Reverse Charge Mechanism (‘RCM’) in case of purchase from unregistered supplier

The provision that has gathered maximum attention for its ability to create significant stress and nuisance would clearly be Section 9(4) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). Before we go to that, we should understand Reverse Charge Mechanism.

Reverse Charge Mechanism (RCM).

Normally, the supplier of goods or services pays the tax on supply. In case of RCM, the recipient becomes liable to pay the tax, i.e., the chargeability gets reversed.

As per Section 2(98) of the CGST Act, 2017.

“reverse charge” means the liability to pay tax by the recipient of the 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 subsection (4) of section 5 of the Integrated Goods and Services Tax Act.

Reverse charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply. Although, they are eligible for credit, but the procedure formalities are there which need to be complied with.

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Scenarios of RCM available in GST Law.

There are two types of scenarios in GST Law-

• Compulsory Reverse Charge even if the supplier is registered: –

First is dependent on the nature of supply and/or nature of supplier. This scenario is covered by Section 9(3) of the CGST/ SGST (UTGST) Act and Section 5 (3) of the IGST Act.

• Reverse Charge if the supplier is unregistered: –

Second scenario is covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 of the IGST Act where taxable supplies by any unregistered person to a registered person is covered.

#CGST Act- The Central Goods and Services Tax Act, 2017

#SGST Act- The State Goods and Services Tax Act, 2017

# UTGST Act- The Union Territory Goods and Services Tax Act, 2017

# IGST Act- The Integrated Goods and Services Tax Act, 2017

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RCM dangerous for recipient.

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 Law irrespective of the threshold limit of registration and threshold limit of Rs. 20 lakhs / Rs.40 lakhs (Rs.10 lakhs for Special Category States).

Exemption Notification No. 5/2017-Central Tax dated 19^th June 2017 applicable with effect from 22^nd June, 2017

No doubt, RCM may dangerous for recipient. However, to avoid hardship, the Central Government had issued exemption Notification Dated 19^th June, 2017, for obtaining registration under GST Law.

As per exemption Notification Dated 19^th June, 2017, the persons who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both under sub-section (3) of section 9 of the said Act as the category of persons exempted from obtaining registration under the aforesaid Act.

It means if any person is making all his supplies only on reverse charge basis u/s Section 9(3), he will be exempted from obtaining registration under GST.

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Provisions of Section 9(4) of the CGST/ SGST (UTGST) Act and section 5(4) of the IGST Act.

It is to be noted that existing provisions of RCM have been replaced by the CGST (Amendment) Act 2018 (‘Amendment Act’). Also, various notifications had come to give exemption regarding provision of RCM. But now the amended provisions of Section 9(4) of the CGST Act have been made effected w.e.f 01/02/2019 and notified the specified persons and goods. Now, we would like to read the old and new provisions of RCM in sequence (amended and notified day by day) to understand in better a position-

Section 9(4) of CGST Act provides that-

“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.”

As per the above provision, whenever a registered person procures supplies from an unregistered supplier, he needs to pay GST on reverse charge basis. Please note that all the transactions of the supply of taxable goods or services or both from an unregistered person to registered were covered under RCM basis without any limit.

Partial Exemption Notification No. 8/2017-Central Tax dated 28^th June 2017 applicable with effect from 1^st day of July, 2017.

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, in exercise of the powers conferred by sub-section (1) of section 11 of the CGST Act, 2017, had issued a Notification No. 8/2017-Central Tax dated 28^th June 2017 applicable with effect from 1^st day of July, 2017.

By the said Notification dated 28^th June, 2017, the Central Government had exempts Intra-State supplies of goods or services or both received by a registered person from any unregistered person regarding applicability of the whole provisions of Section 9(4) of the CGST Act, 2017. The said Notification dated 28^th June, 2017 dated was applicable w.e.f. 1^st day of July, 2017.

