Reverse Charge Mechanism (RCM) in Goods and Services Tax (GST)

The concept of Reverse Charge Mechanism in Good and Services Tax has the same concept as it was in erstwhile Services Tax Act, except some changes are like Applicability on different tax payers, Compliance and its applicablity on some of the Goods as notified by the Government.

The below note will update you about the concept of Reverse Charge Mechanism and its applicability on Goods and Services till the date of writing this letter.

Defination of Reverse Charge as per CGST Act 2017:

As per section 2(98) “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 of CGST Act 2017, or under sub-section (3) or subsection (4) of section 5 of the IGST Act;

So, In RCM the recipient has to pay the tax instead of Supplier and recepient can take credit of the RCM paid as ITC.

The aim of Government behind this is to keep track and control of unorganized sectors.

The Charging Sections are 9(3) and 9(4) of CGST and 5(3)& 5(4) of IGST are reproduced as below:

Section 9(3) & 5(3) ; 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) & 5(4) ; 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.

Every Registered Tax payer has to comply with the provision of reverse charge mechanism irrespective of the Turnover threshold limit, Scheme of Registration whether Composition or registered as per section 24 of CGST act 2017.

Below is the list of Goods and Services on which GST on RCM shall be applicable as per the Notifications issued by CBIC

Notification Serial No. Tariff item, sub-heading, heading or Chapter Description of supply of Goods/ Services Supplier of goods/ Services Recipient of supply Type Goods/ Services
1 801 Cashew nuts, not shelled or peeled Agriculturist Any registered person Goods
2 1404 90 10 Bidi wrapper leaves (tendu) Agriculturist Any registered person Goods
3 2401 Tobacco leaves Agriculturist Any registered person Goods
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 Goods
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 provisions of sub section 1 of section 11 of the Lotteries (Regulations) Act, 1998 (17 of 1998). Goods
6 Any Chapter 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 Goods
4A 5201 Raw cotton Agriculturist Any registered person Goods
7 Any Chapter Priority Sector Lending Certificate Any registered person Any registered person Goods
1 Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road
“, who has not paid central tax at the rate of 6%,” (Inserted vide notfctn no. 22/2017, Central tax Rate dated: 22/08/2017) Inserted vide notfctn no. 29/2018, dated 31.12.2018 as below:
“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(63 of 1948); or Services
(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or Services
(c) any co-operative society established by or under any law; or Services
(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or Services
(e) any body corporate established, by or under any law; or Services
(f) any partnership firm whether registered or not under any law including association of persons; or Services
(g) any casual taxable person Services
located in the taxable territory.
2 Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity. Substituted vide Corrigendum to Notfct no. 13/2017, “Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly. An individual advocate including a senior advocate or firm of advocates. Any business entity located in the taxable territory. Services
3 Services supplied by an arbitral tribunal to a business entity. An arbitral tribunal. Any business entity located in the taxable territory. Services
4 Services provided by way of sponsorship to any body corporate or partnership firm. Any person Any body corporate or partnership firm located in the taxable territory. Services
5 Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, – Central Government, State Government, Union territory or local authority Any business entity located in the taxable territory. Services
(1) renting of immovable property, and Services
(2) services specified below- Services
(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; Services
(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; Services
(iii) transport of goods or passengers. Services
5A 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 (12
of 2017).
Central Government,
State Government,
Union territory or
local authority
Any person registered under the Central Goods and Services Tax Act, 2017 Services
5B 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. Any person Promoter Services
5C 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. Any person Promoter Services
6 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 The company or a body corporate located in the taxable territory. Services
7 Services supplied by an insurance agent to any person carrying on insurance business. An insurance agent Any person carrying on insurance business, located in the taxable territory. Services
8 Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company. A recovery agent A banking company or a financial institution or a non-banking financial company, located in the taxable territory. Services
9 Supply of services by an author(author has been taken in new clause 9A via notfctn no. 22/2019, so removed from this clasue) , music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright 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. Services
9A Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher. Author Publisher located in the taxable territory: But if author give declaration in AnxI to Authority and declaration on INVOICE, that he has taken registration and will pay GST in Forward charge basis, then this RCM clause not applicable. Services
10 Supply of services by the members of Overseeing Committee to Reserve Bank of India Members of Overseeing Committee constituted by the Reserve Bank of India Reserve Bank of India. Services
11 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). 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.”; Services
12 Services provided by business facilitator (BF) to a banking company Business facilitator (BF) A banking company,
located in the taxable
territory
Services
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 Services
14 Security services (services provided by way of supply of security personnel) provided to a registered person:
Provided that nothing contained in this 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) 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 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.
Any person other than a body corporate A registered person,
located in the taxable
territory.”;
Services
15 Services provided by way of renting of a motor vehicle provided to a body corporate. Substituted vide Notfctn No. 29/2019, dtd. 31/12/2019, CT-Rate, 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. Any person other than a body corporate, paying central tax at the rate of 2.5% on renting of motor vehicles with input tax credit only of input service in the same line of business, substituted vide notfct No. 29/2019 Central tax rate:  Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6 per cent. to the service recipient. Any body corporate located in the taxable territory. Services
16 Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”), as amended. Lender i.e. a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the Scheme of SEBI. Borrower i.e. a person who borrows the securities under the Scheme through an approved intermediary of SEBI.” Services
Section 9(4) Vide Notification No. 01/2019 Central tax Rate, Recinds the Notification No.8/2017, Central tax Rate, which enabled to charge RCM on purchase from URD if in excess of Rs. 5000 in totallity in a day. (Suspeneded) Services
Section 9(4) Government has Notified certain business/Goods under RCM vide notification no. 07/2019, 29/03/2019, in which Promoter has to buy minimum 80% of Goods and Services (as per notfctc CT-R No.03/2019, 29.03.2019)  to be used in Construction of Project from Registered dealer. Also Cement and Capital Goods notified if buy from unregistered, then promoter has to pay RCM. Goods & Services
Section 5(3) of IGST Act IGST Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient Any person located in a non-taxable territory Any person located in the taxable territory other than non-taxable online recipient. Services
Section 5(3) of IGST Act IGST 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. Any person located in a non-taxable territory Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory. Services

