Understanding Reverse Charge Mechanism (RCM) in India GST

Understanding Reverse Charge Mechanism (RCM) in India GST

Janhavi Wagh
Janhavi Wagh
Table of Contents
Table of Contents

The new Goods and Services Tax (GST) regime has brought about a slew of reforms to the indirect tax system, affecting firms doing business in India.

One such change pertains to introducing a reverse charge mechanism (RCM) and the taxation of import of services via RCM.

What is the Reverse Charge Mechanism under GST?

Reverse Charge is a mechanism in which the recipient of the goods/services can pay the tax instead of the goods and service provider.

Under the normal tax regime, the buyer's supplier collects the tax collection and deposits the same after adjusting the output tax liability with the available input tax credit. But under the reverse charge mechanism, liability to pay tax shifts from supplier to recipient.

When Is Reverse Charge Applicable?

Under GST law, the following are the scenarios of the reverse charge mechanism.

Supply of specific goods and services specified by the CBIC

Under section 9(3) of the CGST Act, 2017, this scenario is covered. According to this section, the GST council's categories of goods and services will come under the RCM in GST. In simple words, the recipient receiving any specific type of goods/services will be liable to pay GST instead of the supplier.

  • List of Goods under RCM in GST

There are a total of 8 categories of goods in the supply of goods, subject to RCM as per section 9(3) of the CGST Act.

Following is the list of goods under RCM in GST,

S.No.

Description of Supply of Goods

Supplier of Goods

Recipient of Goods

1.

Cashew nuts, not shelled or peeled

Agriculturist

Any registered person

2.

Bidi wrapper leaves (tendu)

Agriculturist

Any registered person

3.

Tobacco leaves

Agriculturist

Any registered person

4.

Silk yarn

Any person who manufactures silk yarn from raw silk or silkworm cocoons for the supply of silk yarn

Any registered person

4A.

Raw cotton

Agriculturist

Any registered person

5.

Supply of lottery

State government, a union territory or any local authority

Lottery distributor or selling agent

6.

Used vehicles, seized and confiscated goods, old and used goods, waste and scrap

The central government, state government, a union territory, or a local authority

Any registered person

  • List of Services under RCM in GST

In the case of a supply of services, under section 9(3) of the CGST Act, there are specific categories of services and certain types of services as per the IGST Act, subject to RCM. Following is the list of RCM services under GST.

S.No.

Description of Supply of Service

Supplier of Service

Recipient of Service

1.

Services supplied by any person located in non-taxable territory to any person located in the taxable territory other than the non – taxable online recipient (as per notification no. 13/2017 – Central Tax (Rate) as issued on 28th June, 2017)

Any person located in a non – taxable territory

Any person located in the taxable territory other than non – taxable online recipient

2.

Services rendered by a Goods Transport Agency (GTA) in respect of goods transported via road (as per notification no. 13/2017 – Central Tax (Rate) as issued on 28th June 2017)

Goods Transport Agency (GTA)

  • any factory registered under Factories Act, 1948

  • Society registered under Societies Act, 1860

  • Cooperative Society established by any law

  • A person registered under CGST, SGST, IGST, or UTGST acts

  • A body corporate established by any law

  • Partnership Firm

  • Casual Taxable Person

located in the taxable territory

3.

Services provided by an individual advocate or a firm of advocates in the form of legal services (as per notification no. 13/2017 – Central Tax (Rate) as issued on 28th June 2017)

An individual advocate including a senior advocate or a firm of advocates

Any business entity that is located in the taxable territory

4.

Services provided by an arbitral tribunal to a business (as per notification no. 13/2017 – Central Tax (Rate) as issued on 28th June 2017)

An arbitral tribunal

Any business entity located in the taxable territory

5.

Services provided by Central or State government, a Union territory, or local authority to a business entity except:

  • renting of immovable property and

  • services such as:

    • speed post, express parcel post, life insurance, and agency services rendered to a person other than Central or State government, a Union territory, or local authority

    • services with regards to an aircraft or a vessel, inside or outside the boundaries of a port or an airport

    • transport of goods or passengers (as per notification no. 13/2017 – Central Tax (Rate) as issued on 28th June 2017)

The central government, state government, a union territory, or local authority

Any business entity located in the taxable territory

5A.

