Detailed Analysis of RCM under GST

Detailed Analysis of Reverse Charge Mechanism (RCM) under GST

> Meaning and Applicability of RCM under GST

1) Meaning of Reverse Charge under GST [Sec. 2(98)]

In case of normal taxable supply, supplier issues tax invoice to recipient and receives the amount from recipient along with GST and then discharge his GST liability to the Govt. It is referred to as ‘forward Charge‘. In ‘reverse charge‘ supplier shall not charge GST on invoice and receives the amount from recipient without GST. Further, 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

2) Applicability of Reverse Charge [Sec. 9(3)]

The Govt. on the recommendations of the GST council notified the goods or services which shall be liable to tax in the hands of the recipient under reverse charge vide Notification No. 4/ 2017-Central Tax (Rate), dated 28-Jun-2017 in case of goods and Notification No. 13/ 2017-Central Tax (Rate), dated 28-Jun-2017 in case of services, as amended from time to time.

3) Reverse Charge on supply received from Unregistered Persons [Sec 9(4)]

The Govt. on the recommendations of the GST council notified (a) ‘class of registered persons’ and (b) ‘categories of goods or service’ in respect of which registered person (recipient of supply) shall pay tax on reverse charge basis vide Notification No. 07/ 2019-Central Tax (Rate) dated 29^th March, 2019.

> Services notified under RCM for CGST/SGST/IGST purposes

1. Goods Transport Agency (GTA) services

2. Legal services

3. Arbitral Tribunal services

4. Sponsorship services

5. Services by Central Govt., State Govt., Union Territory or Local Authority

6. Services of Transfer of Development Rights or FSI

7. Leasing services

8. Services by Director

9. Services by Insurance Agents

10. Services by Recovery Agents

11. Services by Music Composer, Photographer, Artist or the like

12. Services by Author

13. Services by Members of Overseeing Committee

14. Services by DSAs (Direct selling agents)

15. Services by Business Facilitator

16. Services by Agents of Business Correspondent

17. Security services

18. Services of Renting of Motor Vehicles

19. Services of Lending of Securities

Analysis

1. Goods Transport Agency (GTA) services

I. Meaning of GTA

GTA means any person who provides service in relation to transport of goods by road and issues consignment note

Note: If no consignment note is issued then those services will not be covered in GTA and shall be exempt from GST. Thus, a consignment note is an essential condition to be considered as a GTA.

II. GST Rate on GTA Services (The below rates are applicable only if GTA is registered under GST)

There are 2 options available to GTA (Notification No. 22/2017-Central Tax (Rate) dated 22^nd Aug, 2017)

Option-1 GST Rate @ 5% without ITC

Note: As per Explanation (iv) to the Notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017

– If input goods or services are exclusively utilized for providing GTA services, the entire ITC shall be ineligible

– If input goods or services are used partly for taxable supply and partly for GTA services then ITC in respect of GTA services shall be reversed proportionately.

Option-2 GST Rate @ 12% with full ITC

III. GST payable under RCM on GTA services

If GTA has not opted to pay tax @ 12% and providing services to any of the following categories of recipients then RCM is applicable and recipient is liable to discharge the GST liability @ 5%

(a) Factories registered under Factories Act, 1948;

(b) Society registered under Societies Registration Act, 1860;

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

(d) Any person registered GST Act;

(e) Body corporate established by or under any law;

(f) Partnership firm whether registered or not including association of persons;

(g) Casual Taxable Person

IV. ITC Availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

V. GTA services provided to an unregistered person

If GTA services provided to an unregistered person except the categories of recipients specified in point 3 above then it shall be exempt (Notification No. 32/2017- Central Tax (Rate) dated 13^th Oct, 2017 – Refer Entry no. 21A in the notification

VI. Exemption from GST in case of GTA services

GST shall be exempt if GTA services provided by way of transport in a goods carriage of (Notification No. 12/2017- Central Tax (Rate) dated 28th June. 2017 – Refer Entry no. 21 in the notification):

(a) agricultural produce;

(b) goods, where consideration charged for the transportation of goods on a consignment transported in a single carriage does not exceed one thousand five hundred rupees;

(c) goods, where consideration charged for transportation of all such goods for a single consignee does not exceed rupees seven hundred and fifty;

(d) milk, salt and food grain including flour, pulses and rice;

(e) organic manure;

(f) newspaper or magazines registered with the Registrar of Newspapers;

(g) relief materials meant for victims of natural or man –made disasters, calamities, accidents or mishap;

(h) defence or military equipments.

