Forward Charge Mechanism Under GST: Explained with Examples
The forward charge mechanism is the default method of tax collection under India’s Goods and Services Tax (GST). This guide explains how it works, who pays tax, and how it differs from the reverse charge mechanism, with practical examples.
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What is the Forward Charge Mechanism in GST?
Under the forward charge mechanism, the supplier is responsible for collecting and paying GST to the government. This is the standard method for most GST transactions.
- The seller adds GST to the invoice.
- The buyer pays the total invoice value including GST.
- The seller deposits the GST with the government.
This is applicable unless the transaction is specifically covered under reverse charge.
Example of Forward Charge Mechanism
Let’s say a manufacturer sells goods worth ₹1,00,000 to a retailer. GST @18% is applicable.
- Invoice Value: ₹1,00,000
- GST @18%: ₹18,000
- Total Invoice: ₹1,18,000
The manufacturer collects ₹18,000 as GST and pays it to the government via GSTR-3B.
Forward Charge vs Reverse Charge
| Point of Comparison | Forward Charge | Reverse Charge |
|---|---|---|
| Who pays GST? | Supplier | Recipient |
| Who issues invoice? | Supplier (with tax) | Supplier (no tax), recipient pays GST |
| Input Tax Credit | Buyer can claim | Buyer can claim after payment |
| Applicability | Default for all regular supplies | Notified goods/services only |
Reverse charge is covered under RCM in GST, whereas forward charge is the standard process.
Claiming Input Tax Credit (ITC) Under Forward Charge
Buyers registered under GST can claim Input Tax Credit on GST paid under forward charge, provided:
- A valid tax invoice is available
- Goods/services are used for business
- Supplier has filed GST returns and paid tax
For example, a cafe purchasing furniture can claim ITC on GST paid if the supplier follows the forward charge route.
Goods and Services Where Forward Charge Applies
Common goods and services covered:
- Goods: Electronics, FMCG, furniture, stationery, clothing
- Services: Consultancy, IT services, logistics, advertising, event management
All these are typically invoiced with GST under forward charge unless notified otherwise.
When Forward Charge Does Not Apply
- Supplier is under Composition Scheme
- Supplier is unregistered under GST
- Transaction is covered under reverse charge (e.g. import of services, legal services)
In these cases, the recipient of goods/services may have to pay GST directly under RCM.
Conclusion
The forward charge mechanism is the backbone of GST compliance in India. It helps in clear tax collection and enables the seamless flow of Input Tax Credit. If you’re a business issuing GST invoices, understanding this mechanism is crucial for correct filing and avoiding penalties.
I am a Chartered Accountant with more than five years of experience in the accounting field. My areas of expertise include GST, income tax, and audits. I am passionate about sharing knowledge through blogs and articles, as I believe that learning is a lifelong journey. My goal is to provide valuable insights and simplify financial matters for individuals and business owners alike.
