Reverse Charge Mechanism – RCM concepts and understanding
A thorough explaination on Reverse Charge Mechanism
- What is Reverse Charge Mechanism?
- Why use Reverse Charge Mechanism?
- 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?
- Input Tax Credit Under RCM
- What is Self Invoicing?
- What taxes should we pay? IGST or CGST and SGST?
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.
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
DESCRIPTION OF SERVICE
Import of Service
Goods transport agency services, who has not paid GST rate of 12%
Services by Advocate (legal services) to any business entity
Services supplied by an arbitral tribunal to a business entity
Services provided by way of sponsorship to any body corporate or partnership
Services provided by Government (Other than renting, speed post, express parcel post, life insurance, and agency services) to any business entity
Services provided by Government by way of Renting of Immovable property to any person registered under GST
Services supplied by a director of a company or a body corporate to the said company or the body corporate
Services supplied by an insurance agent to any person carrying on insurance business
Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company
Transportation of goods from outside India to India by a person located in non-taxable territory by Vessel
- 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:
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.
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.
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.
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