Demystifying Reverse Charge Mechanism in GST: A Step-by-Step Guide

A reverse charge is a system in which the beneficiary of goods or services is liable for paying the Goods and Services Tax (GST) instead of the supplier.

What does the Reverse Charge Mechanism mean?

Usually, the person who sells the goods or provides the service has to pay GST. Under the reverse charge system, however, the recipient may be held responsible in certain situations, such as when goods are imported or supplied in a way that has been reported. 

When there is a reverse charge, the person who receives the goods or services is taxed, not the person who provides them, for certain types of supplies that have been identified.

Passing the responsibility of paying GST on the receiver is meant to increase the number of unorganized sectors that are taxed, exempt certain types of suppliers, and tax the import of services (since the supplier is not in India).

GST reverse charge applicability mechanism only works for certain kinds of businesses. The GST search tool can be used to find out what kind of business any GST number belongs to.

When to apply Reverse Charge?

Section 9(3), 9(4), and 9(5) of the Central GST and State GST Acts regulate the circumstances where the recipient of goods or services is liable to pay the tax instead of the supplier for transactions within the same state.   

Furthermore, the reverse charge possibilities for inter-state transactions are regulated by sections 5(3), 5(4), and 5(5) of the Integrated GST Act.  

Let us indulge in an in-depth conversation concerning these specific situations: 

#1. Provision of specific goods and services as specified by the Central Board of Indirect Taxes and Customs (CBIC) 

According to the authority granted under section 9(3) of the CGST Acts, the CBIC has released a roster of goods and services subject to reverse charge. 

#2. Supplying from an unregistered supplier to a registered dealer

According to Section 9(4) of the CGST Act, if a seller who is not registered under GST provides products to a person who is registered under GST, then reverse charge applicability is applied.

Consequently, the recipient will be responsible for paying the GST directly rather than the supplier. The buyer who is registered and liable to pay Goods and Services Tax (GST) using the reverse charge mechanism is required to generate invoices for their purchases.  

The purchaser is required to pay CGST and SGST under the reverse charge mechanism (RCM) for intra-state purchases. Furthermore, when it comes to purchases made between states, the customer is obligated to pay the Integrated Goods and Services Tax (IGST). The government periodically informs the specific items or services subject to this regulation.    

In the real estate industry, the government has notified that promoters must purchase 80% of their inward supplies exclusively from licensed suppliers.

If the purchases from registered dealers fall short by 80%, the promoter must apply an 18% GST on the reverse charge for the amount that is less than 80% of the inward supply. 

Nevertheless, if the promoter procures cement from an unregistered GST supplier, then he falls under the reverse charge applicability category; they are obligated to remit a tax rate of 28%. This calculation is to be performed regardless of the 80% calculation.    

The promoter is responsible for paying Goods and Services Tax (GST) on a reverse charge applicability basis for Transferable Development Rights (TDR) or floor space index (FSI) provided on or after April 1st, 2019.   

Even if a landowner is not actively involved in normal land-related commercial activities, the transfer of development rights by the landowner to the promoter is subject to GST. 

It is because it is regarded as a provision of services according to section 7 of the CGST Act. Furthermore, when one developer supplies TDR to another developer, GST is levied at 18% under a reverse charge mechanism.

#3. Supply of services facilitated by an e-commerce operator 

Various firms can utilize e-commerce operators as a consolidator to market products or offer services.   

According to Section 9(5) of the CGST Act, when a service provider utilizes an e-commerce operator to offer specific services, the reverse charge mechanism will apply to the e-commerce operator. 

As a result, the e-commerce operator will be obliged to pay the Goods and Services Tax (GST). This section encompasses the range of services provided like,

Passenger transportation services are provided by several means, such as radio taxis, motor cabs, maxi cabs, and motorcycles. For instance, companies like Ola and Uber.  

GST reverse charge applicability refers to providing lodging services in various commercial establishments such as hotels, inns, guest houses, clubs, and campsites. 

However, the requirement for registration is only applicable to individuals who offer these services through electronic commerce platforms and have exceeded the turnover threshold.   

For Example

• Oyo
• MakeMyTrip
• Tripadvisor

Reverse charge applicability for small businesses like housekeeping services, such as plumbing and carpentry, are exempt from registration for Internet commerce operators unless their turnover exceeds the threshold level.   

For instance, Urban Company offers various services, including plumbing, electrical work, teaching, and beauty treatments.   

Urban Company is liable for the payment of GST and the collection of GST from clients rather than the registered service providers in this scenario. 

Additionally, let’s assume that the e-commerce operator lacks a physical presence inside the taxable jurisdiction. Under those circumstances, an individual acting as a representative for an electronic commerce operator shall be liable for paying taxes for whatever reason.   

In the absence of a representative, the operator will designate a representative who will bear the responsibility of paying GST.

Registration Rules for GST Reverse Charge Applicability

According to Section 24 of the CGST Act 2017, individuals required to pay GST using the reverse charge applicability must register for GST without exception. They will be exempt from the threshold limitations of Rs.20 lakh or Rs.40 lakh, depending on the circumstances. 

Who is liable for GST reverse charge applicability?  

