Under Goods and Service Tax (“GST”), generally, a supplier of goods and services is liable to pay GST for the supplies, i.e., at the time of supply of goods or service supplier charges GST over sales consideration and collect the same from recipient and by due date deposit such GST amount to the account of government
On the contrary, in the case of Reverse Charge Mechanism (“RCM”) under GST, the recipient himself is liable to pay the tax for goods and services received by him instead of the supplier. Therefore, the recipient is liable for all compliance under GST.
Here we are providing a close look into the RCM (Reverse Charge Mechanism) to make it easier for you to understand. Scroll down and have a look.
1. When does Reverse Charge under GST apply?
Power to levy GST on RCM basis is given under Section 9(3), 9(4) and 9(5) of Central Goods and Service Tax Act, 2017 which specifies various conditions under which GST shall be payable under RCM. Those are as follows-
1.1 Reverse charge on supply of specified goods and services
1.2 Reverse charge on supply by an unregistered person to a registered person.
1.3 Reverse charge on supplies through e-commerce operator.
1.1 Reverse charge under GST on Supply of specified goods and services (Section 9(3) of CGST Act, 2017)
Section 9(3) of CGST Act, 2017 authorises the government to specify certain category of goods and services, in consultation with GST Council, where GST shall be payable by recipient under RCM.
CBEC (Central Board of Excise & Customs) has specified the following category of goods and services under section 9(3) of CGST Act, 2017 where GST is payable under RCM. That are-
1.1.1 List of Goods on which GST would be paid under reverse charge under GST
- Cashew nuts, not shelled or peeled
- Tobacco leaves
- Bidi wrapper leaves (tendu)
- Raw cotton
- Silk yarn
- Supply of lottery
- Priority Sector Lending Certificate
- Used vehicles, old and used goods, seized and confiscated goods, waste and scrap
1.1.2 List of services on which GST would be paid under reverse charge under GST
Following services are specified under RCM vide notification No. 13/2017 dated 28th June, 2017:
|Nature of Service||Supplier of Service||Recipient of Service (Liable to pay GST under RCM)|
|Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road||Goods Transport Agency (GTA)||Specified persons|
|Services supplied by an individual advocate including a senior advocate||An individual advocate including a senior advocate or firm of advocates||Any business entity located in the taxable territory.|
|Services supplied by an arbitral tribunal to a business entity.||An arbitral tribunal.||Any business entity located in the taxable territory.|
|Services provided by way of sponsorship to any body corporate or partnership firm||Any person||Any body corporate or partnership firm located in the taxable territory.|
|Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding certain services||Central Government, State Government, Union territory or local authority||Any business entity located in the taxable territory.|
|Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the GST.||Central Government, State Government, Union territory or local authority||Any person registered under the GST law|
|Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter.||Any person||Promotor|
|Long term lease of land (30 years or more) for consideration in the form of upfront amount (called as premium, salami, cost, price, development charges or by any other name) or periodic rent for construction of a project by a promoter.||Any Person||Promoter|
|Services supplied by a director of a company or a body corporate||A director of a company or a body corporate||The company or a body corporate located in the taxable territory.|
|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|
|Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company.||A recovery agent||A banking company or a financial institution or a non-banking financial company, located in the taxable territory|
|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||Author or music composer, photographer, artist, or the like||Publisher, music company, producer or the like, located in the taxable territory.|
|services by an author by way of transfer or permitting the use of a copyright covered under Section 13(1)(a) of the Copyright Act, 1957 relating to original literary works to a publisher.||Author||Publisher located in the taxable territory subject to given exception|
|Supply of services by the members of Overseeing Committee to Reserve Bank of India||Members of Overseeing Committee constituted by the Reserve Bank of India||Reserve Bank of India|
|Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs)||Individual Direct Selling Agents (DSAs)||A banking company or a non-banking financial company, located in the taxable territory|
|Services provided by business facilitator (BF) to a banking company||Business facilitator (BF)||A banking company, located in the taxable territory|
|Services provided by an agent of business correspondent (BC) to business correspondent (BC).||An agent of business correspondent (BC)||A business correspondent, located in the taxable territory.|
|Security services (services provided by way of supply of security personnel) provided to a registered person||Any person other than a body corporate||A registered person, located in the taxable territory.|
|Services of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient||Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6 per cent. to the service recipient||Any body corporate located in the taxable territory|
|Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”), as amended.||Lender||Borrower|
- In case suppliers of goods or services, who are only engaged in supplying goods or services, on which tax to be paid by Recipient u/s 9(3), such supplier are exempted from GST registration. Notification No. 5/2017 – Central Tax
1.2 Reverse charge under GST on Supplies made to a Registered Dealer from an Unregistered Dealer (Section 9(4) of CGST Act, 2017)
Unregistered dealers in GST, are not liable to charge GST on goods or services supplied by them. However, to curb GST evasion, section 9(4) has specified that When an unregistered vendor supplies goods or services to a registered dealer then GST on such transaction will be payable by recipient under RCM. That means, instead of the supplier, the receiver needs to pay GST directly to the Government.
