Reverse Charge Mechanism (RCM) in GST: How it Works and Why it Matters”

Reverse Charge is a mechanism where the recipient of goods or services is liable to pay Goods and Services Tax (GST) instead of the supplier.

When is Reverse Charge Applicable?

Section 9(3), 9(4) and 9(5) of CGST and SGST Acts govern the reverse charge scenario for intra-state transactions. Also, sections 5(3), 5(4) and 5(5) of the Integrated GST Act govern the reverse charge scenarios for inter-state transactions. Let’s have a detailed discussion regarding these scenarios:

A. Supply of certain goods and services specified by the CBIC

As per the powers conferred in section 9(3) of CGST Acts, the CBIC has issued a list of goods and services on which reverse charge is applicable.

LIST OF GOODS AND SERVICES NOTIFIED UNDER THE REERSE CHARGE MECHANISM.

(1) GOODS

The following goods are under RCM as per section 9(3) of CGST Act.

S.No.	Tariff item, Sub	Description of supply of goods	Supplier of goods	Recipient of
	-Heading or			Supply
	chapter
1.	0801	Cashew nut not shelled or	Agriculturist	Any registered
		peeled		Person
2.	1404 90 10	Bidi Wrapper leaves (tendu)	Agriculturist	Any registered
				Person
3.	2401	Tobacco Leaves	Agriculturist	Any registered
				Person
3 A	1301 24 00	Following essential oils other	Any	A Registered
	3301 25 10	Thant hose of citrus fruit	Unregistered	Person
	3301 25 30	Namely: a) Of peppermint	Person
	3301 25 40	(Menthapipetia)
		b) Of other mints:
		(i) Spearmint Oil
		(Exmenthaspicata)
		(ii) Water mint-oil
		(Exmentha aquatic)
		(iii) Horsemint oil
		(Exmenthasylvesrries)
		(iv) Bergamentoil
		(ex- menthe citrate)
4	5004 to 5006	Silk Yarn	Any person who	Any registered
			Who manufactures	Person
			Silk yarn from
			Raw silk or silk
			worm cocoons
			For supply of
			Silk yarn

LIST OF GOODS AND SERVICES NOTIFIED UNDER THE REERSE CHARGE MECHANISM:

(1) GOODS

The following goods are under RCM as per section 9(3) of CGST Act.

S.No.	Tariff item, Sub	Description of supply of	Supplier of goods	Recipient of
	-Heading or	goods		Supply
	Chapter
4A	5201	Raw Cotton	Agriculturist	Any Registered
				Person
5	–	Supply of lottery	State –	Lottery
			Government,	distributor
			Union Territory	Or selling
			Or any local	agent
			Authority
6	Any Chapter	Used vehicles, seized	Central Govt.,	Any registered
		And confiscated goods,	State Govt.,	person
		Old and used goods,	Union territory
		Waste and scrap	Or local
			Authority.
7	Any Chapter	Priority Sector	Any registered	Any registered
		Lending Certificate	Person	Person
8	2523	Cement	An unregistered	Promoter /
			Supplier	Builder
9	Any chapter	Input and Input Services	An unregistered	Promoter /
			Supplier	Builder
				Note that the
				promoter/
				Builder has to
				Pay only on
				The difference
				Between 80%
				Of purchases
				(minus) actual
				registered
				Purchases.
10	Any chapter	Capital goods	An unregistered	Promoter/
			Supplier	Builder

