Reverse Charge Mechanism and Input Tax Credit Time Limits under GST

Summary: Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) shifts the tax payment responsibility from the supplier to the recipient for certain notified goods and services. As per Section 9(3) and 9(4) of the CGST Act, 2017, RCM applies to specific services like transportation by a Goods Transport Agency (GTA), legal services, and sponsorships, as well as goods like cashew nuts and silk yarn. Businesses receiving these supplies must ensure timely self-invoicing, as per Section 31(3)(f), to claim Input Tax Credit (ITC). The ITC can only be availed if the goods or services are used for business purposes, and the recipient holds a valid tax invoice. Notably, ITC must be claimed by November 30th following the financial year in which the self-invoice is issued. Circular No. 211/5/2024-GST, issued on June 26, 2024, clarifies these time limits and conditions, highlighting the importance of compliance to avoid interest, penalties, and potential litigation. Businesses must verify their RCM liabilities, ensure accurate self-invoicing, and adhere to ITC time limits to manage their tax obligations effectively under GST.

Introduction: Reverse Charge Mechanism (RCM) is a provision under the Goods and Services Tax law where the liability to pay tax is shifted from the supplier to the recipient of goods or services. This mechanism is particularly applicable in cases where the supplier is unregistered or in specific notified supplies.

1. Legal Provision –

Section 9(3) of the CGST Act, 2017 specifies categories of supply of goods or services, the tax on which shall be paid on a reverse charge basis by the recipient.

Section 9(4) of the CGST Act, 2017 pertains to supplies received from unregistered suppliers, where the recipient is liable to pay tax under RCM. The government, on the recommendations of the GST Council, may specify a class of registered persons who shall pay tax on reverse charge basis for specified categories of goods or services received from unregistered suppliers.

Under the GST framework, the RCM is applicable only to certain specified services and goods as notified by the government. These notifications are issued under Section 9(3) of the CGST Act, 2017. Notification No. 13/2017-Central Tax (Rate) dated 28th June 2017, specifies list the specific services and goods covered under RCM.

2. Notified Services Under RCM :-

1. Services by a Goods Transport Agency (GTA) – Services provided by a GTA in respect of transportation of goods by road to specified persons, including a registered person, are covered under RCM.
2. Legal Services – Services provided by an individual advocate or a firm of advocates, including senior advocates, to a business entity are subject to RCM.
3. Services by an Arbitral Tribunal – Services provided by an arbitral tribunal to a business entity are covered under RCM.
4. Sponsorship Services – Sponsorship services provided to any body corporate or partnership firm are liable under RCM.
5. Services by the Central Government, State Government, Union Territory, or Local Authority – Certain services provided by these entities to a business entity, such as renting of immovable property, are covered under RCM.
6. Security Services – Services provided by a person other than a body corporate to a registered person are covered under RCM.

3. Notified Goods Under RCM :-

1. Cashew Nuts – Supply of cashew nuts, not shelled or peeled, by an agriculturist to a registered person.
2. Bidi Wrapper Leaves (Tendu) – Supply of bidi wrapper leaves (tendu) by an agriculturist to a registered person.
3. Silk Yarn – Supply of silk yarn by any person who manufactures silk yarn from raw silk or silk worm cocoons to a registered person. 

4. Time of Supply – RCM –

According to the GST law, for the services under RCM, the time of supply is the earliest of:

1. The date of payment.
2. The date immediately after 60 days from the invoice date.
3. If neither is determinable, the date of entry in the recipient’s books of account. 

5. Input Tax Credit – RCM –

The recipient can avail of Input Tax Credit (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 recipient cannot use the ITC to pay output GST on goods or services under reverse charge and should be paid in cash only.

6. Input Tax Credit – Eligibility conditions for availing ITC under RCM –

According to Section 16 of the CGST Act, 2017:

1. The recipient must have a tax invoice or debit note.
2. The goods or services must be received.
3. The tax must be paid to the government.
4. The recipient must file the return under Section 39.

7. Self-Invoicing – RCM –

Self-invoicing is to be done when purchases 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.

Accordingly, self-invoicing, in this case, becomes necessary document for availing ITC as per Section 16 of CGST Act, 2017.

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.

8. Time Limit for ITC –

As per Section 16(4) of the CGST Act, 2017, A registered person cannot be claimed ITC after the 30th of November following the end of the financial year to which the invoice pertains or the filing of the annual return, whichever is earlier.

Let’s understand the concept with below case study;

A company did not pay RCM liability for purchases of services from an unregistered supplier in year 2018. During a GST audit, the department highlighted this liability. The company paid the liability along with interest and penalty in 2022. In this case taxpayer and department has two different stands;

Taxpayers stand – ITC on delayed payment of RCM liability for 2018– Allowed, as we have paid now in 2022.

Department stand – ITC on delayed payment of RCM liability for 2018 – Not Allowed in 2022.

While deciding the case below points to be observed;

1. There is the existence of RCM liability for supplies received from Unregistered supplier as per Section 9 (3) or (4) of the GST Act.
2. For availing the ITC company must have self invoice as per section 31(3)(f) of CGST Act, 2017.
3. ITC eligibility and time limit to be determined as per Section 16 (2) , Section 16 (4) of CGST Act, 2017.

In this regard, Circular No. 211/5/2024-GST dated 26th June 2024 provides important clarifications regarding the time limit for availing Input Tax Credit under the Reverse Charge Mechanism for supplies received from unregistered persons.

It clarifies that the time limit for availing Input Tax Credit on tax paid under the Reverse Charge Mechanism for supplies from unregistered persons is until the 30th of November following the end of the financial year in which the self-invoice is issued.

Accordingly, companies whenever paid liability under RCM for an unregistered supplier must ensure timely issuance of self-invoices and adherence to the specified time limits to claim ITC to avoid further GST litigation issues.

7. Checkpoints to be remember by companies, taxpayers and tax professionals –

1. Check if the RCM liability is for an unregistered supplier.
2. Ensure self-invoice issuance date is correct.
3. Verify ITC bifurcation in GSTR-9 (Table no. 6) for RCM liability paid for unregistered taxpayers.
4. Confirm payment voucher and self-invoice details in GSTR-1.
5. No ITC is allowed for delayed RCM payments to registered suppliers.
6. Delayed RCM payments may attract interest and penalties u/s 122 of the Act.

Lastly, the issuance of Circular No. 211/5/2024-GST dated 26th June 2024 brings much-needed clarity and uniformity to the process of claiming Input Tax Credit under the Reverse Charge Mechanism for supplies from unregistered persons. By clearly defining the time limits and conditions for availing ITC, the circular helps businesses ensure compliance and avoid potential financial penalties. It underscores the importance of timely self-invoicing and its record-keeping, thereby promoting a more streamlined and consistent approach to GST compliance across different jurisdictions.

Adhering to these guidelines will help businesses manage their tax liabilities and input tax credits effectively and maintain smooth operations.

CMA Amit Devdhe