Reverse Charge Mechanism (RCM) under Section 9(4) of the CGST Act, 2017 and recent Notification No. 07/2019- Central Tax (Rate) dated 29th March 2019 effective from 1st April, 2019

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’) and Section 5(4) of IGST Act, 2017(‘IGST Act’).

It is also aimed to promote the organised business through GST registered person as registered dealer would prefer to purchase goods or services from registered dealers instead of un-registered dealers to avoid unnecessary difficulties as well. It is anticipated that the provision like RCM would discourage the business transactions from unregistered dealers and they would be forced to get themselves registered under GST voluntarily even though they are not compulsorily required to get themselves registered. Before we go to provisions of Revere Charge, 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

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 19th June 2017 applicable with effect from 22nd June, 2017

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

As per exemption Notification Dated 19th 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.

As per provisions of Section 31(3)(f) of CGST Act, “A registered person who is liable to pay tax under sub-section (3) or sub-section (4) of Section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is nor registered on the date of receipt of goods or services or both.”

Therefore, any person being a recipient of goods or service and liable to pay tax under GST is require to issue taxable self-invoice i.e., invoice to self commonly referred to as the Self invoice. Availability of Invoice is the primary condition for claiming ITC against any supply. So, self-invoicing is must so as to avail input tax credit against tax paid to Government Treasury.

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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 28th June 2017 applicable with effect from 1st day of July, 2017.

There were lot of hue and cry over this provision during implementation phase itself and therefor, 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 28th June 2017 applicable with effect from 1st day of July, 2017.

By the said Notification dated 28th 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 28th June, 2017 dated was applicable w.e.f. 1st day of July, 2017.

Please also note that the Central Government, by the proviso under the said Notification dated 28th 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 28th June, 2017 was a partial exemption notification.

Full Exemption Notification No. 38/2017-Central Tax dated 13th 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 28th June, 2017 was a partial exemption, therefore, the Central Government decided to amend the said Notification dated 28th 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 28th 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 13th October, 2017 applicable with effect from 13/10/2017.

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

Pursuant to the both notifications dated 28th June, 2017 and dated 13th 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 30th June 2018 vide Notification No. 10/2018 – Central Tax (Rate) dated 23rd March, 2018.

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

With subsequent Notifications the timeline has been extended up to 30th 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 29th August 2018.

However, it is pertinent to note that the new provisions of Section 9(4) of the CGST Act were not notified till 29th 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 29th 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 29th March 2019 effective from 1st 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 29th March 2019 which has been effective from 01 April, 2019 and will be applicable on “Promoters” only for the ‘specified supplies.

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

As mentioned above, 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 29th 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 29th March, 2019, three kinds of supplies have been specified for which ‘promoter’ shall be liable to pay tax under reverse charge.

1. For Input and input Service for Construction of Project:

If ‘Promoter’ (Recipient) purchased input goods and services used in the construction of project from the unregistered person, the he is liable to pay GST under RCM on the supplies made from unregistered supplier under Section 9(4) of CGST Act, 2017. In respect of shortfall from the minimum value of goods or services or both required to be purchases for construction of project.

Notification No. 07/2019- Central Tax (Rate) dated 29th March 2019 prescribes that-

“Supply of such goods and services or both [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended”

Also, the term used in the notification “shortfall from the minimum value of goods or services or both required to be purchased by a promoter” means, minimum *80% of input and input services or both required to be purchased from registered person and 20% can be purchase from unregistered person. Also, if this condition gets failed, promoted has to be pay RCM on the shortfall from 80% threshold.

Minimum value for the purpose is prescribed as 80% of the value of input & Input Services. However, value of input Services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI) are excluded for calculating 80% procurement limit.

*The condition in Notification No. 3/2019 dated 29th March 2019 specifies that 80% of inputs and input services should be procured from registered person.

To understand: Suppose a promoter purchased 60% of input and input services used in the construction of project from registered supplier. Despite he also purchased 15% Cement & 25% other input & input services from unregistered person, during financial year 2019-20.

Promoter purchased input and input services used in the construction of project from registered supplier 60%
Promoter purchased Cement used in the construction of project from unregistered person. *[He is liable to pay under RCM for total purchase of Cement from unregistered person, irrespective of % total purchase (see Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019)] 15%
Other purchases from unregistered person 25%
Promoter is required to purchase minimum 80% of input and input services or both required to be purchased from registered person
Shortfall from the minimum value of goods or services or both required to be purchased by a promoter

[ Liable to pay under RCM on shortfall 80% – (60% + 15%)]

5%

*Please note that even if Promoter purchased input and input services used in the construction of project from registered supplier is 82% of total purchase, then promoter is still liable to pay on purchase of cement i.e. 15% under RCM (see Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019).

To more understand: Suppose a promoter purchased 60% of input and input services used in the construction of project from registered supplier. Despite he also purchased 15% Cement & 12% other input & input services from unregistered person, during financial year 2019-20. He has also purchased input services on which tax is paid under reverse charge under Section 9(3) of the CGST Act.

