Reverse Charge Mechanism (RCM) in GST

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Published Date:  18-10-2023   Author:   ca-abhishek-mundhra
captainbiz reverse charge mechanism rcm in gst

As a general rule, the supplier of goods or services is liable to pay GST. However, in certain cases, GST is payable by the recipient of goods or services on transactions like the import of goods or the services specifically notified by the department, which becomes the Reverse Charge Mechanism.

Following are the salient features of RCM

  1. Payment of RCM Liability: RCM Liability can’t be discharged by utilizing ITC. It has to be mandatorily discharged by cash payment. Any advance payment made for receiving services is also liable under RCM.
  2. .Eligibility to claim ITC of tax Paid: The recipient is eligible to claim the ITC of the tax paid under RCM. However, this benefit is not available to any person registered as composition taxpayers or Input Service Distributors (ISD). They are not eligible to claim ITC of the same.
  3. Rate of tax for RCM Liability: The rate of tax remains the same as applicable on the respective goods or services.
  4. Self-Invoicing: Service receiver has to do self-invoicing for the liability discharged under RCM.

Our Other Blog: Demystifying Interest Liability in GST: A Comprehensive Guide

Goods and services on which tax liability has to be discharged under RCM:

  1. Person purchasing cashew nuts, bidi leaves, tobacco leaves, and raw cotton from an agriculturist
  2. Purchase of silk yarn from a silk manufacturer.
  3. Lottery distributors purchasing lottery tickets or any person purchasing old or used goods, waste, etc. from the central or state government or local authority
  4. GST on services provided by the Goods Transport Agency (GTA), which does not pay GST at 12% (with the option to claim ITC) or 5% (without claiming ITC), to any taxable person, is liable to be discharged by the service recipient. The option of not paying GST by GTA under forward charge has to be selected by GTA by March 15th of the preceding financial year by filing Form V in Annexure V.
  5. Legal services are provided by advocates or a firm or LLP of advocates.
  6. Services by a director of a company or body corporate Recently, CBIC, through Circular No. 201/13/2023, clarified that the services supplied by such a director in his personal capacity are not taxable under RCM. Simply put, any service provided by the director where his role as a director of the company is not required is liable to be taxed under RCM.
  7. Services are provided by an insurance agent to any person operating the insurance business.
  8. Services provided by a recovery agent to a bank, financial institution, or NBFC
  9. Services of transportation of goods by vessel are provided to the importer of goods.
  10. As per Notification No. 05/2022, dated July 13, 2022, CBIC has brought the renting of residential (excluding commercial) units under RCM purview as follows:

Supplier

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Recipient

Transaction

Taxability

ABC & Co. (unregistered)

XYZ Ltd. (registered)

Renting a Residential Unit for Commercial Purposes

Taxable in the hands of a registered recipient under reverse charge (However, if the premises are taken by the recipient proprietor in his personal capacity, then GST will not be applicable, as clarified in the 48th GST Council Meeting.)

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ABC & Co. (registered)

XYZ Ltd. (registered)

Renting a Residential Unit for Commercial Purposes

Taxable in the hands of the supplier.

ABC & Co. (unregistered)

XYZ Ltd. (registered)

Renting a Commercial Unit for Commercial Purposes

GST is not applicable to renting a commercial unit from an unregistered supplier.

 

All registered persons should be vigilant while filing their taxes and regularly check if they are missing out on GST payments on RCM. The same, if missed, will attract interest liabilities.

Also Read – How To: GST Registration Online

Place of Supply in GST for Goods Exports: Shipping Destination and Customs Clearance

Place of Supply and Taxation in Bill-to/Ship-to Transactions: GST Rates and Compliance

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CA Abhishek D Mundhra

Abhishek D Mundhra is a Chartered Accountant with 12+ years of post qualification experience with expertise in the field of GST and other Direct and Indirect Taxes.

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