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All about Reverse Charge Mechanism

Generally, the supplier of goods or services or both charges and collects the tax from the recipient and deposits the tax with the national treasury. However, under the Reverse Charge Mechanism (“RCM”), the liability to deposit tax shifts from the supplier to the recipient. The chargeability gets reversed and all the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “the Act” or “the CGST Act”) would be applicable to such a recipient as if he is the person responsible for paying the tax in relation to the supply of such goods or services or both.

Meaning of Reverse Charge

As per Section 2(98) of the Act, “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, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act

RCM

Legal Provisions

Specific goods or services notified by Government under RCM

Section 9(3) of the CGST Act and Section 5(3) of the IGST Act – The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Supply of Goods notified (Notification No- 04/2017-Central Tax (Rate) & Notification No-04/2017-Integrated Tax (Rate)dated 28-06-2017 ) for RCM under Section 9(3) of the CGST Act & Section 5(3) of the IGST Act

 

S. No. Tariff item, Sub-heading, Heading or Chapter Description of Goods Supplier of Goods Recipient of Goods
1. 0801 Cashew nuts, not shelled or peeled Agriculturist Any registered person
2. 1404 90 10 Bidi wrapper leaves (tendu) Agriculturist Any registered Person
3. 2401 Tobacco leaves Agriculturist Any registered person
4. 5004 to 5006 Silk yarn Any person who manufactures silk yarn from raw silk or silkworm cocoons for supply of silk yarn Any registered person
4A.  [Notification No- 43/2017 Central Tax (Rate) ] 5201 Raw cotton Agriculturist Any Registered Person]
5. Supply of lottery State Government, Union Territory or any local authority Lottery distributor or selling agent.

Explanation. – For the

purposes of this entry, lottery distributor or selling agent has the same meaning as assigned to it in clause (c) of Rule 2 of the Lotteries (Regulation) Rules, 2010, made under the provisions of sub-section (1) of section 11 of the Lotteries (Regulations) Act, 1998 (17 of 1998).

 

6. [Notification No -36/2017 Central Tax (Rate) ] Any Chapter

 

Used vehicles; seized and confiscated goods, old and used goods, waste and scrap

 

Central Government, State Government, Union Territory or any local authority

 

Any registered person

 

7. [Notification No -11/2018 Central Tax (Rate) ] Any Chapter

 

Priority Sector

Lending Certificate

 

Any registered person

 

Any registered person

 

Supply of Services notified6 for RCM under Section 9(3) of the CGST Act

 

S.No. Description of Services Supplier of Services Recipient of Services
1. Supply of Services by a Goods Transport Agency (GTA) 7[who has not paid central tax @ 6%] in respect of transportation of goods by road to –

(a) any factory registered under or governed by the Factories Act, 1948; or

(b) any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India; or

(c) any co-operative society established by or under any law; or

(d) any person registered under CGST/IGST/SGST/ or UTGST Act; or

(e) anybody corporate established, by or under any law; or

(f) any partnership firm whether registered or not under any law including association of persons; or

(g) any casual taxable person; located in the taxable territory.

[Provided that nothing contained in this entry shall apply to services provided by a goods transport agency, by way of transport of goods in a goods carriage by road, to, –

(a) a Department or Establishment of the Central Government or State Government or Union territory; or

(b) local authority; or

(c) Governmental agencies,

which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under Section 51 and not for making a taxable supply of goods or services.]

 

Goods Transport Agency (GTA) (a) Any factory registered under or governed by the Factories Act, 1948; or

(b) Any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India; or

(c) Any co-operative society established by or under any law;

(d) Any person registered under CGST/IGST/SGST/UTGST Act or

(e) Any body corporate established, by or under any law; or

(f) Any partnership firm whether registered or not under any law including association of persons; or

(g) Any casual taxable person located in the taxable territory.

2 Services provided by an individual Advocate including a Senior Advocate or firm of advocates by way of legal services, directly or indirectly.

Explanation. – “legal service” means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.

 

An individual Advocate including a Senior Advocate or firm of Advocates.

 

Any business entity located in the taxable territory.

 

3. Services supplied by an Arbitral Tribunal to a business entity

 

An Arbitral Tribunal

 

Any business entity located in the taxable territory.

 

4 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.

 

5 Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding the following:

(A) renting of immovable property, and

(B) services specified below: –

(i) services by the Department of Posts by way of speed post, life insurance, express parcel post and agency services provided to a person other than Central Government, State Government or Union territory or local authority;

(ii) services in relation to 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.

 

5A 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 Central Goods and Services Tax Act, 2017

 

Central Government, State Government, Union territory or Local Authority.

 

Any person registered under the Central Goods and Services Tax Act, 2017

 

5B 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

 

Promoter

 

5C Long term lease of land

(30 years or more) by any person against consideration in the form of an upfront amount (called as premium, salami, cost, price, development charges, or by any other name) and/or periodic rent for construction of a project by a promoter.

