Reverse Charge Mechanism (RCM) in GST is a system where the recipient of goods or services is liable to pay the tax instead of the supplier. A supplier cannot take the GST paid under the RCM as ITC. The recipient can avail of ITC on GST amount paid under RCM on receipt of goods or services, only if such goods or services are used or will be used for business purposes.
Forward charge mechanism and reverse charge mechanism are two methods of collecting goods and services tax.
Under the reverse charge mechanism, the liability falls on the recipient to pay the tax amount directly to the government. This is the opposite of the forward charge mechanism where the supplier is obligated to remit the GST to the government. Here, the recipient is liable for the process of both self-invoicing and payment of GST under reverse charge. In case there is any delay from the recipient side, the supplier holds no responsibility to pay the tax.
The objective of shifting the burden of GST payments to the recipient is to widen the scope of levy of tax on various unorganized sectors, to exempt specific classes of suppliers, and to tax the import of services (since the supplier is based outside India).
Section 9(3) and 9(4) of the CGST Act, 2017 provide for levy of GST on reverse charge basis. That is, the liability to pay tax is on the recipient of the goods and services instead of the supplier of such goods or services, in respect of notified categories of supply. (Section 9(3) & 9(4) of CGST Act, 2017)
Also, sections 5(3), 5(4) and 5(5) of the Integrated GST Act govern the reverse charge scenarios for inter-state transactions.
Normally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the liability may be cast on the recipient under the Reverse Charge Mechanism.
For example –
(i) An agriculturist sells 1000 kg Shelled Cashew Nuts to a GST registered person @ Rs. 200/- per kg. The total value of the supply would be Rs. 2,00,000/-. Shelled Cashew Nuts sold by an Agriculturist directly to a GST registered person is notified under Notification No. 4/2017-CT (Rate), dated 28.06.2017, as amended, for payment of tax under Reverse Charge Mechanism (RCM). As such, the liability to pay tax in this case shifts to the recipient of such Cashew Nuts, i.e. the GST registered person. The applicable rate of tax on Cashew Nuts is 5%. Thus, the said GST registered person will pay tax of Rs. 10000/- (Rs. 5000/- CGST + Rs. 5000/- SGST) on such goods received.
(ii) A trader registered under GST takes services of Goods Transport Agency (GTA) for transportation of goods. The amount paid by the trader for transportation is Rs. 20,000/-.Transportation of goods service provided by GTA is notified under Notification No. 13/2017-CT (Rate), dated 28.06.2017 for payment of tax under the reverse charge mechanism. Therefore, the trader has to pay tax @ 5% on Rs. 20,000/-, i.e. Rs. 1000/- (Rs. 500/- CGST + Rs. 500/- SGST).
(iii) In case transportation service is provided to passengers by a radio-taxi through e-commerce platform (aggregator), viz., Ola, Uber, etc., then in such cases the reverse charge will apply to the e-commerce operator and he will be liable to pay GST at the applicable rate.
As per Section 9(3) of CGST Act, 2017, the Government on the recommendations of the GST Council notifies the categories of supply of goods and/or services, the tax on which is required to be paid on reverse charge basis by the recipient of such goods and/or services.
Section 9(4) of CGST Act, 2017 provides that in respect of the supply of taxable goods and/or services by unregistered supplier (who is not registered under GST), to a registered person, the tax shall be paid by the recipient on reverse charge basis.
All the provisions of the CGST Act, 2017 shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods and/or services.
Initially from 01.07.2017 to 12.10.2017, in terms of Notification No. 8/2017-CT (Rate) dated 28.06.2017 exemption from payment of tax on reverse charge basis was given if total value of the purchases in a day by a taxpayer from all unregistered persons was less than Rs. 5000/-. From 13.10.2017 to 31.01.2019 the exemption from payment of tax under reverse charge mechanism (RCM) on purchases from unregistered persons was extended till 31.09.2019 without any capping of value, vide various Notifications amending the said Notification No. 8/2017-CT (Rate) dated 28.06.2017.