Please also note that the Central Government, by the proviso under the said Notification dated 28^th June, 2017, has also putted one restriction on the said exemption by providing the limit of Rs. 5,000/- in day.  Therefore, if the value of Intra-State supplies of goods or services or both is more than Rs.5,000/- per day then RCM is applicable under Section 9(4) of the CGST Act, 2017. Therefore, we can say that Notification dated 28^th June, 2017 was a partial exemption notification.

Full Exemption Notification No. 38/2017-Central Tax dated 13^th October, 2017 applicable with effect from 13.10.2017. [Corresponding IGST Notification No.32/2017-Integrated Tax (Rate) dated 13.10.2017]

As the exemption provided by the Notification dated 28^th June, 2017 was a partial exemption, therefore, the Central Government decided to amend the said Notification dated 28^th June, 2017 to give full exemption in case if Intra-State supplies of goods or services or both received by a registered person from any unregistered person.

It is also pertinent to note that there was no time limit in Notification dated 28^th June, 2017, to obtain the exemption. Therefore, it was also decided by the Central Government to put the restriction for giving full exemption up to a certain time limit.

In view of the above, the Central Government, in exercise of the powers conferred by sub-section (1) of section 11 of the CGST Act, 2017, had issued a Notification No. 38/2017-Central Tax dated 13^th October, 2017 applicable with effect from 13/10/2017.

By the said Notification dated 13^th October, 2017, the Central Government had deleted the proviso to Notification dated 28^th June, 2017, which restrict the exemption for RCM u/s 9(4) of the CGST Act only up to the limit of Rs. 5,000/- in day in case of the value of Intra-State supplies of goods or services or both.

By the said amendment, the partial exemption provided under the Notification dated 28^th June, 2017 had been converted into full exemption. However, the time limit has been fixed for exemption under Notification dated 13^th October, 2017 (which was not earlier) mentioning that the exemption contained in the Notification dated 28th June, 2017 as amended by Notification dated 13^th October, 2017, shall apply to all registered persons till the 31st day of March, 2018.

Pursuant to the both notifications dated 28^th June, 2017 and dated 13^th October, 2017, exemption was available to all the registered persons till March 31, 2018 without any limit in case of supply procured from unregistered supplier. INTER-STATE SUPPLIES received from unregistered supplier is also exempt under corresponding notification issued under IGST Act i.e. Notification No.32/2017-Integrated Tax (Rate) dated 13.10.2017.

Therefore, any registered person procuring taxable goods/services from unregistered suppliers, shall not be required to pay CGST under reverse charge mechanism U/s 9(4) of CGST Act, 2017 or 5(4) of IGST Act, 2017 till March 31, 2018 with effect from 13th Oct, 2017.

Further, the above exemption was extended till 30^th June 2018 vide Notification No. 10/2018 – Central Tax (Rate) dated 23^rd March, 2018.

Again, the above exemption was extended till 30^th September 2018 vide Notification No. 12/2018 – Central Tax (Rate) dated 29^th June 2018.

With subsequent Notifications the timeline has been extended up to 30^th September 2019 vide Notification No.22/2018-C.T.(Rate) dated 6-8-2018.

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CGST (Amendment) Act, 2018 dated 30.08.2018 for RCM.

The provisions of Section 9 (4) of the CGST Act, 2017 deals with the applicability of reverse charge mechanism, wherein, the goods or services or both is being procured by the registered person from the unregistered person.

Due to its wide implication, the said provisions have already undergone various amendments, however, the entire provisions of section 9 (4) has been recently substituted by the CGST (Amendment) Act, 2018 vide published in Official Gazette on 29^th August 2018.

However, it is pertinent to note that the new provisions of Section 9(4) of the CGST Act were not notified till 29^th January 2019. But later on, the new provisions of Section 9(4) of CGST Act have been notified by the Notification No. 2/2019- Central Tax dated 29^th January 2019 notifying the CGST (Amendment) Act, 2018 w.e.f. 01.02.2019.

In section 9 of the principal Act, for sub-section (4), the following sub-section shall be substituted, namely:––

“(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of 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 such supply of goods or services or both.”