Services provided by the Central or state government, Union territory or local authority by the way of renting of immovable property to a person registered under CGST Act, 2017 (as per notification no. 3/2018- Central Tax (Rate) as issued on 25th January 2018)

The central government, state government, a union territory, or local authority

Any person registered under the CGST Act, 2017

5B.

Services provided by any person by the way of transfer of development rights or Floor Space Index (FSI)

(including additional FSI) for the purpose of construction of a project by a promoter (as per notification no. 5/2019- Central Tax (Rate) as issued on 29th March 2019 which shall come into effect from April 1, 2019)

Any person

Promoter

5C.

Long term lease of land (i.e. 30 years or more) by any person in exchange for consideration in the form of an upfront amount (such as cost price, salami, premium, development charges, etc.) and/or periodic rent for construction of a project by a promoter (as per notification no. 5/2019- Central Tax (Rate) as issued on 29th March 2019 which shall come into effect from April 1, 2019)

Any person

Promoter

6.

Sponsorship services provided to any body corporate or partnership firm (as per notification no. 13/2017 – Central Tax (Rate) as issued on 28th June 2017)

Any person

Anybody corporate or a partnership firm located in the taxable territory

7.

Services provided by the director of a company or a body corporate to the said company or a body corporate (as per notification no. 13/2017 – Central Tax (Rate) as issued on 28th June 2017)

Director of a company or body corporate

Company or a body corporate located in the taxable territory

8.

Services provided by an insurance agent to any person carrying on the insurance business (as per notification no. 13/2017 – Central Tax (Rate) as issued on 28th June 2017)

Insurance agent

The person carrying on the insurance business located in the taxable territory

9.

Services provided by a music composer, photographer, artist, etc. by the way of transferring or permitting the use of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 in respect of the original dramatic, musical or artistic works to a music company, producer and the like (as per notification no. 22/2019- Central Tax (Rate) as issued on 30th September 2019 which shall come into effect from October 1, 2019)

Music composer, photographer, artist, and the like

Music companies, producers, and the like are located in the taxable territory

9A.

Services provided by an author by the way of transferring or permitting the use of copyright specified under clause subsection (1) of section 13 of the Copyright Act, 1957 in respect of the original literary works to a publisher (as per notification no. 22/2019- Central Tax (Rate) as issued on 30th September 2019 which shall come into effect from October 1, 2019)

Author

A publisher who is located in the taxable territory. Provided that this would not apply to cases where:

  • the author is registered under CGST Act, 2017 and has filed a declaration, in the form at Annexure I within the prescribed time limit, with the jurisdictional CGST or SGST commissioner that he exercises the option to pay central tax on this service under forwarding charge in accordance with Section 9 (1) of the CGST Act, 2017 under forwarding charge, and to comply with all the provisions of CGST Act, 2017 as they apply to a person liable for paying the tax in relation to the supply of any goods or services and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option

  • The author makes a declaration, as prescribed in Annexure-II on the invoice issued by him in Form GST Inv-I to the publisher

10.

Services provided by the members of the overseeing committee to the RBI (as per notification no. 33/2017- Central Tax (Rate) as issued on 13th October 2017 which shall come into effect from October 1, 2019)

Members of the overseeing committee formed by the RBI

RBI

11.

Services provided by Individual Direct Selling Agents (DSAs) except a body corporate, partnership, or limited liability partnership firm to a bank or NBFCs (as per notification no. 15/2018 – Central Tax (Rate) as issued on 26th July 2018)

DSA other than a body corporate, partnership, or limited liability partnership firm

A banking company or an NBFC; located in the taxable territory

12.

Services gave by a business facilitator (BF) to a banking company (as per notification no. 29/2018 – Central Tax (Rate) as issued on 31st December 2018 which shall come into effect from October 1, 2019)

Business Facilitator (BF)

Banking company located in the taxable territory

13.