 

 

Any person

 

Promoter

 

6 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

 

A company or a body corporate located in the taxable territory

 

7 Services supplied by an insurance agent to the person carrying on insurance business

 

An Insurance agent

 

Any person carrying on insurance business, located in the taxable territory.

 

8 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 financial institution or a non-banking financial company, located in the taxable territory.

 

9 Supply of services by a music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of Section 13 of the Copyright Act, 1957 relating to original dramatic, musical or artistic works to a music company, producer or the like.

 

Music composer, photographer, artist, or the like.

 

The music company, producer, or the like, located in the taxable territory.

 

9A Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher.

 

Author

 

Publisher located in the taxable territory: –

Provided that nothing contained in this entry shall apply where: –

(i) the author has taken registration under the Central Goods and Services Tax Act,2017 (12 of 2017), and filed a declaration, in the form at Annexure I, within the time limit prescribed therein, with the jurisdictional CGST or SGST commissioner, as the case may be, that he exercises the option to pay central tax on the service specified in column (2), under the forward charge in accordance with Section 9 (1) of the Central Goods and Service Tax Act, 2017 under the forward charge, and to comply with all the provisions of Central Goods and Service Tax Act, 2017 (12 of 2017) as they apply to a person liable for paying the tax in relation to the supply of any goods or services or both and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option;

(ii) the author makes a declaration, as prescribed in Annexure II on the invoice issued by him in FORM GST Inv-I to the publisher.

10 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

 

11 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) other than a body corporate, partnership, or limited liability partnership firm.

 

A banking company or a non-banking financial company, located in the taxable territory.

 

12 Services provided by the business facilitators (BF) to a banking company. Business facilitator (BF)

 

A banking company, located in the taxable territory.

 

13 Services provided by an agent of business correspondent (BC) to a business correspondent (BC).

 

 

An agent of business correspondent (BC)

 

A business correspondent, located in the

taxable territory

 

14 Security services (services provided by way of supply of security personnel) provided to a registered person:

Provided that nothing contained in the entry shall apply to, –

(i)(a) a Department or Establishment of the Central Government or State Government or Union territory; or

(b) local authority; or

(c) Government agencies;

which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under Section 51 of the said Act and not for making a taxable supply of goods or services; or

(ii) a registered person paying tax under Section 10 of the said Act

 

Any person is other than a body corporate.

 

A registered person, located in the “taxable territory.”

 

15 Services provided by way 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 provided to a body corporate

 

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 percent. to the service recipient

 

Any body corporate located in the taxable territory.

 

16 Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”), as amended

 

Lender i.e. a person who deposits the securities registered in his name or in the name of any other person duly authorized on his behalf with an approved intermediary for the purpose of lending under the scheme of SEBI.

 

Borrower i.e. a person who borrows the securities under the Scheme through an approved intermediary of SEBI).]

 

Supply of goods or services by an unregistered supplier to the registered recipient under RCM

Section 9(4) of the CGST Act & Section 5(4) of the IGST Act – The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of the supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.”

Erstwhile Section 9(4) of the CGST Act & Section 5(4) of the IGST Act – The central tax 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 such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

“An exemption was provided for payment of tax under RCM up to an aggregate value of such supplies of goods or services or both received by a registered person from any or all the unregistered suppliers, where such value did not exceed five thousand rupees in a day.

Thereafter the exemption was provided in respect of any payment of tax liability by a registered person on supplies made by an unregistered person.

The above exemption was rescinded, when the provision was substituted by the Central Amendment Act, 2018”

Specified Categories of Goods and/or Services and specified class of registered persons as notified27 by Government under section 9(4) on which tax shall be paid by the recipient of such goods or services or both, in case of supply by an unregistered supplier

Sl. No Description of Goods and Services Recipient of Goods and Services
1. Supply of such goods and services or both [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges, etc.) or FSI (including additional FSI)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of the 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, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June 2017, as amended.

 

Promoter
2 Cement falling in Chapter Heading 2523 in the First Schedule to the Customs Tariff Act,1975 (51 of 1975)

 

Promoter

 

3 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, published in Gazette of India vide G.S.R. No.690, dated 28th June 2017, as amended

 

Promoter

 

 Registration

As per Section 24(iii) of the CGST Act, persons who are required to pay tax under reverse charge shall be required to be registered under GST. There is no threshold limit for registration for a recipient of RCM supplies.

As per Section 25(1) of the CGST Act, every person who is liable to be registered under section 22 or section 24 shall apply for registration in every such State or Union territory in which he is so liable within thirty days from the date on which he becomes liable to registration, in such manner and subject to such conditions as may be prescribed.

Time of Supply under Reverse Charge Mechanism

RCM

In the case of Goods

As per Section 12(3) of the CGST Act, in case of supplies in respect of which tax is paid or liable to be paid on a reverse charge basis, the time of supply shall be the earliest of the following dates, namely: —

(a) the date of the receipt of goods; or

(b) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(c) the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of the supply.

