Impact of GST Reverse Charge Mechanism: Analysis with Practical Examples

Reverse Charge Mechanism – Where And How It Will Influence GST-An analysis with practical examples

Introduction:

As per Latest RCM Update:

These resolutions will take effect upon notification released on 11 July 2023 by the Central Board of Indirect Taxes and Customs (CBIC). 50th Meeting of the GST Council had made the following changes.

1. Raw cotton provided by farmers to cooperative societies including kappa cotton, will now be subject to taxation under the reverse charge mechanism.

2. Services rendered by a company’s director to the company in an individual or personal capacity will not be subjected to taxation under RCM.

How Reverse Charge Mechanism works under GST ACT

To understand how RCM under GST works, let’s first understand how Goods and Services Tax or any other Indirect Tax work.

Typical working of Goods and Service Tax (GST):

Under GST, businesses are required to charge and collect tax on their supplies, and this tax is then remitted to the government. Here is a step-by-step explanation.

The supplier of Goods and Services will add appropriate rate of GST to the invoice issued to the Recipient

The recipient of the goods/services will pay the total amount including GST to the supplier

The supplier then deposits the GST amount after deducting input tax credit (if any) to the government on behalf of the buyer.

RCM is a concept within the GST system where the liability to pay tax is shifted from the supplier of goods or services to the recipient (buyer) of those goods or services. In simple terms, it means that the buyer becomes responsible for paying the tax directly to the government instead of the supplier

• The supplier of Goods and Services will issue a non-GST invoice to the buyer. This may be due to exemption or non-registration of GST by buyer.
• The buyer pays the amount excluding GST to the seller according section 31(3)(g) under 9(3) or 9(4).
• The buyer then needs to issue a self-invoice along with the amount of GST payable on it.
• The buyer then deposits the GST amount to the government.

How can We Understand Reverse Charge System with an Example?

Let’s Understand this with an example of a reverse charge system.

Cashew or (Kaju) falls under the list of goods that fall under reverse charge mechanism. Now let’s suppose a farmer produces cashew worth Rs 20 lakh annually and sells it to a large food processing company that packages it and sells it.

Since the farmer’s turnover is less than GST threshold, he would not have registered under GST. Hence the company can technically avoid paying of GST on purchases of cashews at small quantities from different agriculturalist who are not registered under GST or having below turnover. Due to this gap, even after Cashew being a non-essential edible item is exempted from Goods and Service tax.

Therefore, the government introduces Reverse charge mechanism (RCM) under GST rule for Cashews. Now instead of agriculturalist, the purchaser is liable to pay GST on purchasing cashews at applicable rates. It won’t matter if the farmer (seller) is registered or not or the amount.

Reverse Charge Mechanism is applicable in 3 major scenarios as per conditions specified by CBIC.

Sections 9(3), 9(4), and 9(5) of CGST and SGST Act deal with reverse charge situations within the state (Intrastate).

On the other hand, for IGST (interstate), the rules are outlined in sections 5(3), 5(4), and 5(5) of the IGST Act.

RCM is Applicable

CBIC specifies certain goods and services on which GST should be charged on reverse charge mechanism. When a registered dealer purchases these specified goods or services from an unregistered dealer, the recipient (registered dealer) becomes liable to pay the GST directly to the government under RCM.

Situation 1.

Who is liable to pay RCM in the case of Recovery Agen?

Mr X a recovery agent supplying recovery loan services to HDFC Bank.

Here HDFC bank to pay RCM under Section 9(3) of CGST ACT 2017.

Mr Yadav a Recovery agent is supplying recovery of loan services to business person

Here Yadav has to pay GST under RCM as per section 9(1) of the CGST ACT 2017.

 Situation 2

Who is liable to pay GST under RCM in the case of Direct Selling Agent?

Situation 3

What will be the liability under RCM in the case of Sponsorship Services

1. Venus private limited, Chennai, agrees to sponsor a sports event organized by Rotary Club in Chennai. Venus Private Limited has paid an amount of 5,00,000 for such sponsorship of the sports event. Consequently, said event was named after the brand name of Venus Private Limited. Examine who is the person liable to pay tax in the given case.