However, by the amendment carried out in the Act through CGST (Amendment) Act, 2018, with effect from 01.02.2019 the RCM on purchases from unregistered persons was made applicable to only notified persons. Accordingly, vide Notification No. 07/2019-CT (Rate) dated 29.03.2019, the Builders and Promoters in Real Estate have been notified as persons liable to pay tax under reverse charge on the purchase of goods, viz., Cement and Capital Goods, and services or both which constitute the shortfall from the minimum value of goods or services or both required to be purchased by the promoter for construction of project, i.e. 80% of inputs and input services shall be purchased from the registered persons and on shortfall of purchases tax shall be paid by the builder on reverse charge basis.
In terms of Notification No. 09/2017-CT (Rate), dated 28.06.2017, Government entities who are TDS Deductors under Section 51 of CGST Act, 2017, need not pay GST under reverse charge in case of procurements from unregistered suppliers.
The recipient of goods and/or services making payment of tax under reverse charge has to issue invoice or payment voucher on goods and/or services received from a supplier.
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.
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.
The payment of tax under reverse charge is required to be made in cash only. The reason of this provision is that the definition of ‘output tax’ under Section 2(82) of CGST Act, 2017 categorically excludes tax payable under reverse charge basis and as per Section 49(4) of the CGST Act, 2017, the payment through the electronic credit ledger by utilizing the Input Tax Credit is allowed to be made towards output tax only. (Section 2(82) & 49(4) of CGST Act, 2017)
The benefit of exemption from registration for the small scale suppliers with turnover less than the stipulated threshold limit, is not available if they are liable to pay tax under reverse charge. Such suppliers are compulsorily required to obtain registration, as provided in Section 24(iii) of the CGST Act, 2017. (Section 24(iii) of CGST Act, 2017)
The persons engaged only in supplying goods and/or services on which tax is liable to be paid under reverse charge basis by the recipient, is not required to obtain registration.
The registered taxpayer making payment under reverse charge can take input tax credit on the tax paid under reverse charge on the eligible goods and services after the goods on which GST is payable on reverse charge basis, i.e. the tax is required to be paid by the GST registered recipient, notified in Notification No. 4/2017-CT (Rate), dated 28.06.2017, as amended, are as under-
(i) Cashew nuts not shelled or peeled, Bidi wrapper leaves (Tendu), Tobacco leaves and Raw cotton, purchased by any registered person from any Agriculturist;
(ii) Essential oils other than those of citrus fruit, namely, peppermint (Mentha piperita), other mints: Spearmint oil (ex-mentha spicata), Water mint-oil (ex-mentha aquatic), Horsemint oil (ex-mentha ylvestries), Bergament oil (ex-mentha citrate), supplied by unregistered person to registered person;
(iii) Silk Yarn, supplied by a person manufacturing silk yarn from raw silk or silk worm cocoons;
(iv) Lottery supplied by State Government, Union Territory or any local authority to Lottery distributor or selling agent;
(v) Used vehicles, seized and confiscated goods, old and used goods, waste and scrap supplied by Central Government, State Government, Union territory or a Local authority to any registered person;
(vi) Priority Sector Lending Certificate supplied by any registered person to any registered person.
The services on which GST is payable on reverse charge basis notified in Notification No. 13/2017-CT (Rate), dated 28.06.2017, are as under-
(i) Goods Transport Agency Services supplied by a Goods Transport Agency (GTA) in respect of transportation of goods by road to any factory, any registered society, any Cooperative society, any person registered under CGST/ IGST / SGST/or UTGST Act, any Body Corporate, any partnership firm, any casual taxable person located in the taxable territory.
(ii) Legal Services provided by an individual advocate or firm of advocates to any business entity located in the taxable territory.
(iii) Arbitral Services supplied by an arbitral Tribunal to a business entity located in the taxable territory.
(iv) Sponsorship Services provided by way of Sponsorship Service to any Body Corporate or partnership firm.
(v) Services supplied by the Central Government, State Government, Union territory or local authority to a business entity, excluding renting of immovable property service, services by the Department of posts, services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport and transport of goods or passengers.
(vi) 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 CGST.
