Reverse Charge Mechanism – RCM concepts and understanding
A thorough explaination on Reverse Charge Mechanism
- What is Reverse Charge Mechanism?
- Why use Reverse Charge Mechanism?
- When is Reverse Charge Applicable?
- Categories of Taxpayer under GST Law based on Levy
- When should we pay the tax to the government?
- Registration Rules Under RCM
- Who Should Pay Under RCM?
- Time of supply under RCM
- Input Tax Credit Under RCM
- What is Self Invoicing?
- Difference between Forward charge Mechansim and Reverse charge Mechanism
- What taxes should we pay? IGST or CGST and SGST?
- FAQs
What is Reverse Charge Mechanism? - An introduction
Normally under Goods and Services Tax commonly known as GST, a supplier of goods or services will collect the taxes from the recipient of such goods or services and pay those taxes to the Government. This is called Forward Charge. But under Reverse Charge Mechanism (commonly known as RCM) the recipient himself liable to pay taxes to the government.
Definition of Reverse charge as per GST Law:
As per Section 2(98) of Central Goods and Services Tax Act, 2017 (hereinafter referred as CGST Act, 2017), “Reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9.
Why use Reverse Charge Mechanism?
India is a country where there are organized as well as unorganized sectors. The Government faces huge difficulty in collection of taxes from these unorganized sectors, which requires continuous monitoring for better tax compliance. Hence, the Government has introduced the Reverse Charge Mechanism.
When is Reverse Charge Applicable?
Let’s simplify the explanation of Sections 9(3), 9(4), and 9(5) of the Central GST (CGST) and State GST (SGST) Acts, which cover reverse charge scenarios for intrastate transactions. Similarly, Sections 5(3), 5(4), and 5(5) of the Integrated GST (IGST) Act apply to interstate transactions. Here’s a simplified version:
A. Supply of Specific Goods and Services
Under Section 9(3) of the CGST Act, the CBIC (Central Board of Indirect Taxes and Customs) lists certain goods and services on which reverse charge applies. This means the buyer, not the supplier, is responsible for paying GST.
B. Purchases from Unregistered Dealers
Section 9(4) of the CGST Act states that when a registered buyer purchases goods or services from an unregistered seller, the buyer must pay GST under the reverse charge mechanism. Here’s how it works:
- Intrastate transactions: The buyer pays both CGST and SGST.
- Interstate transactions: The buyer pays IGST.
For the real estate sector:
- Promoters must ensure at least 80% of their purchases come from registered suppliers. If they fall short, they must pay GST at 18% on the difference.
- If the promoter buys cement from an unregistered supplier, a 28% GST applies, regardless of the 80% rule.
Promoters must also pay GST under reverse charge for development rights (TDR) or floor space index (FSI), even if the landowner isn’t regularly involved in business activities.
C. Services Provided Through E-Commerce Platforms
- Passenger transportation is available via platforms like Ola or Uber.
- Accommodation bookings through platforms like Oyo and MakeMyTrip.
- Housekeeping services like plumbing or carpentry via platforms such as Urban Company.
Categories of Taxpayer under GST Law based on Levy
There are two cases of Reverse charge under GST law:
- Notified Categories of supply of goods or services under section 9(3) of CGST Act, 2017
- Supply of Taxable goods or services by an unregistered person to a registered person. Registered person will be liable to pay tax as specified in Section 9(4) of CGST Act, 2017
I. Notified Categories of supply of goods or services under section 9(3) of CGST Act, 2017
SL. NO | DESCRIPTION OF SERVICE |
1 | Import of Service |
2 | Goods transport agency services, who has not paid GST rate of 12% |
3 | Services by Advocate (legal services) to any business entity |
4 | Services supplied by an arbitral tribunal to a business entity |
5 | Services provided by way of sponsorship to any body corporate or partnership |
6 | Services provided by Government (Other than renting, speed post, express parcel post, life insurance, and agency services) to any business entity |
7 | Services provided by Government by way of Renting of Immovable property to any person registered under GST |
8 | Services supplied by a director of a company or a body corporate to the said company or the body corporate |
9 | Services supplied by an insurance agent to any person carrying on insurance business |
10 | Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company |
11 | Transportation of goods from outside India to India by a person located in non-taxable territory by Vessel |
Illustrations:
- Import of Service:
- The GTA has charged 12% GST along with its charges – Since WeDeliver has charged 12% GST in its invoice, there is no liability on Amazing Ltd for payment of GST on a reverse charge basis.