2. Vinayaga Associates provided sponsorship services to TNPL Cricket Academy, an LLP. Determine the person liable to pay tax in this case.

i) Notification no 13/2017 CT (R) dated 28.06.2017 as amended (hereinafter referred to as reverse charge notification), provides that sponsorship services provided by any person to a body corporate or partnership firm located in the taxable territory, shall be liable to GST under reverse charge in the hands of recipient.

In the First Case Rotary Club Chennai, is the supplier of sponsorship services which is receiving the consideration in the form of sponsorship fee of 5,00,000 from Venus Private Limited, against the provision of sponsorship service. Since the recipient of sponsorship services-Venus Private Limited is a body corporate, GST on said services is payable by the recipient- that is Venus Private Limited, under reverse charge.

(ii) In the second situation, services provided by any person by way of sponsorship to anybody corporate/ partnership firm, GST is liable to be paid under reverse charge by such body corporate/ partnership firm located in the taxable territory. Further, for the reverse charge purposes, Limited Liability Partnership formed and registered under the provisions of the LLP Act, 2008 is also be considered as a partnership firm. Therefore, in the given case, TNPL Cricket Academy is liable to pay GST under reverse charge.

Situation 4

In the case of providing Security Services:

1. If an individual Mr Shahabuddin provides security services to Naga Limited a registered dealer under GST Act 2017- Naga Limited has to pay GST under RCM as per the provisions of section 9(3) of the CGST ACT2017.

2. Raj Scan Associates a partnership firm provides security services to one Raja Ganapathy traders who is a composition Dealer registered under GST ACT – then in this case Raj Scan Associates has to pay GST as per the provisions of Section 9(1) of the CGST ACT 2017.

3. Moorthy an individual provides security services to a local authority solely registered under TNGST Act to deduct TDS u/s 51 then in this case Moorthy has to as per Section 9(1) of the CGST ACT 2017

4. Kannika Limited provides security services to Patel Limited, a registered person under CGST ACT 2017 in this case Kannika limited has to pay as per section 9(1) of the CGST ACT

5. Vikki Anand provides such services to Jana Plastic stores an unregistered person – in such case Vikki Anand has to pay as per the provisions of section 9(1) of the said Act.

Situation 5

What is the liability in the case of Renting of Motor Vehicle?

1. XYZ provides GTA services to PQR (Registered Person under GST). XYZ has not opted for forward charge for F.Y. 2022-23.

• Is PQR liable to pay GST on RCM basis on above services?
• At What rate GST will be applicable?
• Can PQR avail credit on above services?

Yes, RCM Applicable GST Rate – 5% PQR can avail ITC

Patel roadways provides GTA services to PQR (Registered Person under GST). Patel roadways charges Rs. 700/- for the entire transaction.

2. Patel Roadways has not opted for forward charge. Is PQR liable to pay GST on RCM basis on above services?

RCM Applicable at 5%Notification No. 4/2022 Central Tax (Rate) dated 13-07- 2022, the limit of Rs. 750/- / 1500/- is omitted.

3. Mr Ramlal owns a goods transport vehicle in Pune, Maharashtra. XYZ provides services of transporting goods within the city to PQR Limited (Registered under GST). Mr Ramlal does not issue any consignment note. Is PQR liable to pay GST on RCM basis on above services

Answer:

Local Transport is exempt from GST. Thus, GST not applicable.

4. Mr Manokar Lokia owns a goods transport vehicle in Pune, Maharashtra. Mr Manokar Lokia provides services of transporting goods within the city and outside the state to PQR Limited (Registered under GST). Mr. Manokar Lokia does not issue any consignment note.

Is PQR liable to pay GST on RCM basis on above services?

Mr Manokar Lokia is transporting goods out of the state, whether it can be said as local transport?