(II) SERVICES

S.No.	Category of supply services	Supplier of services	Recipient of service
1	Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by the road to –	Goods Transport Agency (GTA). This provides options for GTA to opt for	(a) Any factory registered under or governed by the factories Act,1948
S.No.	Category of supply services	Supplier of services	Recipient of service
	(a) any factory registered under or governed by he Factories Act, 1948(63 of 1948); or (b) any society registered under the Societies Registration Act,1860 (21 of 1860) or under other law for the time being in force in any part of India; or (c) any co-operative society established by or under any law; or (d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or (f) any partnership firm whether registered or not under any law including association of persons; or (g) any casual taxable person	Either 5% (without ITC) or 12% (with ITC). They must satisfy three conditions- a) GTA is GST registered and did not opt to pay tax under forward charge. (b) GTA issues tax invoice with GST in it. c) Has not submitted any yearly declaration** for opting under forward charge.	(63 of 1948); or (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 ( c ) any co-operative society established by or under any law; or (d) any person registered under the CGST/IGST/SGST/UTGST Act; or (e) Any- body 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
11	Services supplied by individual Direct Selling Agents (DSAs) other than 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 firm.	A banking company or a NBFC, located in the taxable territory.
12	Service provided by business facilitator (BF) to banking company.	Business facilitator (BF).	A banking company located in the taxable territory.
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.
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,- (1) The below persons registered only for the purpose of making TDS u/s 51 but not for supply of goods or services (i) a Department or Establishment of the Central Government or Establishment of the Central Government or State Government or Union territory (ii ) local authority (iii) Government agencies. (2) A registered person under Composition Scheme u/s 10.	Any person other than a body corporate.	A registered person, located in the taxable territory.

S.NO.	Category of supply services	Supplier of services	Recipient of service
15	Services provided by way of renting of motor vehicle provided to a body corporate.	Any person other than a body corporate, who opts tax at the rate of 5% and he is eligible to claim input tax credit (Persons who are ineligible to claim ITC u/s 17 (5) are covered here)	Any ‘body corporate’ located in the taxable territory.
16	Services of securities under Securities Lending Scheme, 1997(“Scheme’) of the 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.
17	Radio Taxi or passenger transport services provided through an electronic commerce operator.	Taxi driver or rent-a-cab operator	Electronic commerce operator
18	Providing accommodation services in hotels, guest houses, inns, campsites, clubs, or other commercial places meant for lodging or residential purposes.	Any person except in cases where the person supplying the service through an electronic commerce operator is liable for registration under sub-section (1) of section 22 of the CGST Act.	Electronic commerce operator.
19	Housekeeping services such as plumbing, carpentering etc.	Any person except in cases where the person supplying the service through an electronic commerce operator is liable for registration under sub-section (1) of Section 22 of the CGST Act.	Operator.

The list of services as notified under the CGST Act is replicated under IGST Act also. In addition to the same following two additional services are notified under IGST Act.

(b) Category of services on which IGST has to be paid under RCM

S.NO.	Category of supply services	Supplier of services	Recipient of service
1	Any service supplied by any person who is located in non-taxable territory to any person other than a non-taxable online recipient.	Any person located in a no-taxable territory.	Any person located in the taxable territory other than a non-taxable online recipient.
2	Services supplied by a person located in the nontaxable 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 Ac, 1962, is located in the taxable territory.

B. Supply from an unregistered dealer to registered dealer

Section 9 (4) of the CGST Act states that if a vendor is not registered under GST supplies goods to a person registered under GST, then reverse charge would apply. This means that the GST will have to be paid directly by the receiver instead of the supplier. The registered buyer who has to pay GST under reverse charge has to do self-invoicing for the purchase made.

Intra-state purchases, CGST and SGST have to be paid under reverse charge mechanism (RCM) by the purchaser. Also, in the case of inter-state purchases, the buyer has to pay the IGST. The government notifies the list of goods or services on which this provision gets attracted from time to time.

In the real estate sector, the government notified that the promoter should buy inward supplies to the extent of 80% from registered supplies only. Suppose the purchases from registered dealer’s shortfall are 80%, then the promoter should pay GST at 18% on the reverse charge to the extent short of 80% of inward supplies. However, if the promoter purchases cement from an unregistered supplier, he must pay tax at 28%. This calculation is to be done irrespective of the 80% calculation.

The promoter is liable to pay GST on reverse charge basis on TDR or floor space index (FSI) supplied on or after 1^st April 2019. Even if a landowner is not engaged in a regular business of land-related activities, transfer of development rights by such and individual to the promoter is liable to GST as it considered as supply of service under section 7 of CGST Act. In case of outward supply of TDR by one developer to another, GST is applicable at 18% on reverse charge.

