Unlock the secrets of Reverse Charge Mechanism (RCM) under GST with our comprehensive guide. Delve into the intricacies of this transformative tax mechanism introduced in the Goods and Services Tax (GST) regime. Whether you’re a seasoned tax professional, an entrepreneur, or someone eager to understand the complexities of GST, this guide equips you with the knowledge to navigate the dynamic landscape of RCM.
♦ Introduction:
In the pursuit of simplifying the complex web of indirect taxes, India embarked on a transformative journey by introducing the Goods and Services Tax (GST) on July 1, 2017. This landmark tax reform replaced a myriad of indirect taxes and brought the nation under a unified tax regime. Among the many critical components of GST, the Reverse Charge Mechanism (RCM) stands as a key element that has garnered significant attention from businesses and taxpayers alike.
In this article, we delve into the essence of Reverse Charge Mechanism under GST, exploring its significance, scope, and implications. Whether you are an entrepreneur, a seasoned tax professional, or someone keen on understanding the intricacies of GST, this comprehensive guide will equip you with the knowledge necessary to navigate the dynamic landscape of RCM.
Page Contents
- ♦ Understanding the Concept of Reverse Charge Mechanism:
- ♦ Applicability and Scope of RCM:
- ♦ Mechanism of RCM payment and credit availability under GST:
- ♦ Various other RCM related aspects to be kept in mind
- ♦ No RCM Liability if the following services received from Body Corporates:
- ♦ Exploring Special Cases in Reverse Charge Mechanism (RCM) under GST:
- ♦ GST Compliance and Record Keeping:
- ♦ Recent Updates and Future Outlook:
♦ Understanding the Concept of Reverse Charge Mechanism:
The traditional method of taxation, where the supplier is responsible for collecting and remitting taxes, underwent a paradigm shift with the introduction of the Reverse Charge Mechanism. RCM represents a fundamental alteration in the tax collection process, wherein the onus of paying taxes shifts from the supplier to the recipient of goods or services. This novel approach was implemented to improve tax compliance and widen the tax base by including certain specified transactions.
♦ Applicability and Scope of RCM:
Section 9(3), 9(4) and 9(5) of Central GST and State GST Acts govern the reverse charge scenarios for intrastate transactions. Also, sections 5(3), 5(4) and 5(5) of the Integrated GST Act govern the reverse charge scenarios for inter-state transactions. Let’s have detailed discussion regarding applicability of RCM:
A. Supply of certain goods and services specified by the CBIC:
CBIC has issued list of goods and services on which RCM is applicable:
I] GOODS vide Notification No. 4/2017-Central Tax dated 28thJun, 2017
|
S. No. |
Tariff item, subheading, heading, or chapter | Description of supply of goods | Supplier of goods | Recipient of supply |
| 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. | Following essential oils other than those of citrus fruit namely: | Any unregistered person | A registered person | |
| 3301 24 00, | a) Of peppermint (Menthapiperita) | |||
| b) Of other mints: | ||||
| 3301 25 10, | (i) Spearmint oil (Exmenthaspicata) | |||
| 3301 25 20, | (ii) Water mint-oil (Exmentha aquatic) | |||
| 3301 25 30, | (iii) Horsemint oil (Exmenthasylvestries) | |||
| 3301 25 40 | (iv) Bergament oil (ex-mentha citrate) | |||
| 5. | 5004 to 5006 | Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn | Any registered person |
| 6 | 5201 | Raw cotton | Agriculturist | Any registered person |
| 7 | Any chapter | Used vehicles, seized and confiscated goods, old and used goods, waste and scrap | Central Government, State Government, Union territory or a local authority | Any registered person |
| 8 | 2523 | Cement | An unregistered Supplier | Promoter/Builder |
| 9 | Any chapter | Input and Input Services | An unregistered supplier | Promoter/Builder Note that the promoter/builder has to pay only on the difference between 80% of purchases (minus) actual registered purchases. |
| 10 | Any chapter | Capital goods | An unregistered supplier |
Promoter/Builder |
II] SERVICES vide Notification No. 13/2017 & 17/2017- Central Tax dated 28thJun, 2017
| S. No. | Category of supply of services | Supplier of service | Recipient of service |
| 1 | Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road to- | Goods Transport Agency (GTA). This provides options for GTA to opt for | (a) Any factory registered under or governed by the Factories Act, 1948(63 of 1948); or |
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| (a) any factory registered under or governed by the Factories Act, 1948(63 of 1948); or
(b) any society registered under the Societies Registration Act, 1860 (21 of 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 the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax 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. |
Either 5% (without ITC) or 12% (with ITC).