It is very difficult to prove local transport. Merely, consignment note is not issued that does not mean that Mr Manokar Lokia is not a GTA. It is always better to charge GST on RCM basis in such cases and avail input tax credit.

5. XYZ provides GTA services to Kamlesh enterprises (Registered Person under GST). XYZ charges Rs. 1000/- for the entire transaction. XYZ also charges Rs. 50 GST on its invoice and collects Rs. 50/- from Kamlesh Enterprises

XYZ has not opted for forward charge.

 Is Kamlesh Enterprises liable to pay GST on RCM basis on above services?

Answer

RCM Applicable at 5%

As per Section 9 of CGST Act, 2017, liability to pay tax is on Kamlesh enterprises. This liability cannot be shifted merely because GTA collected tax.

Kamlesh enterprises should not pay Rs. 50/- to XYZ and instead pay GST on

RCM basis. GST to be calculated on Rs. 1050/- if Rs. 50 paid

6. Sai Krupa roadways provides GTA services to Yadav mangal enterprises (Registered Person under GST). Sai Krupa roadways charges Rs. 1000/- for the entire transaction. Sai Krupa roadways also charges Rs. 50 GST on its invoice and collects Rs. 50/- from Yadav mangal enterprises.

Sai Krupa roadways has opted for forward charge.

Is Yadav Mangal enterprises liable to pay GST on RCM basis on above services?

Answer:

RCM not applicable.

7. Ahamed Roadways provides GTA services to Jaffar khan (Registered Person under GST). XYZ charges Rs. 1000/- for the entire transaction. Ahamad Roadways issues invoice to Jaffar Khan on 25th February 2023.

I. Ahamad Roadways has not opted for forward charge.

II. Jaffar khan booked the invoice issued by Ahamad Roadways on 1st March 2023

III. The payment of above invoice was made on 28th February 2023

IV. What is the time of Supply for Jaffar Khan?

V. In which month GSTR-3B, PQR should pay GST on above transaction?

VI. What is the due date of that GSTR-3B?

Ans: Time of Supply – Payment date or Entry Date whichever is earlier, thus, 28th February 2023. RCM to be paid in February 2023. Due date – 20th March 2023 for Monthly filers & payment date will be 25th March 2023 for QRMP.

8. Nariman transporters provides GTA services to Mukesh. BOTH are registered under GST. Nariman is located in Gujarat and Mukesh is situated in Maharastra. Nariman has not opted for forward charge. Mukesh wishes to know with, whether to charge CGST SGST or IGST?

Ans: As Nariman is registered person and located in Gujarat, place of supply is MH, thus, it is a interstate supply and IGST should be charged by Mukesh.

9. Black panorama is in the business of renting of motor vehicles. The motor vehicles are specially designed from a unique metal called vibranium.

 Mr. Black Panorama is registered as a partnership firm wide name “Wakanda Forever” On 28th February 2023, Black Panorama rented motor vehicle to James Jerald. Jerald has registered his company under the companies Act, 2013 wide name Winfred solutions. Is RCM applicable on above transaction?

Yes, Reverse Charge Mechanism is applicable

10. Black Panorama is in the business of renting of motor vehicles. The motor vehicles are specially designed from a unique metal called vibranium.

Mr. Black Panorama is registered as a partnership firm wide name “Wakanda Forever” On 28th February 2023, Black Panorama rented motor vehicle to Doctor Michael. Doctor Michael has a partnership firm wide name Home for rescue from Madness. Is RCM applicable on above transaction?

Reverse Charge Mechanism is not applicable.

Situation 6

RCM on Advocate Services

Mr. Ananda Padmanaban an Advocate provides legal services to Kalanithi private limited (A registered person) through its company ABC Private Limited.

ABC private limited is not registered under GST.

Whether Kalanithi private limited is liable to pay RCM on above services?

ABC Private Limited is a body corporate and thus, has to pay GST on forward charge basis. RCM applicable only if services are provided by individual lawyers or a firm of lawyers.