C. Supply of services through an e-commerce operator

All types of businesses can use e-commerce operators as an aggregate to sell products or provide services. Section 9(5) of the CGST Act states that if a services provider uses an e-commerce operator to provide specified services, the reverse charge will apply to the e-commerce operator and he will be liable to pay GST. This section covers the services such as:

Transportation services to passengers by radio-taxi, motor cab, maxi cab and motorcycle. For example – Ola, Uber.
Providing accommodation services in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes, except where the person supplying such service through electronic commerce operator is liable for registration due to turnover exceeding the threshold limit. For example- Oyo and Make My Trip.
Housekeeping services, such as plumbing and carpentering, except where the person supplying such services through electronic commerce operators are liable for registration due to turnover beyond the threshold limit. For example, Urban Company provides the service of plumbers, electricians, teachers, beauticians etc. in this case Urban Company is liable to pay GST and collect it form the customers instead of the of the registered service providers.
Also suppose the e – commerce operator does not have a physical presence in the taxable territory. In that case a person representing such an electronic commerce operator will be liable to pay tax for any purpose. If there is no representative, the operator will appoint a representative, who will be held liable to pay GST.

Time of Supply under RCM

A. Time of supply in case of goods

In case of reverse charge, the time of supply for goods shall be the earliest of the following dates:

The date of receipt of goods
The date of payment*
the date immediately after 30 days from the date of issue of an invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

*This point is no more applicable based this Notification No.6/ 2017 – Central Tax issued on 15^th November 2017

Illustration:

Date of receipt of goods 15^th May 2021

Date of invoice 1^st June 2021

Date of entry in books of receiver 18^th May 2021

The time of supply in case, will be 15^th May 2021.

B. Time of Supply in case of services

In case of reverse charge, the time of supply shall be earliest of the following dates:

The date of payment
The date immediately after 60 days from the date of issue of invoice by the supplier.

Illustration:

Date of payment 15^th July 2023
Date immediately after 60 days from date of issue of the invoice ( Suppose the date of the invoice is 15^th May 2023, then 60 days from this date will be 14^th July 2023)
Date of entry in books of receiver 18^th July 2023

The time of supply of service, in this case, will be 14^th July 2021

Registration Rules under RCM

Section 24 the CGST ACT, 2017 states that a person liable to pay GST under the reverse charge mechanism have to compulsorily register under GST. The threshold limits of Rs. 20 lakh or Rs. 40 lakh, as the case may be, will not apply to them.

Who should pay GST Under RCM?

The recipient of goods / services should pay GST under RCM. However, as per the provisions of GST law, the person supplying the goods must mention in the tax invoice whether tax is payable under RCM.

The following points should be kept in mind while making GST payments under RCM:

The recipient of goods or services can avail of the ITC on the tax amount paid under RCM only if such goods or services are used for business or furtherance of business.
A composition dealer should pay tax at the normal rates and not the composition rates while discharging liability under RCM. Also, they are ineligible to claim any input tax credit of tax paid.
GST compensation cess can apply to the tax payable or paid under the RCM.

Input Tax Credit (ITC) Under RCM

A supplier cannot take the GST paid under the RCM as ITC. The recipient can avail of 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.

What is Self-Invoicing?

Self-invoicing is to be done when purchased 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. Hence, self-invoicing, in this case, becomes necessary.

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.

CONCLUSION:

The Reverse Charge Mechanism (RCM) in GST is a unique way of tax collection where the liability to pay tax shifts from the supplier to the recipient. It’s designed to ensure that taxes are paid even in cases where the supplier might not be required to register under GST. RCM plays a crucial role in plugging potential tax evasion gaps and maintaining the integrity of the GST system. Understanding how RCM functions is essential for businesses and individuals involved in transactions covered by this mechanism.

Subscribe to WhatsApp Updates

Please follow and like us: