Overview of Reverse Charge Mechanism
The Reverse Charge Mechanism or RCM refers to the process of paying GST by the recipient of a product instead of its supplier. Accordingly, the tax payment liability transfers to the receiver or recipient rather than the supplier.
In most cases, Income Tax authorities for Indirect Taxes in India apply the Reverse Charge Compliance for imports, purchases from unregistered dealers, and supplies of any notified goods and services. Regardless of the case, the supplier must issue a payment voucher to the goods’ recipient. Besides, the recipient should be a registered individual according to the CGST Act of 2017.
The Objective of Reverse Charge Mechanism
The main objective behind the mechanism of reverse charge in intrastate transactions is to shift the burden associated with the GST payments to recipients. Accordingly, the concept enhances the scope of a tax levy on diverse unorganized sectors and waives out certain categories of suppliers.
Moreover, the mechanism under the GST taxes the service imports if the supplier is outside of India. However, the reverse charge mechanism applies only to specific categories of business sectors in India.
Also Read: All about Reverse Charge Mechanism (RCM) in GST
Applicability of Reverse Charge Mechanism as Per the Place of Supply
Section 9(3), Section 9(4), and Section 9(5) of both the State and Central GST Acts govern the scenarios related to reverse charges in intra-state supply or transaction. The detailed analysis of the scenarios is as follows-
Supply of Specific Goods and Services according to the CBIC
The Central Board of Indirect Taxes and Customs has applied a reverse charge mechanism on specific goods and services according to Section 9(3) of the CGST Act.
Supply to a Registered Dealer from an Unregistered One
According to the CGST Act Section 9(4), if any GST-unregistered person supplies goods and services to a GST-registered person, a reverse charge mechanism is applicable. Accordingly, the receiver must pay the GST directly to the tax authority instead of the goods/services supplier. On the other hand, the registered buyer bound to pay GST based on reverse charge must do self-invoicing for his made purchases.
In the case of intrastate transactions or purchases, the purchaser needs to pay both the CGST and SGST under the reverse charge mechanism. The Indian government will regularly notify the list of goods and services, on which the reverse tax provisions are applicable. Accordingly-
In the sector of real estate, the Indian government notifies that a promoter must purchase inward supplies to up to 80% only from the registered suppliers. Now, assume that the purchases made from registered dealers have an 80% shortfall, the promoter must apply GST at 18% based on the reverse charge mechanism to the shortcoming of 80% in inward supplies.
In contrast, if the same promoter buys cement from any unregistered supplier, he should pay tax or GST at 28%. The calculation in this case is different from the 80% calculation. The promoter must GST according to the reverse charge on the Floor Space Index or TDR supplied on 1st April 2019. Other than that, Indian tax authorities apply GST at 18% on the reverse charge if outward TDR supply takes place between two developers.
Services Supply via an E-commerce Operator
Almost every type of business may use e-commerce operators as aggregators to supply products and deliver services. According to Section 9(5) of the CGST Act, if any service provider uses an e-commerce operator to deliver specified services, the respective e-commerce operator is liable to pay GST according to the applied reverse charge mechanism. Services covered under this section are as follows-
- Transport services to passengers via motor cabs, radio taxis, motorcycles, and maxi cabs
- Accommodation services in inns, hotels, clubs, guest houses, campsites, and diverse commercial places intended for lodging and residential purposes
- Housekeeping services, like carpentering and plumbing
- If an e-commerce operator is not physically present in the taxation territory, the person representing the respective e-commerce operator must pay tax for every purpose. Alternatively, the operator has the right to appoint a representative if there is no one liable for paying the GST.
Notes-
- RCM is not applicable if the person responsible for providing online accommodation services has turnover exceeding the prescribed threshold limit and he is liable for the registration
- RCM is exempted if the person delivering housekeeping services via e-commerce operators is liable for their registrations because of turnover exceeding the threshold limit.
Reverse Charge Mechanism and Time of Supply
Time of Supply for Goods
According to the updated intrastate reverse charge guidelines, the time of supply for goods must be the earliest of the mentioned dates-
- The date of made payment
- The date, on which the buyer receives the goods
- The date immediately after 30 days right from the date the goods’ supplier issues an invoice
Time of Supply for Services
If the reverse charge is applicable for services, the time of supply must be the earliest of the below dates-
- The payment dates
- The date immediately posts 60 days of the date the supplier issues the invoice
Note-
For both goods and services, if the involved parties fail to determine the time of supply based on the dates mentioned here, the time of supply will be the date of the transaction’s entry in the recipient’s account books.