The party receiving goods or services is liable for paying the Goods and Services Tax (GST) under the Reverse Charge Mechanism (RCM). According to the terms of the GST law, the individual who is providing the products must indicate in the tax invoice whether tax is required to be paid using the Reverse Charge Mechanism (RCM). 

When processing GST payments under RCM, it is important to consider the following points: 

• The recipient of goods or services can claim the Input Tax Credit (ITC) for the tax amount paid via Reverse Charge Mechanism (RCM) only if such goods or services are applied for business purposes or the advancement of business activities.  

• When fulfilling their duty under the Reverse Charge Mechanism (RCM), a composition dealer must pay tax at the regular rates rather than the composition rates. Furthermore, they cannot assert any input tax credit for the tax that has been paid.  
• The GST compensation cess can be levied on the tax due or already paid via the Reverse Charge Mechanism (RCM). 

Input Tax Credit (ITC) in the context of Reverse Charge Mechanism (RCM) 

Suppliers are not eligible to claim Input Tax Credit (ITC) for Goods and Services Tax (GST) paid under the Reverse Charge Mechanism (RCM). The beneficiary is eligible to claim Input Tax Credit (ITC) on the Goods and 

Services Tax (GST) amount paid under the Reverse Charge Mechanism (RCM) when they receive goods or services, but only if those goods or services are utilized or intended to be used for business activities.  

The recipient is not allowed to use the Input Tax Credit (ITC) for settling the output products and Services Tax (GST) on products or services under reverse charge. The payment for such GST shall be made exclusively in cash. 

What is the definition of Self-invoicing?    

Self-invoicing is required for purchases made from an unregistered source if the products or services acquired are subject to reverse charge. 

The reason for this is that your supplier is unable to provide you with an invoice that is compatible with GST regulations, which results in you being responsible for paying taxes on their behalf. That’s why self-invoicing is needed in this case.   

Furthermore, according to section 31(3)(g), a recipient who is obligated to pay tax under section 9(3) or 9(4) must provide a payment voucher when making a payment to the provider.

Conclusion

The Goods and Services Tax (GST) reverse charge method is an integral part of the tax system that is meant to make the person who receives the goods or services pay the tax instead of the person who provides them. 

This strategy is usually used when the supplier is not registered, or the transaction includes certain goods or services covered by GST rules.

The reverse charge method is fundamental because it increases the tax base, makes sure people pay their taxes, and stops people from not paying their taxes. It is up to the person who receives the money to account for the GST and send it to the government. This makes it harder for taxes to be lost. It also makes businesses more likely to work with registered suppliers, which improves the tax system’s transparency and accountability.

The GST reverse charge mechanism (RCM) is an important part of the Indian tax system. It makes processes fair and clear, but it also makes the recipient responsible for paying their taxes. To avoid any bad effects linked to reverse charge applicability, businesses must stay alert and up to date on the latest changes to the rules.

FAQs

1. Who is liable under GST for RCM?

Any online service provided by someone in a non-taxable area to someone who is not a non-taxable online receiver. Individuals residing within a non-taxable territory Persons living in the taxable area who are not non-taxable online recipients.

2. Who doesn’t have to pay RCM?

If a registered person gets products or services from an unregistered person within the same state, they don’t have to pay central tax on them (reverse charge basis), and they don’t have to pay more than INR 5,000 per day. Up to Rs. 5,000 per day, there is no way to reverse the charge.

3. What will happen if RCM doesn’t get paid?

Loss of Input Tax Credit: If RCM is not paid, the person who should have received it may be unable to claim the Input Tax Credit for the tax amount that should have been paid under RCM. This could lead to higher taxes, which could harm the business.

4. How do I put RCM on my GST return?

When the receiver files his GSTR-3B, he has to release the liability through the electronic cash ledger. The person who gets the ITC can only use it on RCM purchases in the next tax period. Table 4A of GSTR-3B lets him claim it (qualifying ITC).

5. What is the reverse charge applicability for exporters?

Due to the revised POS regulations, Indian exporters who ship goods using foreign shipping lines will now have the place of supply determined based on the location of the Indian exporter. Consequently, these transactions will be subject to the reverse charge applicability for exporters.

6. Is GST reverse charge applicable on rent?

Yes, the RCM rule on home rent only applies if the rent paid by the occupier each month is more than Rs. 50,000. The RCM rule only applies if the rent is less than Rs. 50,000.

7. Is the GST reverse charge eligible for a refund?

It depends on the following situation: taxpayers who paid Output RCM on Ocean freight, claimed the related Input Tax Credit, and even used the whole Input Tax Credit will not be able to get any refund for the given judgment.

8. When can someone get an ITC for the tax they paid under RCM?

For the following month, someone who paid tax under RCM can claim it as ITC.   

9. Is it necessary to mention RCM on the invoice?

Part 31 of the CGST Act, 2017, and Rule 46 of the CGST Rules, 2017, say that every tax invoice needs to say if the tax on the supply in the invoice is due on reverse charge.

10. Where do I put the GST reverse charge in GSTR 1?

In his GSTR-1, the seller has to list sales by invoice that are subject to RCM. The seller needs to fill out Table 4B of GSTR-1 to report this (Outward supplies are subject to tax on a reverse charge basis).