In 2017, the Government of India introduced the Goods and Services Tax (GST) in a bid to subsume various indirect taxes into a single taxation system. As a part of the, ‘One Nation- One Tax’ initiative, the new GST system came with various other inclusions, including the Reverse Charge Mechanism. Read on to learn more about the meaning of the reverse charge mechanism under GST, how it works, its applicability and more.
What is the Reverse Charge Mechanism (RCM) in GST?
Reverse charge mechanism, RCM is an important concept under the
Goods and Services Tax (GST) regime. It is a mechanism wherein the
liability to pay tax is shifted from the seller to the buyer. RCM is
applicable when goods and services are purchased from unregistered
dealers or otherwise.
Normally, the goods or services suppliers
pay the supply tax. However, under RCM, the goods and services
recipient has to pay the tax, as the tax chargeability gets reserved.
Its main objective is to widen the tax levy scope on various
unorganised sectors to exempt certain classes of suppliers and to tax
the import of services.
How Does the Reverse Charge Mechanism Work?
Under the reserve charge mechanism, the buyer must pay the GST
for goods and services purchased from unregistered dealers, as these
dealers do not have to pay GST on their sales. Hence, the buyer is
required to pay GST and claim the input tax credit (ITC).
In
addition, RCM applies to certain types of goods and services, notified
by the GST Council from time to time. These goods and services include
alcoholic liquor from human consumption, arbitral tribunal services,
legal services and services by way of renting motor vehicles.
The
RCM applies to both Intra-State and Inter-State transactions:
- In Intra-State transactions, the RCM applies to unregistered dealers in the same state.
- In Inter-State transactions, the RCM applies to unregistered dealers in different states.
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Applicability of Reverse Charge Mechanism (RCM)
The reverse charge mechanism in GST is applicable under the
following scenarios:
1. Supply of Specific Goods and
Services
The Central Board of Indirect Taxes and
Customs (CBIC) has specified certain goods and services on which RCM
is applicable, empowered by Section 9(3) of the CGST Act.
2. Supply from Unregistered Dealer to Registered
Dealer
Section 9(4) of the CGST Act states that for an
unregistered dealer to supply goods to a registered dealer, they
must pay the GST at the applicable rate. In addition, in intra-state
purchases, the SGST and CGST are applicable under RCM, and IGST is
applicable for inter-state purchases.
3. Supply of
Services Through E-Commerce Operators
Section
9(5) of the CGST Act empowers e-commerce operators to collect the
applicable GST from the buyers and deposit the same with the
government. The operator is responsible for providing the details of
the sellers and buyers to the tax authorities.
Responsibility for Paying GST under RCM
The goods and services recipients must pay GST under RCM.
However, according to the GST law provisions, the supplier providing
the goods must mention in the invoice if the tax is payable under
the reverse charge mechanism.
In addition, the following points
are crucial while making GST payments under the reverse charge mechanism:
- The recipient of the goods and services can claim an input tax credit on the tax amount paid under RCM. It is applicable only when the buyer purchases the goods or services for business growth and advancement.
- When discharging liability under RCM, a composition dealer must pay the tax at the normal rate instead of the composition rate. They are also not eligible to claim any input tax credit on the tax paid.
- GST compensation cess may be applicable on the payable or already paid tax under the reverse charge mechanism (RCM).
Goods and Services Governed by RCM
The following tables portray the goods and services governed by RCM:
- List of Supply of Goods Under RCM
| Serial Number |
Description of Supply of Goods | Supplier of Goods | Recipient of Goods |
| 1. | Cashew nuts, not shelled or peeled. |
Agriculturist | Any registered person |
|
2. | Tobacco leaves |
Agriculturist | Any registered person |
|
3. | Bidi wrapper leaves (tendu) | Agriculturist | Any registered person |
|
4. | Silk yarn |
Any person manufacturing silk yarn from raw silk or silk cocoons for supply of Silk Yarn | Any registered person |
|
5. | Used vehicles, seized and confiscated goods, old and used goods, waste and scrap | State Government, Central Government, Union Territory or a local authority | Any registered person |
|
6. | Raw cotton |
Agriculturist | Any registered person |
| 7. |
Supply of lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent |
- List of Supply of Services Under RCM
| Serial Number |
Description of Supply of Goods | Supplier of Services | Recipient of Services |
| 1. | GTA services | Goods Transport Agency under GST (GTA) who has not paid integrated tax at the rate of 12% | Any factory, society, cooperative society, registered person, body corporate, partnership firm, or casual taxable person; located in the taxable territory |
|
2. | Service offered by a person located in non-taxable territory to any person other than the non-taxable online recipient | Any person located in a non-taxable territory |
Any person located in the taxable territory other than a non-taxable online recipient |
| 3. | Legal services by advocate | An individual advocate, including a senior advocate or a firm of advocates | Any business entity located in the taxable territory |
| 4. | Services provided by way of sponsorship to any corporate or partnership firm | Any Person | Anybody corporate or partnership firm located in the taxable territory |
| 5. | Services supplied by an arbitral tribunal to a business entity | An arbitral tribunal |
Any business entity located in the taxable territory |
| 6. |
Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding - (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) services concerning an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers.