In the case of Services

As per Section 13(3) of the CGST Act, in case of supplies in respect of which tax is paid or liable to be paid on a reverse charge basis, the time of supply shall be the earlier of the following dates, namely: –

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of the supply

Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier

Invoicing

For a supplier of notified goods or services

As per Section 31 of the CGST Act read with Rule 46(p) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”), a registered person making the supply of goods or services notified under Section 9(3) of the CGST Act / Section 5(3) of the IGST Act shall issue tax invoice containing the specified particulars including ‘whether the tax is payable on reverse charge basis’ by the recipient.

Since an unregistered person does not come within the ambit of GST Law, he is not required to issue any document in respect of the supply of goods or services notified under Section 9(3) or 9(4) of the CGST Act/ Section 5(3) or 5(4) of the IGST Act.

For the recipient of goods or services under RCM

As per section 31(3)(f) of the CGST Act, a registered person who is liable to pay tax under section 9(3) or section 9(4) shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

As per Second Proviso to Rule 46 of the CGST Rules, where an invoice is required to be issued under section 31(3)(f), a registered person may issue a consolidated invoice at the end of a month for supplies covered under sub-section (4) of section 9, the aggregate value of such supplies exceeds rupees five thousand in a day from any or all the suppliers:

As per section 31(3) (g) of the CGST Act, a registered person who is liable to pay tax under section 9(3) or section 9(4) shall issue a payment voucher at the time of making payment to the supplier.

Accounts and Records

As per Rule 56(1) of the CGST Rules, every registered person shall keep and maintain, in addition to the particulars mentioned in section 35(1), a true and correct account of the goods or services imported or exported or of supplies attracting payment of tax on reverse charge along with the relevant documents, including invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers, and refund vouchers.

Every registered person, other than a person paying tax under section 10, shall keep and maintain an account, containing the details of tax payable (including tax payable in accordance with the provisions of section 9(3) and section 9(4), tax collected and paid input tax, input tax credit claimed, together with a register of tax invoice, credit notes, debit notes, delivery challan issued or received during any tax period.

Payment of Tax under RCM

As per section 49(4) of the CGST Act, the amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.

Any liability of tax payable under reverse charge shall be discharged by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit reflecting in electronic credit ledger. However, after discharging reverse charge liability, the credit of the same can be claimed by the recipient in the same month itself, if he is otherwise eligible.

Input Tax Credit under RCM

As per Rule 36(1) (b), the input tax credit shall be availed by a registered person on an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31, subject to payment of tax. In case the supplier is unregistered then the recipient is liable to issue a tax invoice under reverse charge towards such receipts and claims ITC against such invoice. However, if the supplier is registered, then he shall issue a tax invoice specifying the supply taxable under reverse charge.

As per Section 17 of the CGST Act, ITC cannot be claimed to the extent attributable towards exempt supply which shall include supplies made on a reverse charge basis. The supplier shall not be eligible to claim an input tax credit of GST paid on goods or services used to make supplies on which the recipient is liable to pay tax.

Important Points

  • All recipients required to pay tax on goods or services or both under RCM are mandatorily required to obtain GST Registration and the threshold of ` 40 Lakhs/ 20 Lakhs is not applicable to them. However, registration need not be obtained by the recipient if such recipient supplies only services covered under Notification No. 12/2017-Central Tax (Rate), dated 28-6-2017.
  • Where any registered person is supplying specific goods or services or both notified by Government under RCM then invoice wise details of such supplies shall be reflected in Table 4B of FORM GSTR-1.
  • A supplier shall not be eligible to claim an input tax credit of GST paid on goods or services used to make supplies on which the recipient is liable to pay tax.
  • GST payable under RCM shall be paid by the recipient by the due date for furnishing FORM GSTR-3B.
  • The payment of GST under reverse charge shall be made by the recipient by the debit of electronic cash ledger only.
  • Tax paid on RCM basis shall be available for the input tax credit only if such goods and/or services are used, or will be used, in the course or furtherance of business.
  • The recipient shall issue a self-invoice for the goods or services received from an unregistered supplier.
  • The recipient of supplies under RCM from an unregistered supplier can avail input tax credit on the basis of self-invoice made by him.
  • The recipient shall issue a payment voucher at the time of making payment for the goods or services received from a supplier of goods or services liable to tax under RCM.
  • The condition of payment of the value of service within 180 days of the date of the supplier invoice is not applicable to supplies liable to tax under RCM. Hence, there would be no interest liability on account of the same.29

 

TaxClue Team

Taxclue is an online news portal for reporting all news, articles, judgments, Circulars, orders, and notifications relating to various corporate and tax laws in India. We use the tagline ‘Simplifying Laws’. Our mission is to Simplify the Laws and make people aware of their rights and duties in relation to tax matters in order to equip them to participate in nation-building. TaxClue is a team of young professionals. We started in December 2016 with the mission of knowledge sharing. TaxClue would like to hear your valuable suggestion. Please write to our editorial team at info@taxclue.in

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