VII. Exemption from GST on GTA services provided to Governmental departments

GST shall be exempt if GTA services provided by way of transport in a goods carriage of (Notification No. 28/2018- Central Tax (Rate) dated 31^st Dec, 2018 – Refer Entry no. 21B of the notification):

> A Department or Establishment of Central Government or State Government or Union Territory or a Local Authority or Governmental Agencies

which has taken registration under CGST Act only for the purpose of TDS under section 51 and not for making any taxable supply of goods or services.

VIII. Whether GTA is liable to register under GST

Any person shall be exempt from obtaining GST registration if he is engaged only in making supplies of taxable goods or services where tax is payable under RCM. (Notification No. 5/2017 – Central Tax (Rate) dated 19th June, 2017)

Hence, a GTA is not required to obtain GST registration if he is exclusively engaged in GTA services where the tax is paid by recipient under RCM even if turnover crosses the threshold limit.

IX. GST applicability on hiring of vehicles by a GTA

GST is exempt on hiring services taken by GTA on hire by means of transportation of goods (Notification No. 12/2017- Central Tax (Rate) dated 28th June. 2017 – Refer Entry no. 22 of the notification)

Note:

It is important to note here that when any service is placed under RCM, the supplier shall not charge any tax from the service recipient as this is the settled procedure in law under RCM.

2. Legal Services

I. Meaning of Legal Service

“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

II. GST payable under RCM on Legal Services

If “Legal Services” provided by an individual advocate including a senior advocate or a firm of advocates to a Business Entity, then that Business Entity (recipient) shall be liable to discharge GST liability under RCM @ 18%

III. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

IV. Exemption from GST in case of Legal services

Legal service is exempt from GST if provided by an individual advocate including a senior advocate or a firm of advocates to:

(a) any person other than a Business Entity;

(b) a Business Entity with an aggregate turnover upto an exemption limit specified for registration under CGST Act.

(c) the Central Govt., State Govt., Union Territory, Local Authority, Governmental Authority or Government Entity

Note:

1. If an individual advocate or a partnership firm of advocates provides Legal Service to an individual advocate or a partnership firm then it shall be exempt from GST

2. If a senior advocate provides Legal service to other advocates or a firm of advocates then it shall be liable to GST under forward charge mechanism

3. Firm of advocates include LLP registered under LLP Act, 2008

4. “Business Entity” means any person who is carrying out business

5. “Senior Advocate” has the same meaning as assigned in Sec. 16 of Advocates Act, 1961

3. Arbitral Tribunal Services

I. Meaning of Arbitral Tribunal

“arbitral tribunal” means a sole arbitrator or a panel of arbitrators (Sec. 2(d) of the Arbitration and Conciliation Act, 1996)

II. GST payable under RCM on Arbitral Tribunal Services

If “Arbitral Tribunal Services” provided to a Business Entity then that Business Entity (recipient) shall be liable to discharge GST liability under RCM @ 18%

III. TC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

IV. Exemption from GST in case of Legal services

Arbitral Tribunal Services are exempt from GST if provided to:

(a) any person other than a Business Entity;

(b) a Business Entity with an aggregate turnover upto an exemption limit specified for registration under CGST Act.

(c) the Central Govt., State Govt., Union Territory, Local Authority, Governmental Authority or Government Entity

4. Sponsorship Services

I. Meaning of Sponsorship

“Sponsorship” includes naming an event after the sponsor, displaying the sponsor’s company logo or trading name, giving the sponsor exclusive or priority booking rights, sponsoring prizes or trophies for competition; but does not include any financial or other support in the form of donations or gifts, given by the donors subject to the condition that the service provider is under no obligation to provide anything in return to such donors.

II. GST payable under RCM on Sponsorship Services

If “Sponsorship Services” provided by any person to a Body Corporate or a Partnership Firm, then that Body Corporate or Partnership Firm (recipient) shall be liable to discharge GST liability under RCM @ 18%

III. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

IV. Exemption from GST in case of sponsorship services

Sponsorship service is exempt from GST if provided by way of sponsorship of sporting events organised –

(a) by a national sports federation, or its affiliated federations, where the participating teams or individuals represent any district, State, zone or Country;

(b) by Association of Indian Universities, Inter-University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India or Special Olympics Bharat;

(c) by the Central Civil Services Cultural and Sports Board;

(d) as part of national games, by the Indian Olympic Association;

(e) under the Panchayat Yuva Kreeda Aur Khel Abhiyaan Scheme

5. Services by Central Govt., State Govt., Union Territory or Local Authority

I. GST payable under RCM on services provided by Central Govt., State Govt., Union Territory or Local Authority

If any service provided by Central Govt., State Govt., Union Territory or Local Authority to any Business Entity, then that Business Entity (recipient) shall be liable to discharge GST liability under RCM @ 18%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

III. The below services are excluded from RCM, therefore, the respective Central/State Govt, Union Territory or Local Authority shall be liable to discharge GST liability under forward charge mechanism

(a) Renting of immovable property;

(b) 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 Central Government;

(c) Services in relation to an aircraft or vessel, inside or outside the precincts of a port or airport;

(d) Transport of goods or passengers

IV. Exemption from GST on services provided by Central Govt., State Govt., Union Territory or Local Authority

The below services are exempt from GST if provided by Central/State Govt, Union Territory or Local Authority to

(a) any person other than a Business Entity;

(b) a Business Entity with an aggregate turnover upto an exemption limit specified for registration under CGST Act.

(c) a Business Entity by way of allowing them to operate as a telecom service provider or use radio frequency spectrum during the period prior to the 1^st April, 2016, on payment of license fee or spectrum user charges, as the case may be

Note:

1. If service of Renting of immovable property provided by Central/State Govt., Union Territory or Local Authority to a person registered under CGST Act then the registered person shall be liable to discharge GST liability under RCM @ 18%

2. If any of the four services specified above where respective Central/State Govt, Union Territory or Local Authority is liable to discharge GST liability under forward charge mechanism then it shall not be exempt in any case.

6. Services of Transfer of Development Rights or FSI

I. Meaning of Transfer of Developmet Rights (TDR) or FSI

“Transfer of Development Rights (TDR)” is a certificate from the Municipal Corporation that the owner of the property gets where his/her property reserved for the purpose of public utilities such as road, garden, school etc. The rights/certificates, which are equivalent to the reserved portion, are obtained by the owner on surrendering his property to the Municipal Corporation. These rights/certificates can then be sold to builders who use it for additional construction on their property.

“Floor Space Index (FSI)” is the ratio between the built-up area allowed and plot area available (FSI = Total Covered Area on Floor ÷ Plot Area)

II. GST payable under RCM on TDR or FSI

GST on TDR/FSI shall be payable by Promoter @ 18% (Notification no. 05/2019- Central Tax (Rate) dated 29^th March. 2019)

III. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

7. Leasing Services

I. Meaning of Leasing Services

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

II. GST payable under RCM on Leasing services

GST on Leasing services shall be payable by Promoter @ 18% (Notification no. 05/2019- Central Tax (Rate) dated 29^th March. 2019

III. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

8. Services by Director

I. GST payable under RCM on services by Director to a Body Corporate or a Company

A Body Corporate or a Company shall be liable to discharge GST liability on services provided by their Directors under RCM @ 18%

Note:

CBIC has issued Circular No: 140/10/2020 – GST dated 10th June, 2020 to clarify the position of GST on services by Director to the company and taxability shall be decided on mainly 2 broad aspects as follows:

(a) Whole time director and managing director shall be considered as employee of the company and GST provision is not applicable in this case provided Tax deducted (TDS) u/s 192 of Income Tax Act. If Tax deducted (TDS) u/s 194J of Income Tax Act then RCM provision shall be applicable

(b) RCM provision shall be applicable on Independent Director of the company

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

9. Services by Insurance Agent

I. GST payable under RCM on services by Insurance Agent to any person carrying on Insurance Business

Any person carrying on insurance business i.e. Insurance company shall be liable to discharge GST liability on services provided by their agents under RCM @ 18%

II. ITC availability

Recipient (Insurance company) shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

10. Services by Recovery Agent

I. GST payable under RCM on services provided by Recovery Agent to Banking Company or a Financial Institution or a NBFC

If any service provided by recovery agent to a banking company or a financial institution or a NBFC, then that banking company or a financial institution or a NBFC shall be liable to discharge GST liability on services provided by recovery agents under RCM @ 18%

II. ITC availability

Recipient (Insurance company) shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

11. Services by Music composer, photographer, artist or the like

I. GST payable under RCM on transfer or permitting the use of copyright Services

If any services of transfer or permitting the use or enjoyment of a copyright covered u/s 13(1)(a) of Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works provided by a Music composer, photographer, artist or the like to a Music Company, producer or the like, then that Music Company, producer or the like shall be liable to discharge GST liability under RCM @ 12%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

12. Services by Author

I. GST payable under RCM on transfer or permitting the use of copyright Services

If any services of transfer or permitting the use or enjoyment of a copyright covered u/s 13(1)(a) of Copyright Act, 1957 relating to original literary works provided by an Author to the Publisher, then that Publisher shall be liable to discharge GST liability under RCM @ 12%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

Note:

RCM shall not be applicable if all the below conditions are satisfied:

(a) The author has taken the registration under CGST Act, 2017 and filed a declaration in form at Annexure-I with the jurisdictional commissioner to pay the GST under forward charge and shall not withdraw this option within a period of 1 year from the date of exercising such option

(b) Further, the author makes declaration in the invoice issued by him in Form Inv-I to the Publisher

