Reverse Charge Mechanism (RCM) under GST- A Complete Analysis

As we all must be aware of this fact that GST is normally charged by Supplier of Goods/Services. But there are some cases where the Recipient will be liable to pay GST instead of Supplier. This structure of charging GST is called Reverse Charge Mechanism (RCM). Now Let’s Understand it step by step:

A. When is RCM under GST applicable?

There are following cases when charging GST on Reverse Charge Mechanism basis are mandatory:

i. RCM on Supply from an Unregistered dealer to a Registered dealer

If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier. This is a case where the concept of Self Invoicing came into being. The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.

[Announcement dated 6th Aug 2018: RCM (in case of supplies made by unregistered persons to registered persons) deferred to 30th Sept 2019. Previously, this provision was applicable from 1st Oct 2018.]

ii. RCM on Services through an e-commerce operator

If an e-commerce operator supplies services then the reverse charge will be applicable to the e-commerce operator. He will be liable to pay GST.

For example, Ola provides services of transportation of Passenger through Radio Taxis. Then Ola has to pay GST on behalf of actual service provider i.e. Driver.

If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator shall appoint a representative who will be held liable to pay GST.

iii. Other Notified Goods and Services By CBIC:

There are various Goods and Services which are notified by CBIC which will be covered under RCM. Those are provided as follows:

a.  Notified Goods for RCM: 

-Cashew nuts, not shelled or peeled,

-Bidi wrapper leaves (tendu),

-Tobacco leaves,

-Silk yarn,

-Raw Cotton,

-Supply of lottery,

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

-Priority Sector Lending Certificate

b. Notified Services for RCM:

–Services by Goods transportation Agency (GTA)

-Services Provided by Advocates to Business Entity

-Services Provided by Arbitral Tribunal to Business entity

–Sponsorship service to any Body corporate/Firm

-Services provided By Central Govt./State Govt./UT/Local Authority to Business Entity

-Services provided by Director of a Company

-Services Provided by Insurance Agents

-Services Provided by Recovery Agents to a Banking co./NBFC

-Supply of services by an author, music composer, photographer, artist or the like to s to a publisher, music company, producer or the like.

-Supply of services by the members of Overseeing Committee to RBI.

B. The Time of Supply (TOS) in case of RCM:

TOS is considered as the point in time when the Goods/Services would be considered as Supplied and consequently liability for GST would arise. The TOS in case of RCM would be as follows:

In case of GOODS	In case of Services
The TOS would be Earliest of the following: the   date of Receipt of goods the   date of Payment* the date immediately after 30 days from the date of issue of an invoice by the supplier {not from Self Invoicing} If it is not possible to determine the TOS by the above, the time of supply shall be the date of entry in the books of account of the recipient. *This point is no more applicable based this Notification No. 66/2017 – Central Tax issued on 15.11.2017	The TOS shall be the earliest of the following dates: The date of Payment The date immediately after 60 days from the date of issue of an invoice by the supplier {not from Self Invoicing} If it is not possible to determine the TOS by the above, the time of supply shall be the date of entry in the books of account of the recipient.

C. Some Important Points:

a. Is Input Tax Credit allowed under RCM? If yes, then on what document?

Tax paid on RCM basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The recipient (i.e., who pays reverse tax) can avail input tax credit on basis of Self Invoice made by Recipient.

b. What if an Input Service Distributor receives supplies liable to Reverse Charge?

An ISD cannot make purchases liable to Reverse Charge. If the ISD wants to procure such supplies and take the Reverse Charge paid as credit, the ISD should register as a Normal Taxpayer.

c. What if the receiver of goods and/or services who is required to pay tax under RCM himself an Unregistered Dealer?

All taxpayers required to pay tax under reverse charge have to register for GST and the threshold of Rs 20 Lakhs/10Lakhs is not applicable to them.

In case of any ideas, Suggestions or queries, please do comment below. Thanks. Be Helpful to One Another!

Click here to Read More about RCM under GST