Services gave by an agent of Business Correspondent (BC) to a Business Correspondent (BC) (as per notification no. 29/2018 – Central Tax (Rate) as issued on 31st December 2018 which shall come into effect from October 1, 2019)

Agent of a Business Correspondent (BC)

Business Correspondent (BC) located in the taxable territory

14.

Security services such as the supply of security personnel are provided to a registered person.

Provided that this does not apply to

  • 1. (a) a Department or Establishment of the Central or State Government, Union territory

(b) local authority
(c) Governmental agencies that have taken registration under the CGST Act, 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

2. a registered person paying tax under section 10 of the said Act (as per notification no. 29/2018 – Central Tax (Rate) as issued on 31st Dec 2018 which shall come into effect from October 1, 2019

Any person other than a body corporate

A registered person located in the taxable territory


Supply from an unregistered dealer to a registered dealer

Section 9(4) of the CGST Act, 2017 declares that the supplies made taxable by an unregistered supplier to a registered recipient under GST will be subject to an RCM. In short, in such a case, the registered person will be liable to pay GST on a reverse charge basis. Thus, all GST provisions will apply to the registered recipient so that he is liable yo pay GST with the supply of goods and services he received.

Hence, every time the registered person buys supplies from an unregistered supplier, he must pay GST on a reverse charge basis. However, if the value of these supplies is less than Rs 5,000, then the registered person under the RCM is exempted from paying GST on such goods and services.

Further, section 9(4) of the CGST Act will not apply to an unregistered supplier if he makes supplies to a TDS deductor. In other words, as per section 51 under CGST Act, and who deducts TDS, the government companies will not be liable to pay GST under Reverse Charge.

Supply of Services By E-Commerce Operator

Section 9(5) of the CSGT Act, 2017 declares that supplied services by an e-commerce operator are subject to the RCM. In short, if an e-commerce operator supplies services, he will be liable to pay and collect GST for the supplied services.

Therefore, the GST Act shall apply to the e-commerce operator as if he is the supplier who is liable to pay GST with regard to the supply of services.

However, suppose the electronic commerce operator does not have a physical presence in the taxable territory. In that case, the person who is representing an e-commerce operator will be responsible for tax payment.

If in the taxable territory, if these e-commerce operator does not have a representative, then he needs to appoint a person liable to pay GST for the services supplied.

Time of supply under RCM

In the case of Goods:

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

Note: However, if it is not possible to find out the time of supply in mentioned above cases than the time of supply will be considered the date of entry in the books of account of the recipient of the supply.

With the following example, let us understand in detail:-

  • Payment Date – June 18th, 2019
  • Invoice Date – July 1st, 2019
  • Entry date in books by the recipient – June 19th, 2019

Here the time of supply will be June 18th, 2019. In case the supplier is located outside India, then the time of supply will be earlier of, " When the amount is paid (The payment date) OR When the recipient records the payment in his accounting books.

In the case of services

The time of supply for services, in case of reverse change, shall be the earliest of the following dates:


With the following example given below, let us understand in detail:-

  • Payment Date – August 18th, 2019
  • Invoice Date – September 1st, 2019
  • Entry date in books by the recipient – August 19th, 2019
Note: In this case, the time of supply will be 18th August 2017, Due to some reasons if the time of supply can’t be ascertained under 1 or 2 heads, in this case, it will be August 19th i.e., date of entry in books by the recipient.

In the law, there are two types of reverse charge scenarios.

  1. Depends on the nature of supply and nature of supplier, under section 9 (3) of CGST/ SGST (UTGST) Act and section 5 (3) of the IGST Act
  2. Taxable supply made by the unregistered person to a registered person covered under section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act.

What Are the Exemptions to RCM?

Following are a few cases that are exempted from Reverse Charge under GST-

  • Exempted goods or services- The Reverse Charge will not be applicable if the goods and services are exempted from GST,
  • If the aggregate value of the goods & services does not exceed the amount of Rs. 5000 a day, then such transactions will be exempted from the provisions of reverse charges.