13. Services by members of Overseeing committee

I. GST payable under RCM on services provided by the members of overseeing committee to RBI

If any services provided by the members of overseeing committee to RBI, then RBI shall be liable to discharge GST liability under RCM @ 18%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

14. Services by DSAs (Direct selling agents)

I. GST payable under RCM on services provided individual DSAs other than a body corporate, partnership firm or LLP to a Banking company or a NBFC

If any services provided by individual DSAs other than body corporate, partnership firm or LLP to a banking company or a NBFC, then that banking company or NBFC shall be liable to discharge GST liability under RCM @ 18%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

15. Services by Business Facilitator

I. GST payable under RCM on services provided by Business Facilitator

If any services provided by a business facilitator to a banking company, then that banking company shall be liable to discharge GST liability under RCM @ 18%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

16. Services by Agents of Business Correspondent

I. GST payable under RCM on services provided by Agents of Business Correspondent

If any services provided by any agent of business correspondent to business correspondent, then that business correspondent shall be liable to discharge GST liability under RCM @ 18%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

17. Security Services

I. GST payable under RCM on security services

If security services provided by any person other than a body corporate to any registered person under CGST Act, 2017 then that registered person shall be liable to discharge GST liability under RCM @ 18%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

Note:

RCM shall not be applicable if security services provided to:

a) A Department or Establishment of Central Government or State Government or Union Territory or a Local authority or a Governmental Agency, which has taken registration under CGST Act,2017 only for the purpose of TDS under section 51 and not for making taxable supply of goods or services; or

b) a composition dealer who has taken registration u/s 10 of CGST Act, 2017

18. Services of Renting of Motor Vehicle

I. GST payable under RCM on renting of motor vehicle services

If the services of renting of motor vehicle designed to carry passengers where cost of fuel is included in the consideration charged from the service recipient provided by any person other than a body corporate to a body corporate and does not issue invoice charging GST @ 12%, then that body corporate shall be liable to discharge GST liability under RCM @ 5%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

III. GST Rate on Renting of Motor Vehicle services (The below rates are applicable only if supplier is registered under GST)

There are 2 options available to supplier (Circular No. 130/ 2019-GST, dated 31^st Dec, 2019)

Option-1 GST Rate @ 5% with limited ITC (of input services in the same line of business)

Option-2 GST Rate @ 12% with full ITC

Conclusion:

RCM shall be applicable on the service 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 only if the supplier fulfills all the following conditions:

a) other than a body-corporate; and

b) does not issue an invoice charging GST @ 12% from the service recipient; and

c) supplies the service to a body corporate

Note:

It is important to note here that when any service is placed under RCM, the supplier shall not charge any tax from the service recipient as this is the settled procedure in law under RCM.

19. Services of Lending of Securities

I. GST payable under RCM on lending of securities services

If any service of lending of securities under the scheme of SEBI provided by a lender to a borrower through an approved intermediary of SEBI, then that borrower shall be liable to discharge GST liability under RCM @ 18%

II. ITC availability

Recipient shall be eligible to avail the ITC of GST paid under RCM if used for outward taxable supply

Definition:

1. Lender: means a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the scheme

2. Borrower: means a person who borrows the securities under the scheme through an approved intermediary

3. Approved Intermediary: means a person duly registered by the Board under the guidelines/scheme through whom the lender will deposit the securities for lending and the borrower will borrow the securities

4. Securities: has the meaning assigned to it in Section 2 of the Securities Contracts (Regulation) Act, 1956

5. Scheme: means Securities Lending Scheme, 1997 for lending of securities through an approved intermediary to a borrower under an agreement for a specified period with the condition that the borrower will return equivalent securities of the same type or class at the end of the specified period along with the corporate benefits accruing on the securities borrowed

> Services notified under RCM for IGST purposes

S. No.	Nature of Service	Supplier of Service	Recipient of Service
1.	Import of Service	Any person erson located in a non-taxable territory	Any person located in the taxable territory other than non-taxable online recipient
2.	Service of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India (Ocean Freight)	A person located in non-taxable territory	Importer (Sec. 2(26) of Customs Act, 1962), located in the taxable territory
Note: “Non-Taxable Online Recipient” means any Government, local authority, governmental authority, an individual or any other person not registered and receiving online information and database access or retrieval services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory.

> RCM Applicability on Supply of Goods

S. No.	Description 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
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	Central Government, State Government, Union territory or a local authority	Any registered person
7.	Priority Sector Lending Certificate	Agriculturist	Any registered person

> RCM on Supply Received from Unregistered Person

S. No.	Category of supply of goods and services	Supplier of Goods or Services	Recipient of Goods or Serivces
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 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	Unregistered Person	Promotor
2.	Cement falling in Chapter heading 2523 in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of 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	Unregistered Person	Promotor
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	Unregistered Person	Promotor