The supplier of goods or services is liable to pay GST. However, in some specified cases like Notified supplies and imports, the liability may be on the recipient under the reverse charge mechanism. 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.
There are two types of reverse charge scenarios provided in law:
- The first is dependent on the nature of the supply and/or the nature of the supplier. This scenario is covered by Section 9(3) of the CGST/SGST (UTGST) Act and Section 5(3) of the IGST Act.
- The second scenario is covered by Section 9(4) of the CGST/SGST (UTGST) Act and Section 5(4) of the IGST Act, where taxable supplies by any unregistered person to a registered person are covered.
What is reverse charge in the case of goods?
When the Reverse Charge is applied, the recipient of the goods or services makes the declaration of both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. In this way, the two entries cancel each other from a cash payment perspective in the same return
The supplier of goods and services pays the tax on supply. Under the reverse charges mechanism, the recipient of goods or services becomes liable to pay the tax, i.e., the chargeability gets reversed. The objective of shifting the burden of GST payments to the recipients is to widen the scope of levy tax on various unorganized sectors, exempt specific classes of suppliers, and tax the import of services since the supplier is based outside India. Not all but certain types of businesses apply to the reverse charge mechanism.
What is RCM in GST in simple words?
This is the process of GST payment by the recipients of goods and services or both to the government instead of supplier. The payment of goods shall only be made to supplier and the GST directly to the government. The liability of payment of GST is transferred to recipient from the supplier.
If the receiver is purchasing goods and services from an unregistered supplier, the GST needs to be paid by the recipient on behalf of the supplier. The supplier shall raise an invoice of the supplies made to their recipient.
As per section 2(98) of 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
On which items RCM is applicable?
In case of an unregistered person is selling goods or providing any services to the registered person, then the liability to pay tax shifts on the registered person i.e. the recipient of goods/services, where such supply is of taxable supplies. No reverse charge mechanism in case of exempted supplies.
For services provided by e-commerce operator –
In the case of services provided by e-commerce operators, the liability of tax payment lies on the recipient of services. If the assessee has no physical presence in the taxable area, then the representative of such an e-commerce operator will be liable to pay tax. If there is no representative, then the assessee has to appoint one who will be liable to pay GST.
Supplies of goods under reverse charge mechanism:
| Description of supply of goods | Supplier of goods | Recipient of goods |
| Cashew nuts, not shelled or peeled | Agriculturist | Any registered person |
| Bidi wrapper leaves (tendu) | Agriculturist | Any registered person |
| Tobacco leaves | Agriculturist | Any registered person |
| Supply of lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent |
| Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn | Any registered person |
| Description of supply of service | Supplier of service | Recipient of service |
| GTA Services | Goods Transport Agency (GTA) | Any factory, society, cooperative society, registered person, body corporate, partnership firm, casual taxable person; located in the taxable territory |
| Legal Services by advocate | An individual advocate, including a senior Advocate or a firm of advocates | Any business entity located in the taxable territory |
| Services supplied by an arbitral tribunal to a business entity | An arbitral tribunal | Any business entity located in the taxable territory |
| Services provided by way of sponsorship to anybody corporate or partnership firm | Any person | Anybody corporate or partnership firm located in the taxable territory |
| Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding: – (1) renting of immovable property, and (2) services specified below: – (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; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers | Central Government, State Government, Union territory or local authority | Any business entity located in the taxable territory |
| 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 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 supplied by a recovery agent to a banking company or a financial institution or a nonbanking financial company | A recovery agent | A banking company or a financial institution or a nonbanking financial company, located in the taxable territory |
| Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1)(a) 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 |
What happens if RCM is not paid?
Section 24 of 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.
Loss of Input Tax Credit: If RCM is not paid the recipient may not be eligible to claim Input Tax Credit for the tax amount that should have been paid under RCM. This can result in increased tax liability and impact the business.
The interest will be calculated at the rate of 18% per annum from the due date of the tax payment until the actual payment date. It is important to note that the taxpayer may also face penalties under the GST Act for non-payment of tax. The penalty amount can be up to 100% of the tax amount that is due.
Section 73 and Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act) deal with the penalty for wrongly availing ITC. The penalty for wrongly availing ITC is equivalent to the amount of ITC claimed. In addition, interest is also payable at the rate of 18% per annum on the amount of ITC claimed
When does a goods-reverse charge apply?