GST Payment as Per the Reverse Charge Mechanism
The payment of GST on the intra-state reverse charge mechanism is highlighted in section 49(4) of the latest CGST Act. Accordingly, an individual may use the Input Tax Credit (ITC) to pay output tax only. The tax based on reverse charge is payable only via cash without getting any benefit related to ITC. Besides, the supplier should compulsory in the tax invoice whether the tax is payable according to the reverse charge mechanism.
Also Read: Reverse Charge Mechanism (RCM) In GST
Input Tax Credit
Any service recipient may receive the Input Tax credit on his tax amount payable as per the Reverse Charge compliance on goods and services. The condition is that goods and services must be used or are already used for business furtherance or existing business.
If the composite dealer belongs to the mechanism of reverse charge in intra-state transactions, the respective dealer cannot make any credit claim to his paid taxes. The tax is payable at the regular applicable rates instead of any composition rate.
Registration Requirement Rules as Per the Reverse Charge Mechanism
Every individual bound to pay GST on an intra-state reverse charge mechanism must register himself. Here, registration is compulsory even when the turnover goes below the threshold limit.
GST Compensation Cess as per the RCM
GST Compensation Cess is also applicable to the paid GST on the intra-state reverse charge mechanism. The objective here is to compensate Indian states for the revenue loss on the implemented GST. The compensation cess is for a maximum of 5 years right from the date of the GST implementation.
Considerable Points for GST Under RCM
- The person responsible for paying tax for the goods and services notified under Section 9 must be a GST-registered one.
- According to the intra-state reverse charge guidelines, the recipient should submit the GST amount to the Indian government on every 20th of the upcoming month.
- ITC is applicable only for the RCM goods used for business or its furtherance based on the paid GST. In contrast, the person paying the reverse charge and acquiring services may take benefits related to the input tax credit.
- GST paid or payable in GSTR 2 as per the RCM does not possess any auto-population of its details. However, the tax will be subject to furnishing the details manually.
- The recipient must arrange the invoice on itself if the RCM applies and the involved parties should issue both the consolidated purchases and invoices daily on the applicable GST.
- The recipient should issue the payment voucher while making the supplier’s payment.
- The Input Tax Credit is not present for the payment of RCM to the authority.
- The individuals registered under the composition scheme also fall under the reverse charge but they cannot get the credit of RCM.
- The RCM is also applicable to advanced payments.
Note-Intrastate transaction must be compulsory to apply any reverse charge mechanism.
Also Read: GST Compensation Cess: Impact, Mechanism, And Role
Conclusion
To conclude, we should say that the Reverse Charge Mechanism applies only to specific goods and services when it is impossible to collect the tax from the supplier. However, registered buyers must do self-invoicing to pay GST as per the RCM guidelines. At the same time, the recipient/receiver must be well-familiar with the input tax credit and other essential GST aspects to stay strictly compliant with GST and RCM both.
Frequently Asked Questions
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What refers to the reverse charge and the supply place?
Reverse charge refers to the liability of the recipient to pay taxes for receiving goods and services by the supplier based on notified supply categories.
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Is Input Tax Credit applicable/allowed under the reverse charge?
Tax payable on reverse charge is applicable for Input Tax Credit if the respective goods/services are for business applications. In this situation, the recipient paying the reverse tax may claim for ITC.
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Is GST registration mandatory for the receiver of goods/services for paying taxes under the reverse charge?
If the receiver of goods/services is bound to pay taxes under the reverse charge mechanism, he must be a GST-registered taxpayer.
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Is the threshold limit applicable to the RCM-based goods and services taxpayers?
No, the threshold limit of Rs. 40 lakhs or Rs 20 lakhs is not applicable for the taxpayer of goods/services according to the RCM guidelines.
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On what type of transaction, is Reverse Charge Mechanism applicable?
The Reverse Charge Mechanism is only applicable for intrastate transactions and is not for interstate transactions.
