Complete Provisions of Reverse Charge Mechanism (RCM) Till Date – Under GST

Introduction: The concept of reverse charge mechanism was introduced in erstwhile Service Tax laws. Generally, tax is payable by the person who provides Services but under reverse charge mechanism the liability to pay tax has shifted to recipient of Services. The similar concept of reverse charge mechanism has incorporated under GST, but in GST regime Government has notified not only supply of certain Services but also supply of certain goods. The objective of reverse charge mechanism is to widen the scope of levy of tax on unorganized sectors and give exemption to specific class of supplier of goods / services and import of services.

Therefore, under reverse charge mechanism the liability to pay tax has fixed on the recipient of supply of goods or services instead of the supplier or provider in respect of certain categories of goods or services or both under Section 9(3) or Section 9 (4) of the CGST Act.2017 and under sub-section (3) or sub-section (4) of section 5 of the IGST Act, 2017.

Statutory Provision of Reverse Mechanism:

Section 2(98) of the CGST Act, 2017 has defined the term “reverse charge” and the same is reproduced as follows:

“reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act.

The plain reading of the cited definition of reverse charge under GST laws, it is clearly stated that reverse charge is not only confined to services rather the scope of reverse charge is extended to goods also. For more detailed provisions of reverse charge as provided under section and sub-section of the CGST Act,2017 and IGST Act, 2017 is reproduced in the following paras as under:

Section 9(3) of the CGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows;

“The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

Section 9(4) of the CGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows;

The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

The above provision has been deferred till 30’th September’2019 vide Notification No.22/2018-IT dated 6.8.2018

Section 5(3) of the IGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows;

“The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

Section 5(4) of the IGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows;

“ The integrated tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

The above provision has been deferred till 30’th September’2019 vide Notification No.23/2018-IT dated 6.8.2018

The above cited provisions of CGST Act, 2017 and IGST Act, 2017 says that there are two type of reverse charge scenarios provided in law. First situation is dependent on the nature of supply and /or nature of supplier. This is covered by section 9(3) of the CGST / SGST/UTGST Act and section 5(3) of the IGST Act. Second situation is covered by section 9(4) of the CGST / SGST/UTGST Act and section 5(4) of the IGST Act where a taxable supply by any unregistered person to a registered person is covered. Accordingly, whenever a registered person procures supplies from an unregistered supplier, he needs to pay GST on reverse charge basis, However, supplies where the aggregate value of such supplies of goods or services or both received by a registered person from any or all the unregistered suppliers is less than five thousand rupees in a day are exempted vide Notification No.8/2017-Central Tax (Rate) dated 28.06.2017.

GST Registration under RCM:-

As per section 24 of the CGST Act, 2017, a person who is required to pay tax under reverse charge has to compulsorily register under GST irrespective of the threshold limit of registration and threshold limit of Rs.20 lakhs / Rs.40 lakhs (Rs.10 lakhs for special category states except J & K) but special category States threshold exemption is increased to Rs.20 lakhs (as per CGST Amendment Act, 2018) is not applicable to the reverse charge mechanism.

Invoicing Rules under RCM:-

Under reverse charge, the buyer or recipient of goods or services or both has to issue invoice or payment voucher on received of goods or services or both from the supplier as may be the case.

In terms of sub-section (3) of Section 31 (3) (f) of the CGST Act,2017 and read with clause (f) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 of the CGST Act, shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both; and as per clause (g) a registered person who is liable to pay tax under sub-section (3) or sub-section(4) of section 9 shall issue a payment voucher at the time of making payment to the supplier.

The second proviso to Rule 46 provides that where an invoice is required to be issued under Section 31(3)(f) of the CGST Act, a registered person may issue a consolidated invoice at the end of a month for supplies covered under Section 9(4) the aggregate value of such supplies exceeds rupees five thousand in a day from any or all the supplies.

Considering the inconvenience that may be caused to the stakeholders in the procedure under Section 9(4) of the CGST Act, 2017, the Central Government, therefore, issued a Notification Vide No.8/2017-C.T (Rate), dated 28-6-2017 has given exemption to intra-State supplies of goods or services or both to the tune of Rs.5000/- in a day from the purview of Section 9(4) which came into effect from 1-7-2017. If the value of the supply is more than Rs.5000/- per day then reverse charge is applicable under Section 9(4).

