Ramesh Chandra Jena

Ramesh Chandra JenaThe 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 as notified by the Government.

Definition of Reverse Charge under GST:

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 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.”

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 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.10 lakhs for special category states except J & K) is not applicable to him.

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 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.

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.

The supply of goods under reverse charge mechanism has notified vide Notification No. 4/2017-Central Tax (Rate) dated 28.06.2017 and the same is reproduced in the below Table:-

S. No. Tariff item, Sub-heading, 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
5. Supply of lottery State Government ,Union Territory or any local authority Lottery distributor or selling agent. ( As per Lotteries (Regulation) Rules 2010 and Lotteries(Regulations) Act,1998

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.

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

Services Covered Under Reverse Charge w.e.f. 01.07.2017
Sr. No. Description of Services Supplier of Service Recipient of service % of GST payable by Service Provider % of GST payable by a person other than service provider
1 Import of Service Import of taxable services other than non-assessee online information recipient. Person located in a non-taxable territory i.e. any foreign country or in the State of Jammu and Kashmir. Any business entity located in taxable territory. 0% 100%
2 Goods Transport Agency Service (GTA) Services provided by a goods transport agency (GTA) in respect of transportation of goods by road. Goods Transport Agency (GTA) (a) any factory registered under or governed by the Factories Act,1948; (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; ( c ) 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.

0% 100%
3 Legal Service Legal services by a firm of advocates or an individual advocate. An individual advocate including a senior advocate or firm of advocates Any business entity located in the taxable territory. 0% 100%
4 Services provided by an arbitral Tribunal to a business entity. An arbitral Tribunal Any business entity located in the taxable territory. 0% 100%
5 Service provided by way of Sponsorship Service to any body corporate or partnership firm. Any person Anybody corporate or partnership firm located in the taxable territory. 0% 100%
6 Government Services Services provided by Central Government, State Government, Union territory or local authority 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 Government; (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. 0% 100%
7 Services by Director Services provided 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 0% 100%
8 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. 0% 100%
9 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. 0% 100%
10 Goods Transport Services by Vessel Services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India A person located in non-taxable territory to a person located in non-taxable territory Importer as defined under Clause (26) of section 2 of the Customs Act,1962 0% 100%
11 Copyright Service 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. Author or music composer, photographer artist, or the like. Publisher, Music company, producer or the like, located in the taxable territory. 0% 100%
12 Services by E-commerce Operator Radio taxi or passenger Transport Services provided through electronic commerce operator. Taxi driver or Rent-a-cab operator Any person located in the taxable territory. 0% 100% by Electronic Commerce Operator

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.

Conclusion: The provision of reverse charge mechanism in GST regime has extended to certain categories of Services as well as goods also. The objective of the Government behind the implementation of reverse charge mechanism in GST is to enhance the scope of levy of tax and to bring unorganized sectors in the tax net. But the small business entity would find it difficult to pay tax by purchasing / procuring goods or services from the unregistered dealer. Consequently, the cost of business as well as cost of production of small business entity will be increased and they cannot compete in the domestic as well as international market. There is need of further modification on Reverse Charge mechanism so that it will be beneficial to all sectors of business entity in the country.

Author Details:-

Ramesh Chandra Jena, B. A (Hons)., M.A (Eco)., D.M.M., LL.B.

Senior Manager- Indirect Taxation,  KSK Energy Ventures Limited.

Author Bio

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14 responses to “Reverse Charge Mechanism in GST Regime with Chart”

  1. Pampa Mukopadyay says:

    Can any company get the input benefit of RCM paid against GTA.

  2. Raj Krishan Garg says:

    PL. GUIDE ME RICE BRAN REVERSE CHARGE

  3. surya prakash says:

    Dear Sir
    Thank you for publishing
    most useful to us

  4. 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.

  5. 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

  6. 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.

  7. 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

  8. 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.

  9. Kumar says:

    please clarify about RCM on rent

  10. Jitender Gupta says:

    Dear Sir,
    I have a doubt that only 9 Services were notified in N. No 13/2017, Pls revert
    I also watched same thing in –
    https://youtu.be/TptUvfjAxKk

  11. 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?

  12. 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….

  13. 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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