The reverse charge mechanism is applicable only when the recipient is registered under GST. The RCM in GST does not apply if the recipient is not registered. Additionally, the recipient must self-invoice their transactions and pay taxes to the government as and when required
In intra-state purchases, CGST and SGST have to be paid under the 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.
Who is liable to pay GST under a goods reverse charge?
RCM requires that the recipient pay GST on goods/services. Nonetheless, in order to comply with GST law, the supplier of goods is required to indicate whether RCM tax is due on the invoice.
In case of supplies where the tax is to be paid or liable to be paid on reverse charges mechanism the time of supply shall be earliest of
(a) The date of the receipt of goods, or
(b) The date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(c) The date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier
If it not possible to determine the time of supply under the above stated points, the time of supply shall be the date of entry in the books of account of the recipient of supply.
RCM GST payments should be made keeping the following points in mind:
- ITC on RCM tax amounts can only be claimed by recipients of goods or services if they are used to conduct business or further that business.
- If a composition dealer discharges liability under RCM, he should pay tax at the normal rates, not the composition rates. Additionally, they are not eligible to claim GST credit.
- RCM tax payables or charges can be subject to GST compensation cess.
Conclusion
Under Section 9 (3) few goods and services are specifically notified by way of notification in which case tax is to be paid under reverse charge like in case of advocates, goods transport agency etc.
Further, from the foresaid notifications and amended provision of section 9(4), 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 person, goods and services. It is applicable only to selected categories of registered persons and Goods and services as and when notified by the government.
- Goods and services notified under section 9(3) or section 9(4) must have person registered under GST.
- Under RCM the GST applicable must be submitted to the government on every 20th of next month
- The ITC will be available for all the RCM goods and services used for the furtherance of business according to the GST paid. And the service acquiring individual, who is also paying reverse charge can take the benefits of an input tax credit.
- There will be no auto-population of details of the GST paid under the RCM in GSTR 2, but it will be subjected to the manual furnishing of details.
- Wherever the RCM is applicable the invoice must be arranged by the recipient on itself while the invoices along with the consolidated purchases should be issued on a daily basis. On all the GST applicable who are under section 31(3).
- Payment voucher must be issued by the recipient at that during the time period of supplier payment.
- The ITC is not available for the reverse charge payment to the authority.
- The composition scheme registered individuals also come under the reverse charge, well there will be no credit of RCM availed.
- The reverse charge mechanism is applicable to payments made in advance also.
Note: If in case, a dealer is unregistered under GST, then he is not allowed to deal in any interstate transactions. For any reverse charge mechanism to applicable, there must be only intra-state transactions.
FAQ
What is reverse charge mechanism?
It means the ability to pay tax by the recipient of supply of goods or services instead of the supplier of such goods or services or both in respect of the notified category of supply
Can GST paid on reverse charge basis be considered as input tax?
Yes, the definition of input tax includes the tax payable under reverse charge mechanism.
Whether legal services provided by advocate firm are under reverse charge mechanism?
Yes, same can be availed under RCM.
A person receives a supply from an unregistered person in another state, whether he has to pay tax on reverse charge basis?
No, the person supplying the inter-state supply will have to compulsorily register irrespective of his turnover and will be liable to pay tax, unless the supplier has been exempted from taking registration. This question of supply by unregistered suppliers making inter-state supplies does not arise.
Who will issue the tax invoice in case of reverse charge supplies?
The recipient receiving supplies from unregistered suppliers will have to issue invoice himself and pay tax. In other words, the recipient receiving supplies, which are subject to reverse charge from a registered person need not issue a tax invoice.
Under Reverse Charge Mechanism who is liable to register in the new tax regime?
A person who pays taxes under reverse charge is required to register under GST irrespective of the threshold and the annual threshold Limit is 20 lakhs (10 lakhs in the case of Hill states and North Eastern State)
What happens if the receiver of goods or services is required to pay tax under reverse charge but is not a registered dealer?
All taxpayers required to pay tax under reverse charge have to register for GST, and the threshold of Rs.20 lakh or Rs.40 lakh, as the case may be, does not apply to them.
Is RCM applicable on rent?
Yes, the RCM provision on residential rent applies only if the monthly rent paid by the tenant to the landlord exceeds Rs. 50,000. If the rent paid is less than Rs. 50,000, then the RCM provision does not apply
