Reverse Charge Mechanism under GST: A Synopsis

Generally, Onus to pay indirect-tax is on Supplier of Goods & Services. However, there are some cases where this liability to pay indirect-tax may be cast on the recipient of goods or services. This system is called as Reverse Charge Mechanism. Reverse Charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply. In the case of Reverse Charge, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed.

Applicability of Reverse Charge Mechanism in India:

The basic logic behind introducing “Reverse Charge Mechanism” is to collect indirect tax easily and conveniently either fully or partially from the recipient and to increase tax revenues more administratively where the supplier of a particular goods or services are unorganized or they are situated in non-taxable territories or they are illiterate thereby not well versed with the indirect tax laws or they are very large in numbers.

Hence, as per provisions of the statute, government introduced method of tax shift to increase revenue and curb evasion of tax. If the service receiver has to pay the tax directly to the government instead of paying through the service provider it is called reverse charge mechanism or method of tax shift (because responsibility of paying the tax is shifted from provider to receiver). Broadly there are four factors providing the basis for introducing payment of tax under reverse charge:-

1. Assessee in the large number with small payment of tax from each assessee.
2. Unorganized sectors.
3. Problems in Collection of Tax.

The concept of reverse charge mechanism was already present in Service Tax on Services. Taxation system of reverse charge for the service sector under Service Tax regime was came into effect in 1997 for the first time in India while partial reverse charge mechanism for the service sector under Service Tax regime was came into effect in July 2012 for the first time in India. Now, in GST Regime, reverse charge is applicable on Goods and Services both. Earlier, goods were not covered under this mechanism except as purchase tax on few goods in some states.

Legal Background of introducing Reverse Charge Mechanism in India:

In India the concept of reverse charge was introduced in service tax first time on services provided by goods transport agency and service provided by Clearing and forwarding agents in 1997. As per the notification, the recipient of service was made liable to pay the tax. At the relevant time, Section 68(2) of chapter V of the Finance Act, 1994 did not provide for recovery of tax from the recipient of service. Therefore, the recovery of tax from recipient of service was challenged.

Supreme Court in the case of “Laghu Udyog Bharati Vs Union of India (112) E.L.T. 365 (SC) stating that the provision of reverse charge was ultra vires the Act itself. After this Supreme Court Judgment, section 68 was amended by incorporating sub-section (2) which empowers the government to specify the service and the person liable to pay tax by notification. After the issuance of notification, the tax is payable by the person specified in the notification, which can be either the recipient of service or both provider of service as well as recipient of service. The Government has issued notification from time to time for recovery of tax from the recipient of service.

Constitutional validity of this reverse charge tax was upheld in the case of Orient Crafts Ltd Vs UOI (2006) (4) STR 81 (Del).

Reverse Charge Mechanism under GST

Since the inception of GST, reverse charge mechanism has wider scope now as compared to old regime of indirect taxation. At the time of GST implementation, Reverse charge was made applicable to Services as well as goods. There were three type of reverse charge scenarios provided in GST regime at the time of introduction. First is, dependent on the nature of supply and/or nature of supplier. This scenario is covered by section 9 (3) of the CGST/ SGST (UTGST) Act and section 5 (3) of the IGST Act. Second scenario is, covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act where taxable supplies by any unregistered person to a registered person was being covered. Now, There is a change in second scenario, where only notified goods and services shall be covered if, supplied by any unregistered person to a registered person. Third scenario is only applicable to E-commerce operators. This scenario is being covered by Section 9(5) of the CGST/SGST (UTGST) Act and section 5 (5) of the IGST Act.

If the supply involves taxable goods or services then reverse charge shall be applicable while If the supply involves exempted goods or services then reverse charge shall not be applicable. Unlike Service Tax, there is no concept of partial reverse charge under GST regime. The recipient has to pay 100% tax on the supply if covered under RCM.

RCM on the basis of nature of supply or Supplier

As discussed, reverse charge shall be applicable dependent on the nature of supply and/or nature of supplier in the first scenario. As per the provisions of section 9(3) of CGST / SGST (UTGST) Act, 2017 / section 5(3) of IGST Act, 2017, 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. In exercise of the powers conferred by these provisions, CBEC has issued a list of goods and a list of services on which reverse charge is applicable.

Supplies of goods under reverse charge mechanism: In accordance with the provision of Section 9(3) and Section 5(3), government has specified list of 5 goods on which RCM is applicable vide Notification No.4/2017-Central Tax (Rate) and Notification No.4/2017-Integrated Tax (Rate) initially. Since that time, this list is being getting amended by adding items. Now, total 8 items are specified on which RCM is applicable.