(vii) Services by way of renting of residential dwelling to a registered person.
(viii) 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.
(ix) 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.
(x) Services supplied by a Director of a company or a Body Corporate to the said company or the Body Corporate.
(xi) Services provided by an Insurance Agent to person carrying on insurance business.
(xii) 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 relating to original dramatic, musical or artistic works to a music company, producer or the like.
(xiii) Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright relating to original literary works to a publisher.
(xiv) Supply of services by the members of Overseeing Committee to Reserve Bank of India.
(xv) 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).
(xvi) Services provided by Business Facilitator (BF) to a banking company.
(xvii) Services provided by an agent of Business Correspondent (BC) to Business Correspondent (BC).
(xviii) Security Services (services provided by way of supply of security personnel) provided to a registered person.
(xix) Services provided 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, provided to a body corporate.
(xx) Services of lending Securities under Securities Lending Scheme, 1997 (Scheme). Securities and Exchange Board of India (SEBI), as amended.
In addition, the following two services have been notified in Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017 –
(i) Any service supplied by any person who is located in a non-taxable territory to any recipient in India, other than non-taxable online recipient.
(ii) 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.
Latest updatesIn the Union Budget 2024, the Finance Minister proposed an amendment to Section 13 of the CGST Act to provide for the time of supply of services where the invoice is required to be issued by the recipient of services in cases of reverse charge supplies from the unregistered supplier.
*This will come into force once notified by the CBIC.
26th June 2024
The CBIC had issued the circular no. 211/5/2024-GST dt 26th June 2024 to clarify the recommendation by the GST Council w.r.t the availing of input tax credit under the provisions of section 16(4) of CGST Act for which the recipient has issued the invoice under RCM.
22nd June 2024
In the 53rd GST Council meeting held on 22nd June 2024, the Council recommended clarifying that in cases of supplies received from unregistered suppliers, where tax has to be paid by the recipient under reverse charge mechanism (RCM), and invoice is to be issued by the recipient only, the relevant financial year for calculation of time limit for availing of input tax credit under the provisions of section 16(4) of CGST Act is the financial year in which the recipient has issued the invoice.
Input Tax Credit (ITC) Under RCM
A supplier cannot take the GST paid under the RCM as ITC. The recipient can avail of ITC on GST amount paid under RCM on receipt of goods or services, only if such goods or services are used or will be used for business purposes.
The CBIC, vide circular no. 211/5/2024-GST dt 26th June 2024, clarified that the relevant financial year for calculating the time limit for availing of input tax credit under the provisions of section 16(4) of the CGST Act would be the financial year in which such self-invoice was issued.
In case the recipient issues the invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax. Further, in cases of such delayed issuance of invoice by the recipient, he may also be liable to penal action under Section 122 of the CGST Act.
The recipient cannot use the ITC to pay output GST on goods or services under reverse charge and should be paid in cash only.
Conclusion:-
-Reverse charge is a mechanism where the recipient of the goods or services is liable to pay Goods and Services Tax (GST) instead of the supplier.
-The Reverse Charge Mechanism is applicable in the case of :
-
- Imports
- Purchase from an unregistered dealer
- Supply of notified goods and services
- Taxable person paying tax under reverse charge is required to issue self-invoice. • Advance payments are subject to Reverse charge mechanism.
- For a Composite Dealer, if he falls under Reverse Charge Mechanism then the dealer is ineligible to claim any credit of tax paid.
-No partial reverse charge will be applicable under GST. 100% tax will be paid by the recipient if the reverse charge mechanism applies.
- In the case of B2B import of other services, the tax shall be payable by the recipient of services
- In the case of B2B import of goods, the tax shall be payable by the recipient of goods.
-Reverse charge mechanism is not a new concept. We were already dealing with this in the service tax. But imposing a 100% reverse charge is definitely a big change. There are both pros and cons of this reverse charge mechanism but then no accurate conclusion can be drawn currently as to how the Business houses will be impacted by its imposition. On one hand it will definitely be burdensome for the small supply receivers, but on the other hand, it will increase tax compliance for the country as a whole and would increase transparency.
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