Vide Notification No. 38/2017-C. T(Rate) dated 13.10.2017 the threshold limit of Rs.5000/- for exemption per day kept abeyance until 31.3.2018 and also with subsequent Notifications the time –line has been extended up to 30-9-2019 vide Notification No.22/2018-C.T.(Rate) dated 6-8-2018.

Input Tax Credit under RCM:-

A supplier cannot take input tax credit of GST paid on goods or services used to make supplies on which the recipient is liable to pay tax under reverse charge.

The recipient can avail input tax credit of GST amount that is paid under reverse charge on received of goods or services by him.

GST paid on goods or services under reverse charge mechanism is available as ITC to the registered person provided that such goods or services are used or will be used for business or furtherance of business.

The ITC is availed by recipient cannot be used towards payment of output tax on goods or services, the payment of tax under reverse charge only on cash.

Liability arises to pay GST under RCM:-

The time of supply is the point when the supply is liable to GST. One of the factors relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, the recipient is liable to pay GST. Thus, time of supply for supplies under reverse charge is different from the supplies which are under forward charge.

Time of supply for goods under Reverse Charge:-

As per Section 12(3) of the CGST Act,2017 in case of supplies of goods in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely:-

(a) date of receipt of goods; or

(b) date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(c) the date immediately following 30 days from the date of issue of invoice or any other document, or similar other document thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.

Time of supply for Services under Reverse Charge:-

As per Section 13(3) of the CGST Act,2017 in case of supplies of Services in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely:-

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following 60 days from the date of issue of invoice or any other documents, similar other document thereof by the supplier:

Provided, where it is not possible to determine time of supply by using above methods clause (a) and clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply.

Compliances in respect of supplies under reverse charge mechanism:-

1. As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules,2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge.

2. Maintenance of accounts by registered persons; every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge.

3. Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.

4. Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the 4B of GSTR-1.

5. Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.

Reverse charge on Specified goods:

The supply of goods under reverse charge mechanism has notified vide Notification No. 4/2017-Central Tax (Rate) dated 28.06.2017 as amended from time to time under Section 9(3) of the CGST Act, 2017 and the same is reproduced in the below Table:-

S. No. Tariff item, Sub-heading, or Chapter. Description of Supply of Goods Supplier of Goods Recipient of Supply
(1) (2) (3) (4) (5)
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. 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
4A 5201(Effective from 15-11-2017) Raw cotton Agriculturist Any registered person
5. Supply of lottery State Government ,Union Territory or any local authority Lottery distributor or selling agent.

Explanation. – For the purposes of this entry, lottery distributor or selling agent has the same meaning as assigned to it in clause (c) of Rule 2 of the Lotteries (Regulation) Rules, 2010, made under the 2 provisions of sub section 1 of section 11 of the Lotteries (Regulations) Act, 1998.

6 Any Chapter( Effective from 13-10-2017) 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 Any Chapter( Effective from 28-05-2018) Priority Sector Lending Certificate Any registered Person Any registered Person

Remarks: The cited Table Tariff description and rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 and shall apply to the interpretation of the said notification.

Reverse Charge on Specified Services:

The supply of services under reverse charge mechanism has notified vide Notification No.13/2017-Central Tax (Rate) dated 28.06.2017 (as amended from time to time ) and the list Services that will be under reverse charge as notified by the Central Government is given below Table:-

Sr. No. Category of Supply of Services Supplier of Service Recipient of service
1 2 3 4
1 GTA Services :

Supply of Services by a goods transport agency (GTA) who has not paid central tax @6% in respect of transportation of goods by road to-

(a) any factory registered under or governed by the Factories Act,1948;or

(b) any society registered under the Societies Registration Act,1860 or under any other law for the time being in force in any part of India; or

(c) any cooperative society established by or under any law; or

(d) any person registered under CGST / IGST/SGST/ or UTGST 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; located in the taxable territory.

“Provided that nothing contained in this entry shall apply to services provided by a goods transport agency, by way of transport of goods in a goods carriage by road, to, (a) a Department or Establishment of the Central Government or State Government or Union territory; or

(b) local authority; or

(c) Governmental agencies, which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 and not for making a taxable supply of goods or services.