S. No.	Description of supply of goods	Supplier of goods	Recipient of goods
1	Cashew nuts, not shelled or peeled	Agriculturist	Any registered person
2	Bidi wrapper leaves (Tendu)	Agriculturist	Any registered person
3	Tobacco leaves	Agriculturist	Any registered person
4	Silk yarn	Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn	Any registered person
4A	Raw cotton (added w.e.f. 15/11/2017)	Agriculturist	Any registered person
5	Supply of lottery	State Government, Union Territory or any local authority	Lottery distributor or selling agent
6	Used vehicles, seized and confiscated goods, old and used goods, waste and scrap (added w.e.f. 13/10/2017 )	Central Government, State Government, Union territory or a local authority	Any registered person
7	Priority Sector Lending Certificate (added w.e.f. 28/05/2018 )	Registered person	Recipient who is registered person

Supplies of services under reverse charge mechanism: In accordance with the provision of Section 9(3) and Section 5(3), government has specified list of supply of goods on which RCM is applicable and enlarging this list judiciously time to time. Initially, this list was similar to reverse charge mechanism in previous service tax law. But, now more services have been added. Initially, 9 Services were specified in central tax while total 15 services have been notified yet. However, in IGST 2 more services were specified initially. Thus, total 17 services are covered under RCM.

List of specified services under RCM

Sl. No.	Description of Supply of Service	Provider of Service	Recipient of Service
	Notified List of Services under CGST and IGST
1	Services provided or agreed to be provided by a goods transport agency (GTA) in respect of transportation of goods by road.	Goods Transport Agency (GTA)	(a) any factory registered under or governed by the Factories Act, 1948; (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; (c) any co-operative society established by or under any law; (d) any person registered under CGST/SGST/UTGST Act; (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. (g) Casual taxable person. *Not applicable to (w.e.f. 01/01/2019)- (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 GST Act, 2017 only for the purpose of deducting tax under section 51 and not for making a taxable supply of goods or services.
2	Legal Services provided or agreed to be provided by an individual advocate or firm of advocates, directly or indirectly	An individual advocate or firm of advocates	Any business entity located in the taxable territory
3	Services provided or agreed to be provided by an arbitral tribunal	An arbitral tribunal	Any business entity located in the taxable territory
4	Sponsorship services	Any person	Anybody corporate or partnership firm.
5	Services provided or agreed to be provided by Government or local authority excluding,- (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government; (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.	Government or local authority	Any business entity.
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 (12 of 2017). *(Added w.e.f. 25/01/2018)	Central Government, State Government, Union territory or local authority	Any person registered under the Central Goods and Services Tax Act, 2017
6	Services provided or agreed to be provided 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.
7	Services provided or agreed to be provided by an insurance agent to any person carrying on insurance business	An insurance agent	Any person carrying on insurance business.
8	Services provided or agreed to be provided 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.
9	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 covered under section 13(1)(a) of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like.	Author or music composer, photographer, artist, or the like	Publisher, music company, producer or the like, located in the taxable territory
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). **(added w.e.f. 27/07/2018)	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 business facilitator (BF) to a banking company***(added w.e.f.  01/01/2019)	Business facilitator (BF)	A banking company, located in the taxable territory
13	Services provided by an agent of business correspondent (BC) to business correspondent (BC).****(added w.e.f. 01/01/2019)	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 this 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) 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 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. *****(added w.e.f.  01/01/2019)	Any person other than a body corporate	A registered person, located in the taxable territory.”;
	Additional notified services under IGST
1	Taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non-assessee online recipient (OIDAR).	Any person who is located in a non- taxable territory	Any person located in the taxable territory other than non-assessee online recipient (Business Recipient)
2	Services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.	A person located in non-taxable territory to a person located in non-taxable territory	Importer as defined under clause (26) of section 2 of the Customs Act, 1962.

RCM on supplies by any unregistered person to a registered person

In second scenario, section 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017 deals with the RCM on supplies by any unregistered person to a registered person. It provides that the 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 the 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. Accordingly, wherever a registered person procures supplies from an unregistered supplier, he need to pay GST on reverse charge basis.

However, supplies where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the unregistered suppliers is less than five thousand rupees in a day were exempted. ( Notification 8/2017-Central Tax (Rate) dated 28.06.2017). However, vide notification no.38/2017-Central Tax (Rate) dated 13.10.2017, (corresponding IGST notification no.32/2017-Integrated Tax (Rate) dated 13.10.2017) all categories of registered persons were exempted from the provisions of reverse charge under 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017, till 31.03.2018 which was further extended till 30.09.2019. However, this has been rescinded vide notification no. 01/2019 (Central Tax) dated 29^th Jan 2019 due to amendment made in section 9(4) of CGST/ SGST (UTGST) Act and Sec 5(4) of IGST Act, 2017 w.e.f. 1^st Feb 2019.

Now, there is an amendment in Section 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017 w.e.f. 1^st Feb 2019 which provides that RCM will be applicable only on specified goods or services and specified persons. The specific list of persons or goods/services is yet to be notified accordingly. Thus it can be said that RCM u/s 9(4) shall be applicable from the date when specific list for RCM shall be notified.