Under section 9(4), the government would specify a list of goods and services, where GST under RCM would be paid by the recipient of goods and services.
In this case, The registered dealer needs to raise a self-invoice to pay the GST under RCM. In the case of Inter-state purchases, IGSt needs to be paid by the buyer. For Intra-state supplies, the purchaser has to pay CGST and SGST.
Department has notified following goods vide Notification No. 07/2019- Central Tax (Rate) dated 29th March, 2019 to be taxed under section 9(4) of CGST Act, 2017 by recipient under reverse charge mechanism:
|Category of Supply of goods and services||Recipient liable to pay GST under RCM||Date of applicability||Reference|
|Supply of such goods and services which constitute the shortfall from the minimum value of goods or services purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017||Promoter||1st April, 2019||Notification No. 07/2019- Central Tax (Rate) dated 29th March, 2019|
|Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975)||Promoter||1st October, 2019||Notification No.24/2019- Central Tax (Rate) dated 30th September, 2019|
|Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) supplied to a promoter for construction of a project on which tax is payable or paid at the rate prescribed for items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017.||Promoter||1st April, 2019||Notification No. 07/2019- Central Tax (Rate) dated 29th March, 2019|
There are many developments on RCM on supply of goods and services by unregistered persons over the period of time. With help of the below table, we can see the changes over time in case of RCM on supply by an unregistered person.
|Period||Applicability of GST under RCM u/s 9(4) of CGST Act, 2017||Reference|
|1st July, 2017 to 12th October, 2017||GST under RCM was applicable on supply of goods or services received from unregistered dealers u/s 9(4) of CGST Act, 2017 provided aggregate value of supplies received from all or any of unregistered person is INR 5000 or more in a day||Notification No.8/2017-Central Tax (Rate) dated 28th June, 2017|
|13th October, 2017 to 31st March, 2018||All supplies received from unregistered dealers were exempted from Section 9(4) of CGST Act, 2017 irrespective of amount.||Notification No. 38/2017 – Central Tax (Rate) dated 13th October, 2017 issued amending original Notification No. 8/2017-Central Tax (Rate) dated 28th June, 2017|
|31st March, 2018 to 30th June, 2018||Above mentioned exemption extended||N/No. Notification No. 10/2018 – Central Tax (Rate) – Dated 23-03-2018|
|1st July, 2018 to 30th September, 2018||Above mentioned exemption extended||Notification No. 12/2018 – Central Tax (Rate) dated 29-06-2018|
|1st October, 2018 to 30th September, 2019||Above mentioned exemption extended||N/No. Notification No. 22/2018 – Central Tax (Rate) dated 06-08-2018|
Note: Original N/No. 8/2017-Central Tax (Rate) dated 28th June, 2017 rescinded by Notification No. 01/2019-Central Tax (Rate) dated 29th Jan, 2019 with effect from 1st Feb, 2019. Therefore, all exemptions stood withdrawn with effect from 1st Feb, 2019.
1.3 Reverse charge on supplies through e-commerce operator (Section 9(5))
Lots of service providers provide services through electronic platforms as it helps in creating a vast customer base. However, considering the scale of their operator and they are numerous, sometimes it may not be possible to track all. To ease compliance, the government has created liability of GST compliance on e-commerce operators.
Section 9(5) of CGST Act empowers the government to specify certain category of services supplied intra-state through e-commerce operators where e-commerce operators would be liable to pay GST. Accordingly, when a person supplies his service through e-commerce operator then GST on such service shall be paid by e-commerce operator under RCM.