Invoicing Rules under RCM

The recipient/buyer of goods or services, under RCM, issues an invoice on receipt of goods or services from the supplier. Further, at the time of making payment to the supplier, they shall issue a payment voucher.

At the month-end, if the aggregate value of such supplies exceeds Rs 5,000 in a day, then a registered recipient or buyer can issue a consolidated invoice.

Manner of GST Payment under Reverse Charge Mechanism

As per the GST provision law, the person supplying goods needs to mention in the tax invoice whether the tax is payable under the RCM.

Below mentioned are some points to remember while making GST payment under reverse charge:

Input Tax Credit under RCM

Under the RCM, a supplier/seller cannot take an ITC of GST paid on goods and services supplied.

Under reverse charge on the receipt of goods and services, the buyer/seller can avail of ITC on GST paid if such goods and services are used or used for business purposes.

The recipients cannot use ITC to pay output GST on goods and services under the reverse charge. Hence the GST payment under reverse charge shall be paid only in cash.

Impact of RCM on Doing Business in India

Under the GST framework, the RCM acts as a self-policing tool and aims to restrain tax evasion by firms to motivate to register themselves under GST and pay taxes.

As the customers are opposed to directly paying taxes to the government and undertaking all the related paperwork and compliances, they will deal directly with suppliers who are registered under GST.

Hence, due to eroding customer base, the unregistered firms are likely to experience fewer revenues. Thus, this mechanism is designed to force such unregistered firms to get registered and become GST compliant.

How to Check GST Paid by Supplier in RCM under GST?

If the supplier pays the GST, then under RCM, it will not be considered a supply.

If you need to check that your supplier has declared supplies and paid GST, you can do so with the help of your GSTR-2A Form.

Also, if you wish to see if your recipient has declared the sales under RCM and if you are a registered supplier, you will have to follow up with your recipient.

How to Pay Reverse Charge in GST Portal?

Recipients liable to RCM need to pay GST for goods, services, and supplies as per the normal tax rates, directly to the government via GSTR-3B Form.

To pay GST liable to RCM, recipients need to furnish Table 3.1 D of GSTR-3B. Monthly, the GSTR-3B needs to be filed on the GST portal along with the RCM transactions details, and RCM taxes need to be paid using the Electronic Cash ledger only.

Taxpayers can later claim the ITC on such transactions in table-4A of GSTR-3B of the same month.

Frequently Asked Questions

What will happen if the receiver of goods/ services is required to pay tax under reverse charge but is not a registered dealer?
All taxpayers have to register for GST, and are required to pay tax under reverse charge, and as the case may be the threshold of Rs. 20 lakh or Rs.40 lakhs does not apply to them.

Under reverse charge, is ITC allowed?
For ITC, the tax paid on a reverse charge basis will be available if goods/services are used or used for businesses. Therefore, the recipient, who pays the reverse tax, can avail of it as ITC.

What if an Input Service Distributor receives liable supplies to reverse charge?
To the reverse charge, an ISD cannot make purchases liable. The ISD will need to register as a regular taxpayer if he wants to procure such supplies and tale the reverse charge paid as ITC.

Under RCM when can one claim ITC of tax paid?
The person who paid tax under RCM in a month can claim it as ITC in the subsequent month.

Refer the below article to know how does Reverse Charge Mechanism(RCM) work in Deskera Books?

India GST: What is a reverse charge?
Reverse Change is a process under GST in which the receiver, makes the paymentof GST instead of the supplier. In normal cases, the supplier is the one who pays tax on supplies, but in thecase of reverse charge, the role gets reversed. Here, the buyer pays taxes directly to the government. Thi…

Reverse Charge Mechanism Under India GST
Easily Manage RCM with GST for India

Refer to the video tutorial for RCM with India GST in Deskera Books

What is GSTN?
The GSTN is a non-profit, non-government organization. It will manage the GST portal’s entire IT system, which is the mother database for everything GST. The Government of India will use this portal to track every financial transaction.
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GST Calculator – Online Goods and Services Tax Calculator
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How to Register for GST on the GST India Portal. A Step by Step Guide
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