All About Reverse Charge Mechanism On Services Under GST Regime

Introduction To Reverse Charge Mechanism (RCM)

Introduction given in my previous article provides detailed history of reverse charge mechanism and can be read through link http://taxguru.in/service-tax/all-about-service-tax-reverse-charge-mechanism.html. Concept of Reverse charge mechanism on Services under GST Regime is same as it was under pre-GST regime. For better understanding first I am going to give brief explanation of Normal Charge Mechanism. Generally GST is payable by the provider of Service. For eg:- When service is provided by a Chartered Accountant to its client then in this case service provider i.e Chartered Accountant is liable to pay GST and comply with other general provisions of return filing etc. However in Reverse Charge Mechanism Service Received is made liable to pay GST and comply with other provisions of IGST Act, CGST Act and SGST Act (Hereinafter these 3 acts will be referred as “GST Act”).

Why Reverse Charge Mechanism On Services under GST

To collect GST under RCM, power was drawn from Section 9(3)/5(3), 9(4)/5(4) of the CGST / IGST Act, 2017. Motive of this charge is mainly more tax compliance and increased tax revenues. Government was unable to collect service tax from various unorganised sectors but through Reverse charge mechanism compliance has gone up thus on certain services because of this reason RCM has been brought under GST regime as well.

Major Carve Outs From RCM Under Pre-GST Regime

• Earlier there was used to be a concept of Partial RCM which holds no existence in GST Regime.
• A new concept has been introduced where RCM applies not on the basis of nature of service but on the basis of Service Provider (S.P.) and Service Receiver (S.R.). Section 9(4)/5(4) provides for applicability of RCM where a registered person received goods or services from unregistered person.
• In GST Regime concept of Self-Invoicing exists, in case of services prescribed u/s 9(3)/5(3) Self-Invoicing is must where Service Provider is unregistered while in case of RCM liability as per 9(4)/5(4) in all cases Self Invoicing is the need of the law. Thus to conclude, Self-Invoicing is required in all those cases where RCM applies and S.P. is unregistered irrespective of whether RCM is applies as per 9(3) / 5(3) or 9(4) /5(4).
• In GST Regime, RCM is also made applicable on supply of certain goods. Although in this article the analysis is only restricted to supply of service.

Details Of Services Covered Under Reverse Charge Mechanism in GST Regime

Services covered by Section 9(3)/5(3) are as follows:-

In GST regime, majority of services have been copied from earlier regime as I opined in the closing remarks of my previous article. Below is the specified services under GST regime:-

• Services by a goods transport agency in respect of transportation of goods by road;
• Services by individual advocate including a senior advocate or a firm of advocates by way of legal services;
• Services by an arbitral tribunal;
• Services by way of sponsorship;
• Services by Government or local authority by way of support services excluding,-
  • renting of immovable property,
  • services specified below:-
    • Speed Post, Parcel Post, Insurance and Agency service;
    • services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
    • Transport of goods or passengers.
• Services by a director of a company or a body corporate to the said company or the body corporate;
• Services by an insurance agent to any person carrying on insurance business;
• Services by a recovery agent to a banking company or a financial institution or a non-banking financial company;
• 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 clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music-company, producer or the like;
• Supply of services by the members of Overseeing Committee to Reserve Bank of India;
• Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. In regards to non-taxable online recipient we will have a detailed discussion;
• Services supplied by a person located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.

Reverse Charge Mechanism applicability u/s 9(4) / 5(4) of CGST Act, 2017

Apart from above, section 9(4)/5(4) states that any supply of goods or service from an Unregistered supplier to a registered supplier will cast liability to Pay GST under RCM. The Government vide a notification has exempted supplies worth Rs 5000/- per day from any unregistered dealer which means supplies above Rs. 5000 would require registered person to comply with the provisions as specified under GST law. Here services provided can be of any type, the only condition to be checked is service provider should be unregistered and service received should be registered under GST Act.

However currently this provision has been put on hold by government till 30^th June, 2018.

GST Reverse Charge Mechanism Provisions Applicable On Fulfillment Of Certain Condition

• In case of GTA service, RCM applies only if all three conditions as stated below are satisified:-
  • Recipient located in Taxable Territory;
  • GTA has not charged 12% GST rate on its Invoice (Here NCM applies since GTA wants to avail ITC); and
  • Recipient is one of the 7 notified persons:-
    • Factory;
    • Society;
    • Co-operative Society;
    • Registered Person under GST Act;
    • Body Corporate;
    • Partnership firm including AOP and LLP;
    • Casual Taxable Persons (registered or unregistered).
• If Service Receiver is Business Entity:-
  • Services of Arbitral tribunal;
  • Legal Services of Advocate or Advocate Firms;
  • Support Services by government;
• If Service Receiver is body corporate or partnership firm in case of Sponsorship service;
• If Service Receiver is Company or Body Corporate in case of services by Director.
• In case of Import of Service:-
  • Where service is On-line Information & Database Access or Retrieval Service (OIDARS), then RCM shall not apply in case service is provided to Non-Taxable Online Recipient. In such cases service provider shall be liable to pay GST and comply with GST provisions.
  • Where service is Import of Goods by a vessel then it is covered by special entry in notification. However service of Export of goods shall not be taxable as Place of Supply in transportation of goods is Destination;
  • In case of rest of the services, RCM shall apply. This general entry on Import of services also covers service of Coastal movement which is not covered by specific entry related to transportation of goods by vessel.

GST Registration Under Reverse Charge Mechanism

Under Normal Charge Mechanism a service provider is required to get himself registered after the limit of Rs. 20 Lakh (10 lakhs in case of special category states) aggregate turnover is crossed. However under Reverse Charge Mechanism a person liable to pay GST is required to get himself registered as there is a concept of compulsory registration under GST Act.

Time Of Supply in case of Reverse Charge under GST

In case of reverse charge under GST Act, the time of supply shall be the earliest of the following dates:

• The date of payment
• The date immediately after 60 days from the date of issue of invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

Availability of Cenvat Credit To Service Provider Providing Specified Services

Supplier of those services specified in 9(3) / 5(3) can’t avail Input Tax Credit (ITC) as such services are deemed to be exempted services u/s 17(3).

Availability Of Cenvat Credit To Service Receiver Receiving Specified Services

Recipient can take credit of GST paid under RCM subject to if otherwise specifically excluded. However first GST payable under RCM is to be paid in Cash i.e. no ITC can be availed to discharge the liability of GST under RCM.

Other Provisions related to Reverse Charge Mechanism Under GST

• Notification 5/17 has provided an exemption from taking registration to supplier providing only those services which are under RCM.

• The term “Output Tax” (Section 2(82) excludes GST paid under RCM.

• Since RCM is to be paid in Cash, if a company in a state has only taken registration as Input Service Distributor (ISD) then in that case a separate registration as normal assesse since cash ledger is not available to ISD.