They must satisfy three conditions-
a) GTA is GST registered and did not opt to pay tax under the forward charge. b) GTA issues tax invoice with GST in it. c) Has not submitted any yearly declaration** for opting under forward charge |
(b) any society registered under the Societies Registration Act, 1860 (21 of 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 the 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. |
|
| **Declaration as per Annexure III:
I/we have taken registration under CGST Act, 2017 and have exercised the option to pay tax on services of GTA in relation to transport of Goods supplied by us during the Financial Year____ under forward charge.
|
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| 2 | Services supplied by an individual advocate including a senior advocate or firm* of advocates by way of legal services, directly or indirectly, including where a contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity.”
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.” *Firm of advocates includes LLP registered under the The Limited Liability Partnership Act, 2008 |
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, –
(1) renting of immovable property, and (2) services as specified below- (i) services by the Department of Posts; (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. |
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| 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). | Central Government, State Government, Union territory or local authority. | Any person registered under the CGST Act, 2017. |
| 5AA | Renting of a residential dwelling to a registered person (Added by CGST (Rate) Notification no. 5/2022 dated 13th July 2022) | Any persons | Any GST registered person |
| 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 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. | The company or a body corporate located in the taxable territory. |
| 7 | Services supplied by an insurance agent to any 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 a 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 section 13(1)(a) 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. | 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 Section 13(1)(a) 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,
(1) the author is a registered person under GST and filed a declaration, that he exercises the option to pay tax under forward charge and he shall not withdraw the option within 1 year from the date of exercising option; (2) the author makes a declaration to issue the invoice to the publisher in Form GST Inv-I. |
| 10 | Supply of services by the members of Overseeing Committee to Reserve Bank of India. | Members of the 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 NBFC, located in the taxable territory. |
| 12 | Services provided by business facilitator (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 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 this entry shall apply to, –
(1) The below persons registered only for the purpose of making TDS u/s 51 but not for supply of goods or services (i) a Department or Establishment of the Central Government or State Government or Union territory; (ii) local authority; (iii) Governmental agencies. (2) a registered person registered under Composition Scheme u/s 10. |
Any person other than a body corporate. | A registered person, located in the taxable territory. |
| 15 | Services provided by way of renting of a motor vehicle Provided to a body corporate. | Any person other than a body Corporate, who opts to pay tax at the rate of 5% and he is eligible to claim input tax credit (Persons who are ineligible to claim ITC u/s 17(5) are not covered here). | Any body corporate located in the taxable territory. |
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| 16 | Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of the 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. |
| 17 | Radio taxi or passenger transport services provided through an electronic commerce operator. | Taxi driver or rent-a-cab operator. | Electronic commerce operator. |
| 18 | Providing accommodation services in hotels, guest houses, inns, campsites, clubs, or other commercial places meant for lodging or residential purposes. | Any person except in cases where the person supplying the service through an electronic commerce operator is liable for registration under sub-section
(1) of Section 22 of the CGST Act. |
Electronic commerce operator. |
| 19 | Housekeeping services such as plumbing, carpentering, etc. | Any person except in cases where the person supplying the service through an electronic commerce operator is liable for registration under sub-section (1) of Section 22 of the CGST Act. | Electronic commerce operator. |
* Category of services on which IGST has to be paid under RCM vide Notification No. 10/2017 Integrated Tax dated 28thJun, 2017
| S. No. | Category of supply of services | Supplier of service | Recipient of service |
| 1 | Any service supplied by any person who is located in non-taxable territory to any
person other than a non-taxable online recipient. |
Any person located in a non-taxable territory. | Any person located in the taxable territory other than a non-taxable online recipient. |
| 2 | Services supplied by a person located in the nontaxable territory 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 a non-taxable territory. | Importer, as defined in clause (26) of section 2 of the Customs Act, 1962, is located in the taxable territory. |
B. Supply from an unregistered dealer to a registered dealer
Section 9(4) of the CGST Act states that if a vendor is not registered under GST supplies goods to a person registered under GST, then reverse charge would apply. This means that the GST will have to be paid directly by the receiver instead of the supplier.