There are lot of misperceptions regarding applicability of section 9(4) RCM after the amendment made by the Central/Integrated Goods and service Tax amendment act, 2018. Let’s compare the old as well as new provision of section 9(4). So that we could understand current position of this provision effortlessly- Provision before amendment 9(4) 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. Provision after amendment- 9(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of taxable goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as 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. Analysis of the Amendment 1. Section 9(4) which deals with payment of tax on reverse charge basis by a registered person upon receipt of supply from unregistered persons is now under suspension. 2. It has been proposed that the government will notify certain class of registered person who shall be liable to pay tax on reverse charge basis in case of receipt of goods from an unregistered person. 3. This has curtailed the applicability of this section on all registered taxpayers. Only a notified class of registered taxpayers are purported to be covered by this substituted section now. This will bring a huge sigh of relief to those registered taxpayers who will now be outside the scope of this section as it involved a substantial burden of compliance and cash flow on their part.

RCM on supplies made to Electronic Commerce Operator

In this third scenario, The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State/ inter-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of the Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services. In respect of specified services, tax shall be paid by the E-Commerce operator on behalf of the service suppliers. Three categories of services have been notified by the government to give effect the provisions on which tax shall be payable by the electronic commerce operator under RCM-

S. No.	Description of supply of Services	Supplier of service	Person Liable to Pay GST
1	Transportation of passengers by a radio-taxi, motor cab, maxi cab and motor cycle	Any person	E-commerce operator
2	Providing accommodation in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes	Any person except who is liable for registration under sub-section (1) of section 22 of the said CGST Act	E-commerce operator
3	Services by way of house-keeping, such as plumbing, carpentering etc (added w.e.f. 22/08/2017)	Any person except who is liable for registration under sub-section (1) of section 22 of the said CGST Act	E-commerce operator

This is to be noted that above mentioned suppliers of services covered u/s 9(5) are exempted from compulsory registration and can take benefit of aggregate threshold limit.

• Compliances in respect of supplies under RCM: When a person becomes liable to pay tax on the reverse charge, certain provisions should be considered such as threshold exemption limit, time of supply, availing of input credit etc. There are some points which are needed to be considered by a person liable to pay tax under RCM-
• Registration: The person who is required to pay tax under reverse charge has to compulsorily register under GST irrespective of the aggregate limit. Threshold limit of Rs. 20/40 lakhs (Rs. 10/20 lakhs for special category states except J & K) is not applicable to them.
• Input Tax Credit: A supplier cannot take ITC of GST paid on goods or services used to make supplies on which recipient is liable to pay tax. Input tax credit shall be claimed by recipient who has paid GST under RCM subject to the provisions of the act. For this, the goods and services most be used for business or furtherance of business. If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim any credit of tax paid. Along with the dealer is liable to pay tax at normal rates applicable to such supply and not the rate applicable for composition scheme.
• Time of Supply: The Time of supply is the point when the supply is liable to GST. One of the factor relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, recipient is liable to pay GST. Thus time of supply for supplies under reverse charge is different from the supplies which are under forward charge.

In case of supply of goods, time of supply shall be earliest of –

• Date of receipt of goods; or
• Date of payment as per books of account or date of debit in bank account, whichever is earlier; or
• The date immediately following thirty days from the date of issue of invoice or similar other document.

In case of supply of services, time of supply shall be earliest of –

• Date of payment as per books of account or date of debit in bank account, whichever is earlier; or
• The date immediately following sixty days from the date of issue of invoice or similar other document.

In case where it is not possible to determine time of supply using above mentioned methods, time of supply would be date of entry in the books of account of the recipient.

• Tax Invoice: As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge. The recipient paying tax under reverse charge is required to issue self-invoice.
• Maintenance of accounts by registered persons: Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge. Here, concept of self -invoicing and self-documentation shall be applicable.
• Payment: Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible. Thus, Input Tax Credit cannot be used to pay output tax, which means that mode of payment is only through cash/bank under reverse charge.
• Information to be furnished: Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1. Also, details of Inward supplies (liable to reverse charge) e. taxable value and tax thereon, are required to be furnished in Form GSTR-3B in table no. 3.1.(d) and table no. 4.
• Advance Payment: Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.
• ISD: An ISD cannot make purchases liable to Reverse Charge. If the ISD needs to procure such supplies and take the Reverse Charge paid as credit, the ISD should have to get register as a Normal Taxpayer.

Conclusion:

The reverse charge mechanism is a specific provision that intends to bring in the non-formal sections of the economy also within the tax net. All taxpayers are required to pay tax under reverse charge subject to the provisions of GST. Initially, small taxpayers faced many glitches due to non-awareness of RCM on purchase from unregistered persons. Since all provisions of the GST law apply for the registered taxpayers in case of RCM too, this was considered to be a rather onerous clause of the GST Act. Consequently, government came with relaxation in provisions related to RCM.

About the author: Author-Shilvi Khandelwal is a chartered accountant by profession. She is DISA, FCA, LLB and B.Com. She is engaged in GST implementation, writing & training in GST and founder of “The Tax Savvy”- a knowledge hub. Author can be reach at thetaxsavvy@gmail.com.