Goods Transport Agency (GTA) (a) any factory registered under or governed by the Factories Act,1948; or

(c) any society registered under the Societies Registration Act,1860 or under any other law for the time being in force in any part of India; or

(d) any cooperative society established by or under any law; (d) any person registered under CGST / IGST/SGST/ or UTGST 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; located in the taxable territory.

 

2

Legal Services

Services provide by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly.

Explanation: – ‘legal service’ means any service provided in relation to advice, consultancy or assistance in any manner and includes representational services before any court, tribunal or authority.

 

An individual advocate including a senior advocate or firm of advocates Any business entity located in the taxable territory.
3 Arbitral Services

Services supplied by an arbitral Tribunal to a business entity.

An arbitral Tribunal Any business entity located in the taxable territory.
4 Sponsorship Services

Service provided by way of Sponsorship Service to anybody corporate or partnership firm.

Any person Anybody corporate or partnership firm located in the taxable territory.
5 Government Services:

Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding the following :

(A) renting of immovable property service, and

(B) services specified below:-

(i) services by the Department of posts by way of speed post, life insurance, express parcel post and agency services provided to a person other than Central Government, State Government or Union territory or local authority ;

(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.
5A

 

Services by the Government

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 ( with effect from 25-01-2018.

Central Government, State Government, Union territory or Local Authority Any person registered under the Central Goods and Services Tax Act.2017
6 Services by the Director

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 A company or a body corporate located in the taxable territory
7 Insurance Agent Service

Services provided by an insurance agent to person carrying on insurance business.

An Insurance Agent Any person carrying on insurance business, located in the taxable territory.
8 Recovery Agent Service

Services provided by a recovery agent to a banking company or a financial institution or a non-banking financial company.

A Recovery Agent Banking company Financial institution or a non-banking financial company, located in the taxable territory.
9 Copyright Service

Supply of Services by an author , music or the like by way of transfer or permitting the use or enjoyment of a copyright of a covered under clause (a) of sub-section (1) of Section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like.

Author or music composer, photographer artist, or the like. Publisher, Music company, producer or the like, located in the taxable territory.
10 Reserve Bank Services:

Supply of services by the members of Overseeing Committee to Reserve Bank of India ( Effective from 13.10.2017)

Members of Overseeing Committee constituted by the Reserve Bank of India.

 

Reserve Bank of India
11 Services by DSAs:

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) Effective from 27.7.2018)

Individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm. A banking company or a non-banking financial company, 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 the entry shall apply to,- (i)(a) a Department or Establishment of the Central Government or State Government or Union territory, or (b) local authority, or (c) Government agencies, which has taken registration under the Central Goods and Services Tax Act, 2017( 12 of 2017) only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services, or (ii) a registered person paying tax under section 10 of the said Act.

(Sl.No. 12 to 14 – vide Notification. No.29/2018-Central Tax (Rate) dated 31.12.2018. w.e.f.1.1.2019)

Any person other than a body corporate. A registered person, Located in the “taxable territory.”

The cited table is showing the list of services as notified by the Government and approved by the GST Council for levy of GST under reverse charge.

Explanation.- For purpose of this notification,- (a)The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.

(b) “Body Corporate” has the same meaning as assigned to it in clause (11) of section 2 of the Companies Act, 2013.

(c) the business entity located in the taxable territory who is litigant, applicant or petitioner, as the case may be, shall be treated as the person who receives the legal services for the purpose of this notification.

(d) the words and expressions used and not defined in this notification but defined in the Central Goods and Services Tax Act, the Integrated Goods and Services Tax Act, and the Union Territory Goods and Services Tax Act shall have the same meanings as assigned to them in those Acts.

(e) A “Limited Liability Partnership” formed and registered under the provisions of the Limited Liability Partnership Act, 2008 (6 of 2009) shall also be considered as a partnership firm or a firm.”.

(f) “insurance agent” shall have the same meaning as assigned to it in clause (10) of section 2 of the Insurance Act, 1938 (4 of 1938).’.

(g) “renting of immovable property” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property.’.