- GTA has not charged GST in its invoice – Since WeDeliver has not charged GST in its invoice, Amazing Ltd has to remit the GST on such GTA charges on a reverse charge basis.
- GTA has charged 5% GST along with its charges – Liability to pay tax is on the receiver of GTA service when GTA is not charging GST @ 12%. So, Amazing Ltd has to remit GST on such GTA charges on a reverse charge basis, even though WeDeliver has charged GST @ 5%.
3. Advocate – Legal services:
A company Indian Infotech has procured the services of MSS and Co., an advocate firm with respect to filling a writ petition in the High court.
The advocate service is a notified service for remitting taxes by the recipient under reverse charge mechanism. Since Indian Infotech has taken legal service from a firm of advocates, the company has to remit the taxes to the government on such service on a reverse charge basis.
II. Supply of taxable goods or services by an unregistered person to a registered person
- In respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by the recipient on a reverse charge basis.
- For all procurement of goods or services or both from unregistered dealers (a person who is not registered under GST Act), there is a levy of GST on Reverse Charge Basis.
- Important points to remember while paying tax under RCM u/s 9(4):
- The transaction should be supply
- Such supply should be taxable
- Supplier is unregistered
- You have to pay tax on the transaction value
- The rate of tax depends on the supply of goods or services
- However, an exemption has been given for paying taxes by a registered person for procurement from an unregistered person from 13th October 2017 to 30th Sept 2018.
Time of Supply for Reverse Charge - When the tax should be paid to the government?
Time of supply is useful in determining when the liability will arise for payment of taxes to the government. So in case of Reverse Charge, time of supply will be the earliest of following:
Illustration:
Our old company, Amazing Ltd has hired GTA WeDeliver & Co for transportation of materials from factory to its customer. GTA has not charged GST in its invoice. However, GTA has charged Rs 1 Lakh for it services and invoice is dated 1st January 2018. The tax rate is at 5%. Let us consider 2 cases:
- Date of payment to WeDeliver & Co is 10th February 2018
Goods Transport Agency being a service, time of supply in case of reverse charge i.e., the period to which GST has to be remitted is the date of payment to the vendor or 61st day from the date of Invoice, whichever occurs early.
Therefore, in the present case:
- Date of payment – 10th Feb 2018 or
- 61st Day from the date of Invoice – 2nd March 2018
10th Feb 2018 occurs earlier.
Since, time of supply is on 10th Feb 2018, GST liability on RCM has to be remitted by 20th March 2018.
- Date of payment to WeDeliver & Co is 25th March 2018
In this case,
- Date of payment – 25th March 2018 or
- 61st Day from the date of Invoice – 2nd March 2018
2nd March 2018 occurs first.
Since, time of supply is on 2nd March 2018, remittance RCM has to be before 20th April 2018.
Registration Rules Under RCM
According to Section 24 of the CGST Act of 2017, anyone subject to the reverse charge mechanism and liable to pay GST must compulsorily register for GST. There will be no threshold limit of Rs.20 lakh or Rs.40 lakh for them.
Who Should Pay GST Under RCM?
The buyer of the products or services covered by RCM is responsible for paying GST. However, as per GST law, the person supplying the goods must mention whether tax is payable under RCM in the tax invoice.
Below are the things to keep in mind while making GST payments under RCM :
- Under RCM, ITCs are available only for goods and services used for business or furtherance of business by the recipient.
