RCM on Rent: A Subtle Trigger for Higher GST Late Filing Fees

A sudden thought has led to an intriguing doubt regarding the implementation of Reverse Charge Mechanism (RCM) on rent and its impact on GST late filing fees. Before delving into the analysis, it is essential to understand key GST concepts such as NIL returns, late filing fees, forward and reverse charge mechanisms, and the specifics of RCM on renting.

Understanding the Basics

What is a GST NIL Return?

A NIL return under Section 39 of the GST Act refers to a GSTR-3B return where there are no entries in any of the tables — meaning the taxpayer:

• Has made no outward supply (sales),
• Has received no inward supply (purchases),
• And has no tax liability for that period.

This return can be filed if the taxpayer’s activity during the tax period is effectively “zero.”

Late Filing Fee as per the GST Act

The GST Acts has prescribed a certain amount of late fee payable by the taxpayer for filing of GST returns after the due date as prescribed in the act or after the due date as prescribed in the notifications issued by the Central Board of Indirect Taxes and Customs (CBIC). The amount of late fee payable by the taxpayers as per the GST Acts is as below:

1. Late Filing fee payable for other than NIL GSTR 3B returns

2. Late Filing fee payable for NIL GSTR 3B returns

 Note: If only IGST is payable (and not CGST/SGST), the return may be treated as NIL for late fee purposes, since the IGST Act doesn’t prescribe a separate late fee.

The Central Board of Indirect Taxes and Customs (CBIC) through its various notifications from time to time has prescribed the maximum amount of late fee payable under the GST Acts.  The summary of the same is below.

Difference between forward charge and reverse charge mechanism

Forward Charge Mechanism:

• The Supplier’s Mandate: In the forward charge system, the responsibility for GST collection and remittance rests squarely on the shoulders of the supplier. Think of it as the supplier acting as the primary tax conduit, gathering the levy from the buyer and channeling it to the government.
• Supplier as Tax Agent: The forward mechanism essentially designates the supplier as the government’s agent for tax collection at the point of sale. They are tasked with incorporating the GST into their invoice and subsequently transferring those funds to the exchequer.
• Buyer’s Indirect Contribution: While the buyer doesn’t directly interact with the tax authorities under forward charge, they indirectly fulfill their tax obligation by paying the GST component to the supplier as part of the transaction. The onus of onward transmission lies with the seller.
• Standard Tax Flow: The forward charge represents the conventional flow of GST. The tax journey originates with the transaction, is collected by the seller, and culminates with the government. The buyer’s role is primarily at the point of purchase.
• Supplier-Centric Tax Liability: The defining characteristic of the forward charge is the supplier’s inherent liability for the GST. Their operational responsibilities extend to not just the sale of goods or services, but also the accurate collection and timely payment of the associated tax.

Reverse Charge Mechanism:

• The Recipient’s Direct Tax Duty: Shifting the tax burden, the reverse charge mechanism mandates that the buyer directly pays the GST to the government. This flips the conventional model, placing the onus of tax remittance on the receiver of goods or services.
• Buyer as Self-Assessor and Payer: Under the reverse charge, the recipient takes on a more active role in the tax process. They are not only responsible for the tax payment but often also for self-invoicing to account for the transaction.
• Supplier’s Exoneration from Direct Tax Payment: The reverse charge explicitly relieves the supplier of the direct obligation to remit GST. Their responsibility ends with the supply of goods or services, with the tax payment becoming the sole domain of the recipient.
• Unconventional Tax Pathway: The reverse charge mechanism presents an alternative tax pathway where the flow bypasses the supplier’s direct involvement in remittance. The tax liability travels directly from the buyer to the government.
• Recipient-Driven Tax Compliance: The reverse charge framework places the emphasis on the recipient’s compliance with GST regulations. They become the primary point of contact for the government regarding tax payment for specific categories of transactions.

Forward Charge V/s Reverse Charge

Reverse Charge Mechanism (RCM) on renting of any property.

RCM on renting of residential dwelling– The Central Board of Indirect Taxes (CBIC), through its notification no. 05/2022-Central Tax (Rate) issued on 13th July, 2022 has amended the notification No. 13/2017 – Central Tax (Rate) by inserting new serial number 5AA.

The newly inserted serial number 5AA states that, any registered person receiving services by way of renting of residential dwelling from any person shall be liable to pay tax on reverse charge basis for such services.

RCM on renting of any property other than residential dwelling– The Central Board of Indirect Taxes (CBIC), through its notification no. 09/2024-Central Tax (Rate) issued on 08th October, 2024 has amended the notification No. 13/2017 – Central Tax (Rate) by inserting new serial number 5AB.

The newly inserted serial number 5AB states that, any registered person receiving services by way of renting of any property other than residential dwelling from any unregistered person shall be liable to pay tax on reverse charge basis for such services.

On the16th January, 2025 The Central Board of Indirect Taxes (CBIC) has issued notification no. 07/2025-Central Tax (Rate) and amended the serial number 5AB by inserting  the words “other than a  person who has opted to pay tax under composition levy” in place of “Any registered person”

The classification of GST payable for renting under difference scenarios is as below:

How RCM on Rent Affects GST Late Filing Fees

Now after understanding the basic concepts of GST NIL return, late filing fee, forward charge & reverse charge mechanism and RCM on renting, let us try to understand the implications of RCM on renting with relation of late filing fee in case of GST NIL returns.

Assume a scenario:

• where a GST registered taxpayer (not a composition dealer) is using rented premises as his principal place of business
• Has no outward and inward supplies for the period of GST filing.

Let us analyze the GST late fee implications before and after the insertion of serial number 5AA and 5AB to Notification No. 13/2017 – Central Tax (Rate).

1. Before the insertion of serial number 5AA and 5AB:

Since no supplies or liability existed, the return qualified as NIL, attracting a maximum late fee of ₹500 (₹250 CGST + ₹250 SGST).

2. After the insertion of serial number 5AA and 5AB:

Due to RCM liability on rent, the taxpayer now has tax liability — disqualifying the return from NIL status.

The maximum late fees now applicable:

Key Insight: Even if there’s no sales or purchases, the presence of a tax liability under RCM converts a NIL return into a regular return, thereby increasing late filing fees substantially.

Conclusion

While many taxpayers and professionals viewed the RCM on rent as a mere cash flow issue (with Input Tax Credit offsetting the liability), a closer look reveals its hidden cost: a higher late filing fee due to the return no longer qualifying as NIL.

This subtle shift underscores the importance of timely GST compliance even when business activity appears dormant. The presence of a rent-based RCM liability can significantly alter the cost structure of non-compliance.