In intra-state purchases, CGST and SGST have to be paid under reverse charge mechanism (RCM) by the purchaser. Also, in the case of inter-state purchases, the buyer has to pay the IGST. The government notifies the list of goods or services on which this provision gets attracted from time to time.
C. Supply of services through an e-commerce operator
All types of businesses can use e-commerce operators as an aggregator to sell products or provide services. Section 9(5) of the CGST Act states that if a service provider uses an e-commerce operator to provide specified services, the reverse charge will apply to the e-commerce operator and he will be liable to pay GST.
Suppose the e-commerce operator does not have a physical presence in the taxable territory. In that case, a person representing such an electronic commerce operator will be liable to pay tax for any purpose. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.
♦ Mechanism of RCM payment and credit availability under GST:
The mechanism for RCM is different than the normal practice of showing the liability in GSTR-1 and availing the ITC in GSTR-3B.Let’s have a look on the mechanism of paying the RCM liability and claiming the RCM ITC:
- The assesse have to pay RCM liability in Table 3.1(d) of GSTR-3B on Goods or services as mention in the above tables.
- The RCM Liability under Table 3.1(d) should be paid in Cash only, the assesse cannot use the ECL balance for paying the RCM liability.
- The eligible credit of the liability paid in cash can be claimed as ITC credit under Table 4(A).
- If the credit is in relation to IGST the ITC can be claimed under Table 4(A)(2) and if there is normal credit then it can be claimed in Table 4(A)(3).
A. Registration:
All persons liable to pay tax under RCM have to register under GST irrespective of threshold limit.
B. Time of Supply under RCM:
I. Time of supply in case of goods
In case of reverse charge, the time of supply for goods shall be the earliest of the following dates:
- 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
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.
*This point is no more applicable based this Notification No. 66/2017 – Central Tax issued on 15th November 2017
II. Time of supply in case of services
In case of reverse charge, 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.
C. Availing ITC under RCM
Following points should be kept in mind while availing ITC under RCM:
- The recipient of goods or services can avail of the ITC on the tax amount paid under RCM only if such goods or services are used for business or furtherance of business.
- A composition dealer should pay tax at the normal rates and not the composition rates while discharging liability under RCM. Also, they are ineligible to claim any input tax credit of tax paid.
D. Self-Invoicing
What is Self-invoicing?
Self-invoicing is to be done when purchased from an unregistered supplier, and such purchase of goods or services falls under reverse charge. This is because your supplier cannot issue a GST-compliant invoice to you, and thus you become liable to pay taxes on their behalf. Hence, self-invoicing, in this case, becomes necessary.
Conclusion:
Any registered receiving the notified goods or services from the unregistered supplier should prepare Self invoices for against receipt of goods or services per rule 46 of CGST Rules.
Also, section 31(3)(g) states that a recipient who is liable to pay tax under section 9(3) or 9(4) shall issue a payment voucher at the time of making payment to the supplier.