If an e-commerce operator does not have presence in any taxable territory then any person representing such e-commerce operator shall be liable to pay GST.
For instance, UrbanClap renders services of electricians, plumbers, beauticians, etc. Here, the e-commerce platform- “UrbanClap” is liable to pay GST, and it will be collected from the consumers who are receiving the services, not from the registered service providers.
In case, an e-commerce company doesn’t have the physical presence within the taxable territory, they must have a person who will represent the electronic commerce operator, and this individual will be liable to pay the tax amount.
2. Due date of RCM liabilities under GST
Time of supply determines the point of time in which goods or services are considered as supplied and accordingly, liability for payment of taxes arises. It helps the supplier to calculate the taxable amount (IGST/CGSt/SGST) and identify the due date of payment of taxes mentioned in the invoice. Time of supply is different for goods and services. Take a look.
2.1 Due date RCM under GST in case of supply of Goods
When recipient is liable to pay GST under RCM on goods received then time of supply shall be the earliest of the below dates-
- The date of receipt of goods or
- Date of payment as entered in the books of account of the recipient or date on which the payment is debited in his bank account, whichever is earlier or
- 30 days immediately following date of invoice issued by supplier
In case, the date can not be specified by the above mentioned method then the time of supply will be the date of entry in the account books of the recipient and GST liabilities under GST would be paid accordingly.
- The good is received on 15th May 2020
- Date of payment for such supply 20th June, 2020
- The date mentioned in the invoice is 12th May 2020
- Date of entry in the books of the receiver is 18th May 2020
For this, the time of supply of the goods will be 15th May 2020.
2.2 Due date RCM under GST in case of supply of Services
Just like the time of supply for goods; time of supply for services has to be earliest of the following dates:
- Date of payment as entered in books of recipient or the date on which the payment is debited in his bank account, whichever is earllier or
- 60 days from the date of invoice issued by the supplier
When the time of supply can not be determined by above mentioned method then the date of entry in the account books of the recipient must be considered as the time when supplies were made.
- Date of payment in books of recipient- 15th July 2020
- Date immediately after 60 days from the date mentioned in the invoice- [If the date of the invoice is 15th May 2020; 60 days from the date will be- 14th July 2020]
- Entry date in the receiver’s account book- 18th July 2020
So, the time of supply will be 14th July 2020.
3. Input Tax Credit of taxes paid under RCM
As per section 16(2) of CGST Act, 2017, one of the conditions for claiming Input tax credit is “registered person is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed”.
Therefore, for the purpose of claiming ITC of GST paid under RCM, invoice of supplier is not sufficient as in such case, supplier does not issue a tax invoice. However, challan used by the recipient for payment of GST under RCM is a tax paying document.
Therefore, the recipient is entitled to claim ITC in the month in which payment of GST is made under RCM subject to fulfilment of other conditions given in section 16(2) of CGST Act, 2017.
4. FAQs on RCM
4.1 What if the recipient is not a registered dealer but required to pay tax under RCM?
All the taxpayers who are compelled to pay tax as per the Reverse Charge Mechanism need to register themselves under GST, and the threshold of Rs. 20/40 lakhs won’t be applicable for them.
4.2 I am a manufacturer of supplies which are subjected to GST under Reverse Charge. Should I register under GST?
No, the manufacturers of supplies for which receivers is liable to pay taxes under GST are not required to get themselves registered under GST.. However, if liability of registration arises under any other category then supplier is required to take GST registration for that purpose.
4.3 Is the ITC permitted under Reverse Charge?
The total amount of tax paid under reverse charge shall be available for the ITC (input tax credit) only if the supplied goods or services are used or going to be used in business. So, in this case, the receiver can avail ITC.
4.4 Should I pay tax under RCM for small purchases also?
You’re not liable to pay GST under Reverse Charge on the purchases made intra-state from the unregistered seller until the total amount of the supply is more than Rs. 5000 per day.
4.5 What happens if an Input Service Distributor receives such goods or services which are liable to Reverse Charge Mechanism?
Well, an Input Service Distributor can’t purchase any good or service which is liable to RCM. In case, the ISD wishes to obtain such supplies and take the RCM paid as credit; the person needs to register as a Normal Taxpayer.
That’s all! Now you know all about the Reverse Charge Mechanism. If you have further queries related to RCM, write it in the comment box below. Stay connected for latest updates on GST.