Situation 7

RCM on Renting of Residential Dwelling Residence:

RCM on renting of residential dwelling is not defined under the GST Act, 2017. So we will have to consider this in common parlance.

“In normal trade parlance, ‘residential dwelling’ means, any residential accommodation,

but does not include hotel, motel, inn, guest house, campsite, lodge, house boat, or like places meant for temporary stay.”

Residence Accommodation means a place of human habitation, such as a transient dwelling establishment, apartment, condominium, house, manufactured home, or townhome.

Transient dwelling establishment means and includes any place such as a hotel, motel, motor hotel, resort, tourist court, tourist camp, rooming house, boarding house, inn, hostel, and similar facilities by whatever name called, consisting of two or more dwelling units were sleeping accommodations, linens, and cleaning services are provided for transients or tourists provided, however, that the term shall not be construed to include apartments, and similar facilities if occupancy of all dwelling units is on a permanent basis.

1. Mr Karthick Subramanian is a Chartered Accountant and is registered under the TNGST Act, 2017. He lives in a rented house and pays monthly rent of Rs. 20,000/-

Whether GST is payable by him on RCM basis on the above transaction?

RCM is not applicable as per the case law Seema Gupta Vs Union of India (In the High Court of New Delhi dated 27th September 2022)

2. Mr Karthick subramanian is a Chartered Accountant and is not registered under the TNGST Act, 2017. He lives in a rented house and pays monthly rent of Rs. 20,000/-Mr Karthick subramanian has occupied this house from on Mr. Ramanathan who is also not registered under TNGST act 2017 whether GST is payable by him on RCM basis on the above transaction?

NO as both the parties are not registered under TNGST NO RCM

3. Anand Mathew is a Chartered Accountant who is registered under the KGST Act, 2017. He rented commercial premises from Mr. Babulal who is also registered under the KGST Act, 2017. Whether GST is payable by him on RCM basis on the above transaction?

As both are registered and the premises is let out for commercial purpose, being Commercial Property is under forward charge, thus, GST shall be collected and paid by Mr. Babulal on forward charge basis.

4. Anand Mathew is a Chartered Accountant who is registered under the KGST Act, 2017. He rented commercial premises from Mr. Babulal who is not registered under the KGST Act, 2017. Whether GST is payable by him on RCM basis on the above transaction?

Being the Commercial Property GST is under forward charge, however, there are multiple views on applicability of RCM on above transaction (Debatable issue)

Situation 8

RCM on services provided by an artist

Mr. Allu Arjun is a theatre actor by profession. He signed a contract for theatre drama “Pushpa – The Rule” on 28th February 2023 with Muttamsetty Media (Production company) He will be paid Rs. 10,000/- per show for providing his services as a theatre actor Is RCM applicable on above transaction?

Yes, RCM is applicable.

Situation 9

RCM on Import of Services – IGST Act

Sanjay Agarwal is engaged in manufacturing of mobiles in India. He is registered

under the Kerala goods and service Act, 2017 wide name “mobile world”. He wanted to design a logo for his company and thus, he took consultancy of Mr. Binu Joseph

 Mr. Binu Joseph is situated in U.S.A and registered in U.S.A wide name “Kerala land of God”. Mr. Binu Joseph charged $10000 for designing the logo. Is RCM applicable on above transaction?

As it is import of service in India, RCM is applicable.

Conclusion:

Reverse Charge Mechanism under GST is slightly complex to understand however, in simple words it is nothing but shifting the tax liability from supplier to Recipient . RCM is necessary to ensure tax collection even if the supplier is not registered or eligible to pay GST. It prevents tax evasion and promoting compliance. Every business house that needs to pay tax under Reverse Charge mechanism needs to get registered under GST, irrespective of the threshold. The time of supply of Goods and services under GST ACT 2017. RCM is generally the earliest of receiving of goods or services /Payment, 30-60 days from date of invoice, or date of RCM entry in books of accounts. Accounting entry for transactions under reverse charge mechanism (RCM) in recipients’ books must mention both input tax and output tax.