- While discharging liability under RCM, a composition dealer should pay tax at the normal rate, not the composition rate. Additionally, they are not eligible to make any claims for input tax credits for taxes paid.
- Tax that is due or already paid under the RCM may be subject to the GST compensation cess.
Time of supply under RCM
A. Time of Supply for Goods (Reverse Charge)
In the case of reverse charge, the time of supply for goods will be the earliest of the following:
- Date of receipt of goods.
- Date immediately after 30 days from the invoice date issued by the supplier.
- If the time of supply can’t be determined by the above, it will be the date of entry in the recipient’s books of account.
Note: The date of payment rule is no longer applicable as per Notification No. 66/2017 – Central Tax, issued on November 15, 2017.
Example:
- Date of receipt of goods: May 15, 2021
- Date of invoice: June 1 2021
- Date of entry in books: May 18, 2021
Here, the time of supply will be 15th May 2021.
B. Time of Supply for Services (Reverse Charge)
For reverse charge, the time of supply for services will be the earliest of the following:
- Date of payment.
- 60 days after the date of invoice from the unregistered supplier.
- If not determinable by the above, it will be the entry date in the recipient’s books.
Example:
- Date of payment: July 15 2021
- 60 days after the invoice date (invoice date: May 15, 2021): July 14, 2021
- Date of entry in books: July 18 2021
- Date of issuing of the invoice by the recipient: July 24, 2024
In this case, the time of supply will be 14th July 2021
Input Tax Credit (ITC) Under RCM
The supplier cannot claim an ITC for the GST paid under the RCM.
When goods or services are used or will be used for business purposes, the recipient is eligible for ITC on the GST amount paid under RCM.
GST on output goods or services should be paid in cash and cannot be claimed using the ITC.
What is Self Invoicing?
Self-invoicing is required when purchasing from an unregistered source, and such purchase of goods or services comes under reverse charge. As a result, you are responsible for paying taxes on your supplier’s behalf because your supplier cannot issue a GST-compliant invoice to you. Self-invoicing is required in such situations.
Difference between Forward charge Mechanism and Reverse charge Mechanism
In the Forward Charge Mechanism (FCM), the supplier is responsible for paying GST. They collect the tax from the buyer, adjust it with any input tax credits they have, and then remit the balance to the government.
On the other hand, in the Reverse Charge Mechanism (RCM), the responsibility shifts to the buyer. When purchasing from unregistered suppliers or in specific cases outlined by the government, the buyer must pay the GST directly to the authorities instead of the supplier.
What taxes should be paid? IGST or CGST and SGST?
Payment of Tax on reverse charge follows this principle:
When Location of Supplier & Place of Supply
- Is in the same State then Intra-State Supply – CGST + SGST
- Is in different State then Inter-State Supply – IGST
This brings us to the end of this post. If you have any questions, drop them in the comment section below.
This blog was written in coordination with:
Indirect Tax Team
Shekar & Yathish, Chartered Accountants, Bangalore.
You can post inquiries at – info@ca-sny.com
FAQs
1. What is the reverse charge mechanism of GST? With an example?
Ans: The Reverse Charge Mechanism (RCM) in GST is a mechanism in which the recipient of goods or services pays the tax rather than the supplier. For example, if an unregistered dealer sells products to a registered recipient, the recipient becomes liable for taxes. The recipient then pays the tax and can claim an input tax credit.
2. Which services are subject to RCM in GST?
Ans: The Central Board of Excise and Customs (CBEC) has issued a list of services for which the reverse charge mechanism is applicable under GST. These include, among other things, goods transit agency services, legal services supplied by advocates, and insurance agent services.
3. Who is exempt from paying the RCM?
Ans: Exempt supplies are not subject to RCM under GST rules. A composition seller who pays tax at a fixed rate on turnover is likewise exempt from RCM and cannot obtain GST credit.
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