| Central Government, State Government, Union territory or local authority | Any business entity located in the taxable territory |
|
7. | Services supplied by an insurance agent to any person carrying on insurance business | An Insurance Agent | Any person carrying on insurance business, located in the taxable territory |
| 8. | Services supplied by a director of a company or a body corporate to the said company or the body corporate | A director of a company or a body corporate | The company or a body corporate located in the taxable territory |
| 9. | Services supplied by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India | A person located in non-taxable territory | Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory |
| 10. |
Services supplied by a recovery agent to a banking company, a financial institution, or a non-banking financial company | A recovery agent |
A banking company, a financial institution, or a non-banking financial company, located in the taxable territory |
| 11. | Supply of services by the members of the Overseeing Committee to the Reserve Bank of India |
Members of the Overseeing Committee constituted by the Reserve Bank of India | Reserve Bank of India |
|
12. | Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1) (a) of the Copyright Act, 1957, relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like | Author or music composer, photograph her, artist, or the like |
Publisher, music company, producer or the like, located in the taxable territory |
Compliance Guidelines for RCM
The following are the compliance guidelines for the reverse charge mechanism:
- Every registered person must keep and maintain records of all supplies attracting tax payment on reverse charge.
- According to Section 31 of the CGST Act, 2017, read with Rule 46 of the CGST Rules, 2017, every tax invoice must contain whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, it must also be mentioned in the receipt voucher and refund voucher if the tax payable is on reverse charge.
- Any amount payable under reverse charge must be paid by debiting the electronic cash ledger. However, after discharging reverse charge liability, the recipient can take credit for the same, if he is otherwise eligible.
- Advance paid for reverse charge supplies is also leviable to GST. The person making the advance payment must pay tax on a reverse charge basis.
- Invoice level information in respect of all supplies attracting reverse charge, rate-wise, must be furnished separately in Table 4B of GSTR-1.
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Time of Supply of Goods & Services under RCM
Here is the time of supply for goods and services under RCM under GST:
- RCM Time of Supply (Goods)
The time of supply of goods should be the earliest of the following dates:
- The date of receipt of the goods.
- The immediate date is after 30 days from the date mentioned in the invoice issued by the supplier.
- In case the time of supply is unclear, the entry date of the goods in the recipient’s books shall be considered.
- RCM Time of Supply (Services)
In the case of services provided by the supplier, the time of supply will be determined by the earliest one of any of the following dates:
- The immediate date is after 60 days from the date mentioned in the invoice issued by the supplier.
- In case the time of supply is unclear, the entry date in the recipient’s books shall be considered.
Self-Invoicing & Exemptions Under Reverse Charge
Self-invoicing is done when a buyer purchases from an
unregistered supplier, and these purchases of goods and services
come under reverse charge. It is because the supplier cannot issue a
GST-compliant invoice to the buyer, making them liable to pay taxes
on the seller’s behalf. Hence, self-invoicing becomes necessary in
such situations.
In addition, Section 31(3)(G) of the CGST Act
mandates that a recipient who is liable to pay tax under Section 9(3)
or 9(4) must issue a payment voucher to the supplier during the time
of making payment.
The government has ?5,000 exemption per day.
Hence, if the total purchase is less than ?5,000 per day made to an
unregistered seller, the buyer has no requirement to pay tax on the
reverse charge mechanism under GST. However, this total limit of
?5,000 is for all suppliers and not from individual suppliers.
Registration Rules and RCM
A person liable to pay GST under the reverse charge mechanism must compulsorily register under GST, as per section 24 of the CGST Act, 2017. They are also excluded from the threshold limitations of Rs. 20 Lakh or Rs. 40 Lakh as it will not apply to them.
Conclusion on RCM in GST
The reverse charge mechanism is a concept under GST where the buyer has to pay the tax shifted from the goods and services supplier. They must pay the tax directly to the Government of India instead of the supplier. In addition, under the RCM, the payment must be issued within 180 days for the recipient to avail input tax credit.
Frequently Asked Questions about Reverse Charge Mechanism under GST
1. Who is required to register for the
RCM?
Any business buying goods and services from
unregistered suppliers must register for the RCM under GST,
irrespective of the turnover threshold specified by the GST Council.
2. When is the RCM applicable?
The
RCM under GST is applicable under the following scenarios:
- Supply of certain goods and services specified by the CBIC
- Supply from an unregistered dealer to a registered dealer
- Supply of services through an e-commerce operator
3. When can I claim the ITC of tax paid under
RCM?
If you have paid tax under RCM in a month, you
can claim it as an input tax credit (ITC) in the following month.