer period. If the accounting period end on 30th June, the time of supply is 1st July.
4. Special Rules
   • Intra-GST group and interbranch transactions – The earliest of when the invoice in respect of the supply is issued, when the payment is made, and 12 months after the basic tax point. This rule done not apply to continuous supply of services.
   • Transactions straddling the registration – Services performed before registration can be (a) excluded from RC or (b) the time of supply set to the service date or when the service was rendered.
   • Transactions straddling the de-registration – Services performed before de-registration are subject to RC, with the time of supply set to the day immediately before the de-registration takes effect.
   • As an administrative concession, GST-registered businesses who are unable to accurately determine if they will be partially exempted from year to year, they may elect to apply RC only at the end of the longer period.

Mighty Glory Corporate Solutions provides accounting and tax services, bookkeeping, payroll services, and more corporate solutions in Singapore. Connect with us today to know more about the Reverse Charge Regime and how it may affect your business. We look forward to helping you identify your business needs and provide customized, efficient and holistic solutions.