The purpose of the note is to give overall view and update on RCM and to equip anyone to handle RCM related compliance easily.

However there are explanations, definitions to the notification which we have not produced here to make the note compact, so if required please refer the individual  notification as per given in Column above.

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor taxguru.in and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Author Bio

Qualification: CA in Practice
Company: Puneet Deora & Company
Location: Goregaon East, Mumbai, Maharashtra, IN
Member Since: 02 Apr 2020 | Total Posts: 3

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6 Comments

  1. vswami says:

    Author/ ADMN.

    Section 9(4) – Government has Notified certain business/Goods under RCM vide notification no. 07/2019, 29/03/2019, in which Promoter has to buy minimum 80% of Goods and Services (as per notfctc CT-R No.03/2019, 29.03.2019) to be used in Construction of Project from Registered dealer. ALSO CEMENT AND CAPITAL GOODS notified if buy from unregistered, then promoter has to pay RCM. — Goods & Services

    FONT< Confused; one would have thought that cement being one of the 'INPUTS'- revenue items , just as many others, there was no need for a spercific notification.

    As regards , 'capital goods' (X cement – i.e. 'capitalised expenditure') , for reckoning the 20/ 80 per centile, what could conceivably be factored in is not the 'cost'; but only the depreciation (or amortised value) amount charged to the profit and loss account – is that not so ? Open to be enlightened by the learned writer , expected to have a better grip/ know of !

    1. Puneet says:

      In order to remove confusion: it is written in Notification no. 07/2019, Central tax-rate for Goods and services ; the Short fall of 80% is applicable in case of Goods and Services as notified if buy from unregistered dealer.
      But in case of Cement and Capital Goods if buy from Unregistered dealer, then promoter has to pay RCM on entire purchase from unregistered dealer of capital goods and Cement. As the Promoter refer hear is Builders who engaged in construction of building and projects.

    1. vswami says:

      OFFhand

      May be, the concept of RCM stands clarified at least to the extent that the mandated taxpayers should find no serious problem in complying wih, in the same manner as intended, both in letter and spirit of the enactment. However, so far as known, there appears no tight and seamless control over such compliance. Premised so, in the absence of any safe-/ fool- proof mechanism, in place, and incorporated in the GST Portal itself, any breach of the mandate , in a given case, could not be detected, without a detailed enquiry/ investigation – of the forensic type.
      This is an aspect which has been touched upon in the comment posted in another context- vide. https://taxguru.in/…/form-pmt-09-gst-porta…/comment-page-1/…

      1. Puneet says:

        In cases of section 9(3) of CGST Act 2017, RCM on Goods and services can be traced and checked by GStR2A, as supplier has mark in GSTR1 those supplies which attracts RCM. But in case of 9(4) from unregistered supplier, there is no mechanism i think so far created by the Government so that same can be checked, so still it is upon taxpayer to be ethic full as the current culture is of self assessment and rest can be seen in scrutiny, yes in short no mechanism to trace,thanks.

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