“(h) provisions of this notification, in so far as they apply to the Central Government and State Governments, shall also apply to the Parliament and State Legislatures.”.

RCM on the supply from unregistered person (suspended):

Provisions of reverse charge mechanism under sub-section (4) of section 9 of the CGST Act, 2017 and sub-section (4) of section (5) of the IGST Act, 2017 and sub-section (4) of section 7 of the UTGST Act, 2017 have been amended to empower the Government to notify class of persons who would be liable to pay tax under reverse charge with respect to specified categories of goods or services or both. On the recommendations of the GST Council made in its 28’th meeting held on 21.07.2018, the said provisions have been suspended for the CGST Act, IGST Act and the UTGST Act till 30.09.2019. (Notification Nos.22/2018-C.T.(Rate) dated 6’th August’2018. 23/2018-IGST (Rate) dated 6’th August’2018 and 22/2018-Union Territory Tax (Rate) dated 6’th August’2018 respectively).

(Republished with amendments)

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27 Comments

  1. KISHOR says:

    Dear Sir,

    You have provided very useful information. I am clear on some point regarding RCM.

    I am having Retail Loan Business termed AS DSA with Many Banks and NBFC. I am getting Payout under Section 194H. Our Annual Turnover is < 20 Lac and not registered for GST.

    Bank is deduction GST from our payout under RCM system.

    I just wanted to know

    1. if i Provide GST number. Does bank will not Deduct the GST from my Payout.

    2. If i am not crossing Limit of 20 Lac Annual then How the banks are deducting GST from my Payout.

    Please guide me for the above problem.

    Thanks
    Kishor

  2. Srikala Renjith says:

    Thanks a lot for the article.

    I have a query. If an assesee is registered under voluntary scheme due to RCM, do we need to pay gst on any other taxable supplies made by the assessee, even if such supplies are below threshold limit.

  3. Nihar Ranjan Barik says:

    Nicely elaborated the GST under RCM. But no where mentioned regarding GST under RCM on Ocean Freight. Special request kindly make an article on this issue.

  4. K.BALACHANDRAN says:

    What is the Notification No. and date issued under IGST & GST specifying Rate of Tax under reverse charge mechanism. for goods and services

  5. ravi chandiran s says:

    what is the accounting entry to be entered in Tally for RCM GST payable and what is the entry for the payment of the same in Tally and what is the entry for the availing of input tax credit for RCM GST paid.

  6. B K BANKA & ASSOCIATES says:

    whether any charitable society registered u/s 12A liable for GST registration for RCM purpose..Because as per my interpretation they are consumer and they are not getting any supply in furtherance of business

  7. Agoel says:

    What will be the place of service under reverse charge logically it should be the place of recipient and CGST & SGST must attract, please confirm.

  8. KETAN PANDYA says:

    i’d make a entry in tally rcm entry. pl.guide me. 31/7/2017
    input cgst 9 % 24000 DR.
    input sgst 9% 24000 DR.
    output cgst 9% 24000 CR
    ouput sgst 9 % 24000 CR.

    (2 )

    OUTPUT CGST 9 % 24000 DR
    OUTPUT SGST 9 % 24000 DR
    TO BANK CREDIT.
    PL.GUIDE ME. IS IT OK?
    KETAN PANDYA

  9. Kumar says:

    “The ITC is availed by recipient cannot be used towards payment of output tax on goods or services, the payment of tax under reverse charge only on cash.”
    This sentence needs to be clarified.

  10. anil says:

    1) Do we need to deposit GST under RCM only for specified goods and services OR any goods purchased or services received from any person who is unregistered dealer if the amount involved exceeds Rs5,000? and
    2) Do an advocate or a firm rendering legal services need to register for the purpose of Reverse Charge?

  11. Vipin Gupt says:

    corporate office (having nil output supply) is paying tax on reverse charge basis….

    corporate office have both the GST Numbers i.e. normal GST number as well as ISD number.

    how the credit of tax paid under reverse charge will pass on other units….

    please reply….

  12. PADMANABHAN PRAKASH & CO says:

    “The ITC is availed by recipient cannot be used towards payment of output tax on goods or services, the payment of tax under reverse charge only on cash.”
    This sentence needs to be clarified.

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