♦ No RCM Liability if the following services received from Body Corporates:
| Sr. No. | Service under RCM | RCM applicable if supplier is |
| 1. | 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). | Direct Selling Agent(DSA) other than Body Corporate |
| 2. | Security services (services provided by way of supply of security personnel) provided to a registered person. | Any person other than Body Corporate |
| 3. | Services provided by way of renting of a motor vehicle Provided to a body corporate. | Any person other than Body Corporate |
♦ Exploring Special Cases in Reverse Charge Mechanism (RCM) under GST:
1. Real Estate Sector
- The government notified that the promoter should buy inward supplies to the extent of 80% from registered suppliers only. Suppose the purchases from registered dealers shortfall 80%, then the promoter should GST at 18% on the reverse charge to the extent short of 80% of inward supplies.
- If the promoter purchases cement from an unregistered supplier, he must pay tax at 28%. This calculation is to be done irrespective of the 80% calculation.
2. Services received from Government authorities are liable to reverse charge
As per Para2 (zf) of the Notification No. 12/2017-CT (Rate), dated. 28.06.2017, “Government Authority “means an authority or a board or any other body, –
(i). Set up by an Act of Parliament or a State Legislature, or
(ii). Established by any Government,
With 90% or more participants by way of equity or control, to carry out any function entrusted to a Municipality under Article 243W of the Constitution or to a Panchayat under Article 243G of the Constitution.
Following are the some government authorities:
- MIDC
- MMRDA
- CIDCO
- AIDA
- MPCB
- CPWD
- DGFT
- GNIDA
- MHADA
- AIIMS
In order to determine the liability to pay tax under the Reverse Charge Mechanism on services received from the Government, the taxpayer has to consider three factors:
- First, whether the amount paid to the Government is below INR 5,000/- or not as RCM is not liable to pay if amount paid is less than 5,000/- vide Notification No. 12/2017-CT (R) dated 28.06.2017 and Notification No. 8/2017-IT (R) dated 28.06.2017;
- Second, whether the amount paid is against any services or is merely a deposit of taxes, duties or Cess as it will not attract payment of GST under RCM;
- Third, if the amount is paid purely against any service, then it will attract RCM liability.
In the coming time, it will be interesting to see that, whether the late fees or penalty paid to the Government can be considered as an amount paid against any services
♦ GST Compliance and Record Keeping:
Incorporating RCM into the GST compliance structure necessitates a meticulous approach to record keeping and documentation. In this section, we outline the essential records businesses must maintain, the frequency of filing returns, and the GST compliances.
A. GST Compliance for Companies under RCM:
- Registration Requirements: Businesses engaged in transactions liable to RCM are required to register under GST if they meet the threshold for registration. Proper registration ensures seamless compliance and allows businesses to avail themselves of input tax credits.
- Tax Calculation and Payment: When purchasing goods or services under RCM, companies must calculate the GST liability themselves. This involves considering the applicable tax rates and the value of the goods or services received. Timely and accurate payment of GST is crucial to avoid penalties and interest.
- Invoice and Documentation: Maintaining proper documentation is essential for RCM compliance. Businesses should obtain a valid tax invoice from the supplier, which includes all the required details as per GST regulations.
- Input Tax Credit (ITC): Companies operating under RCM are generally eligible to claim input tax credit on GST paid for such transactions. However, certain conditions and restrictions apply, and it’s crucial to ensure compliance with ITC rules.
B. Record Keeping for RCM Compliance:
- Invoice Records: Maintain a comprehensive record of all tax invoices received under RCM, including supplier details, GSTIN (GST Identification Number), invoice number, date, and the amount of GST paid.
- Payment Records: Keep track of all GST payments made under RCM, along with the relevant challans or payment receipts issued by the government.
- Input Tax Credit Records: Record all eligible input tax credit claims, supported by appropriate documentation, to substantiate the credits availed.
- Compliance Reports: Prepare periodic compliance reports, reconciling the GST liability calculated under RCM with the GST payments made and ITC claimed.