By perusal of the said amended section, we can understand that the provisions of Section 9(4) of the CGST Act is not applicable to all registered persons, goods and services.

It is applicable only to selected categories of registered persons & Goods and services which has to be notified by the Government. So, until the same is being notified the provisions will not get effective.

It is also pertinent to mention that by the amendment in Section 9(4) through CGST (Amendment) Act, 2018 which has become effective, the exemption notification i.e.  Notification No. 8/2017 stands rescinded w.e.f. 01.02.2019.

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Notification No. 07/2019- Central Tax (Rate) dated 29^th March 2019 effective from 1^st April, 2019.

After a long gap, the Central Government has used its power provided under amended Section 9(4) of the CGST Act, 2017 (Through CGST (Amendment) Act, 2018). In exercise of the powers conferred by Section 9(4) of the CGST Act, 2017, the Central Government notified the registered person and goods and/or services which shall be covered under RCM if received from unregistered suppliers. In this regard, the Central Government has issued a Notification No. 07/2019- Central Tax (Rate) dated 29^th March, 2019 which has been effective from 01 April, 2019 and will be applicable on “Promoters” only for the ‘specified supplies.

Under the said Notification dated 29^th March, 2019, three kinds of supplies have been specified for which ‘promoter’ shall be liable to pay tax under reverse charge.

SUMMARISED POSITION

Summarised position of RCM provisions on the basis of the above-mentioned respective notifications as amended time to time, are as under-

Relevant Notification	Relevant Provisions/ Amendments	Remarks
Section 9(4) of CGST/SGST (UTGST) Act, 2017/section 5(4) of IGST Act, 2017	“the 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.”	All the transactions of the supply of taxable goods or services or both from an unregistered person to registered were covered under reverse charge basis.
Notification no. 8/2017-Central Tax (Rate) dated 28th June, 2017	Central tax payable on reverse charge basis on INTRA-STATE supplies of goods or services or both received by the registered person from the unregistered person is exempted till an aggregate value of INR 5000 per day.	01.07.2017 to 12.10.2017- No Reverse Charge Mechanism upto Rs. 5000 per day.
Notification no. 38/2017-Central Tax (Rate) dated 13 October, 2017	Entire central tax payable on reverse charge basis on Intra-state supplies of goods or services or both received by the registered person from an unregistered person is exempted (i.e. exemption upto INR 5000 replaced and the entire transaction was exempted) till 31 March, 2018.	As the proviso was omitted and notification was effective since 13.10.2017, therefore 13.10.2017 to 31.03.2018- No Reverse Charge Mechanism is applicable u/s 9(4). 01.07.2017 to 12.10.2017- No Reverse Charge Mechanism upto Rs. 5000 per day
Notification no. 10/2018-Central Tax (Rate) dated 23 March, 2018	The above exemption was extended till 30 June, 2018	13.10.2017 to 30.06.2018- No Reverse Charge Mechanism is applicable u/s 9(4).
Notification no. 12/2018-Central Tax (Rate) dated 29 June, 2018	The above exemption was extended till 30 September, 2018.	13.10.2017 to 30.09.2018- No Reverse Charge Mechanism is applicable u/s 9(4).
Notification no. 22/2018-Central Tax (Rate) dated 6th August, 2018	The above exemption was extended till 30 September, 2019.	13.10.2017 to 30.09.2019- No Reverse Charge Mechanism is applicable u/s 9(4).
Notification no. 01/2019-Central Tax (Rate) dated 29th January, 2019	The above exemption (Notification No. 8/2017) stands rescinded w.e.f. 01.02.2019.	Reverse Charge Mechanism is applicable u/s 9(4). But new provision of CGST (Amendment) Act 2018 shall apply
Notification No. 07/2019- Central Tax (Rate) dated 29th March, 2019	The Central Government notified the registered person u/s 9(4) as specified in said notification.	The said Notification is applicable w.e.f. 01.04.2019

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.