Promoter purchased input and input services used in the construction of project from registered supplier. 60%
Promoter purchased Cement used in the construction of project from unregistered person. [He is liable to pay under RCM for total purchase of Cement from unregistered person, irrespective of % total purchase (see Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019)]. 15%
Input services on which tax is paid under reverse charge under Section 9(3) of the CGST Act. 13%
Other purchases from unregistered person. 12%
Promoter is required to purchase minimum 80% of input and input services or both required to be purchased from registered person.
Shortfall from the minimum value of goods or services or both required to be purchased by a promoter

[ Liable to pay under RCM on shortfall 80% – ( 60% + 15%+13% )]

NIL

*Please also note that inputs and input services on which tax is paid by promoter under reverse charge under Section 9(3) of CGST Act shall be deemed to have been procured from registered person.

Please also note that input & input services from composition dealer shall be considered as purchase from registered person paying taxes under composition scheme.

Please also note that the calculations of shortfalls are to be done financial year-wise. The excess % of purchased from registered suppliers in a financial year cannot be adjusted in a next financial year.

Caution:

Inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating threshold of 80% – FAQ (Part II- issued by CBI&C vide Circular F No. 354/32/2019-Tax Research Unit dated 14-5-2019)

Expenditure such as salaries, wages etc should not be considered in calculating the 80% threshold of input and input services because these are not supplies under GST Schedule III. [ FAQ(II)-Real-estate-sector-1405]

GST Rate: The GST Rate is 18% even if the actual rate of GST in case of some of inputs or input services is lower than 18% – (Sr No. 452Q of Schedule III of Notification No. 08/2019-CT (R) dated 28-6-2017 as inserted w.e.f. 1-4-2019.)

2. For Purchase of Cement:

Notification No. 07/2019- Central Tax (Rate) dated 29th March 2019 prescribes that-

Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended”

The Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019 has amended the category of Cement from Notification No. 07/2019- Central Tax (Rate).

“Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975).”

In simple terms: As per Notification No. 24/2019-Central Tax (Rate) dated 30 September, 2019 RCM will be applicable on any amount of purchase of ‘Cement’ by the “promoter” from an unregistered supplier for the construction of project during the financial year, irrespective of the condition of 20/80%, as in case of input goods and services at point 1 above i.e. on any purchase from unregistered person, RCM is applicable. At present GST Rate of Tax for cement is 28%. This tax will be paid under RCM in the same month of purchase.

After considering payment of GST on cement under reverse charge (if any), at least 80% of the procurement of inputs and input services used in supplying the real estate project service shall be received from registered supplier only. In case requirement of procurement of 80% from registered suppliers is not achieved, and there is a shortfall in procurement from registered supplier, GST @18% is payable on value to the extent of shortfall.

3. For Purchase Capital goods:

Notification No. 07/2019- Central Tax (Rate) dated 29th March 2019 prescribes that-

“Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) supplied to a promoter for construction of a project on which tax is payable or paid at the rate prescribed for items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.”

As per Notification No. 07/2019- Central Tax (Rate), “promoter” is liable to pay GST under RCM for purchase of any capital goods from any unregistered supplier for construction of project during the financial year.

To understand: Suppose a promoter purchased 82% of input and input services used in the construction of project from registered supplier. Despite he also purchased 05% Cement & 03% other input & input services from unregistered person, during financial year 2019-20. He has also purchased 10% capital goods from unregistered person during financial year 2019-20.

Promoter purchased input and input services used in the construction of project from registered supplier. 82%
Promoter purchased Cement used in the construction of project from unregistered person. [He is liable to pay under RCM for total purchase of Cement from unregistered person, irrespective of % total purchase (see Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019)]. 05%
Capital Good purchased from unregistered person. 10%
Other purchases from unregistered person. 03%
Promoter is required to purchase minimum 80% of input and input services or both required to be purchased from registered person.
Shortfall from the minimum value of goods or services or both required to be purchased by a promoter

[ Liable to pay under RCM on shortfall 80% – (82% + 05% +10%)]

[However, Promoter is liable to pay GST under RCM on purchase of Cement and Capital Goods in spite of his purchased from registered supplier exceeds from minimum value of 80%]

NIL

For the purpose of this notification i.e. Notification No. 07/2019- Central Tax (Rate) dated 29th March 2019, –

(i) the term “promoter” shall have the same meaning as assigned to it in clause (zk) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

(ii) “project” shall mean a Real Estate Project (REP) or a Residential Real Estate Project (RREP);

(iii) the term “Real Estate Project (REP)” shall have the same meaning as assigned to it in in clause (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

(iv) “Residential Real Estate Project (RREP)” shall mean a REP in which the carpet area of the commercial apartments is not more than 15 per cent. of the total carpet area of all the apartments in the REP.

(v) the term “floor space index (FSI)” shall mean the ratio of a building’s total floor area (gross floor area) to the size of the piece of land upon which it is built.

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.

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One Comment

  1. M.K.ANIL KUMAR says:

    What about applicability of RCM for companies involved in infrastructure development, railways, highways,etc? The same rule applies for the above said promoters?

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