- Retention Period: As per GST regulations, businesses are required to maintain all records related to RCM transactions for a specific period, typically six years from the end of the financial year.
♦ Recent Updates and Future Outlook:
The world of taxation is continually evolving, and RCM is no exception. Let’s discuss some recent updates and future outlook which we will see in case of RCM under GST:
A. Recent Updates
50th GST Council meeting
In the 50th GST Council meeting held on 11th July 2023, the following decisions were taken with regard to the reverse-charge mechanism under GST*-
-
- That the supply of raw cotton by agriculturists to cooperatives, including kala cotton, will be taxable under the reverse charge mechanism.
- That services supplied by a director of a company to the company in their personal or private capacity will not be taxable under RCM.
*These decisions will come into force once notified by the CBIC.
B. Future Outlook:
The Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) regime is an innovative mechanism that shifts the responsibility of tax payment from the supplier to the recipient of goods and services. Implemented to curb tax evasion and enhance tax compliance, RCM has been a subject of both praise and criticism. In this article, we explore the future outlook of the Reverse Charge Mechanism under GST and its potential to shape the tax landscape for businesses and the economy at large.
1. Evolving Compliance Framework:
One of the key aspects of RCM is its impact on tax compliance. As businesses adapt to the GST framework and authorities refine the RCM process, we can anticipate an evolving compliance framework. The introduction of technology-driven solutions, such as real-time reporting and robust invoice matching systems, will likely streamline RCM procedures and minimize compliance challenges faced by taxpayers.
2. Extended Applicability:
Currently, RCM applies to specific goods and services listed under GST law. However, the future outlook suggests that the ambit of RCM may be expanded to include a broader range of supplies. By expanding its applicability, the government aims to capture a wider tax base, enhance revenue collection, and deter tax avoidance.
3. Impact on Small and Medium-sized Enterprises (SMEs):
While large businesses may have the resources to adapt to RCM, SMEs might face operational and financial challenges. The future outlook emphasizes the need for targeted measures and support to assist SMEs in adjusting to the RCM mechanism. Government initiatives, such as tax education programs and simplified compliance procedures, could prove instrumental in easing the burden for smaller enterprises.
4. Clarity on Sector-specific Implications:
Certain sectors, such as the healthcare and real estate industries, have unique considerations under RCM. The future outlook necessitates greater clarity on sector-specific implications, addressing concerns and uncertainties that businesses in these sectors may face. Regulatory authorities may develop industry-specific guidelines to foster better compliance and understanding.
5. Impact on Cash Flow:
The Reverse Charge Mechanism can impact the cash flow of businesses, particularly for the recipients liable to pay tax. The future outlook points toward possible measures to alleviate the cash flow burden, such as staggered payment options, tax credits, or adjustments in tax return filing deadlines.
6. Mitigating Tax Evasion:
RCM was introduced as a powerful tool to counter tax evasion. The future outlook depends on its effectiveness in this regard. Ongoing monitoring, data analytics, and stringent penalties for non-compliance are essential components of the government’s efforts to curb tax evasion.
7. International Trade Implications:
RCM can have implications on international trade, especially for businesses involved in imports and exports. The future outlook calls for a balanced approach to ensure that RCM’s application does not hamper trade competitiveness while still achieving its primary goal of curbing tax evasion in cross-border transactions.
♦ Conclusion:
The Reverse Charge Mechanism, a pivotal element of the Goods and Services Tax, has undoubtedly redefined tax compliance in India. With its distinct approach of shifting tax liabilities from the supplier to the recipient, RCM has presented businesses with both challenges and opportunities. In navigating the complexities of this mechanism, understanding its applicability, implications, and compliance requirements becomes indispensable for businesses aiming to thrive in the GST era.
As we embark on this journey to explore the intricacies of RCM under GST, we equip ourselves with the knowledge to navigate this transformational tax landscape effectively. Together, we can embrace the vision of a simplified, transparent, and robust indirect tax regime that propels India’s economy to greater heights.
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