2018-08-09 00:00:10GST CenterEnglishReverse charge mechanism means the liability to pay GST is on the recipient instead of the supplier of goods and services.https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2018/08/accountant-explains-reverse-charge-mechanism.jpghttps://quickbooks.intuit.com/in/resources/gst-center/reverse-charge-mechanism/Reverese Charge Mechanism Under GST %%sep%% %%sitename%%

What Is Reverse Charge Mechanism Under GST?

18 min read

Reverse charge mechanism is typically, the taxable person supplying goods and services is liable to pay GST. But, there are certain cases such as imports and other types of supplies where the recipient of goods and services is liable to pay GST instead of the supplier. In other words, the liability to pay GST shifts from the supplier to the recipient of goods and services. Further, the recipient must be a registered person as per section 2(94) of the CGST Act, 2017.

According to section 2(94) of the CGST Act, a registered person means a person who is registered under section 25 of the Act. This does not include the person having a unique identity number.

Therefore, this article talks about the:

  • concept of reverse charge mechanism (RCM) under GST,
  • applicability of RCM and
  • provisions regarding time of supply and ITC under RCM

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What is Reverse Charge Mechanism Under GST?

Reverse charge means the liability to pay GST is on the recipient instead of the supplier of goods and services. This is unlike the usual regulation under GST where the supplier of goods and services is obligated to pay GST for the supplies made.

Further, this means all the provisions of the Act would be applicable to such a recipient as if he is the person responsible for paying the tax with regards to supply of goods or services. In other words, in case the recipient is unable to pay the tax under reverse charge mechanism, the supplier holds no liability to pay such a tax.

Compulsory Registration For Persons Subject To Reverse Charge

There are certain categories of persons required to register under GST compulsorily. Section 24 of the CGST Act, 2017 provides the list of such category of persons. As per this list, persons required to pay tax under reverse charge are also required to compulsorily register under GST.

In other words, the threshold limit for GST registration of Rs 40 Lakhs in case of goods and Rs 20 Lakhs in case of services shall not apply to such persons.

When Is Reverse Charge Applicable?

GST law provides the following scenarios of reverse charge mechanism under GST. These are as follows:

1. When GST Council Notifies Specific Goods and Services For Reverse Charge Levy

This scenario is covered under section 9(3) of the CGST Act, 2017. As per this section, the government on the suggestions made by the GST Council notifies categories of goods or services which would come under RCM in GST. In other words, the recipient receiving specific category of goods or services would be liable to pay the GST instead of the supplier.

  • List of Goods under RCM in GST

In case of supply of goods, there are in total eight categories of goods subject to reverse charge mechanism as per section 9(3) of the CGST Act. The list of goods under RCM in GST is as follows:

S.No.Description of Supply of GoodsSupplier of GoodsRecipient of Goods
1.Cashew nuts, not shelled or peeledAgriculturistAny registered person
2.Bidi wrapper leaves (tendu)AgriculturistAny registered person
3.Tobacco leavesAgriculturistAny registered person
4.Silk yarnAny person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarnAny registered person
4A.Raw cottonAgriculturistAny registered person
5.Supply of lotteryState government, union territory or any local authorityLottery distributor or selling agent
6.Used vehicles, seized and confiscated goods, old and used goods, waste and scrapCentral government, state government, union territory or a local authorityAny registered person
  • List of Services under RCM in GST

And in case of supply of services, there are certain categories of services as per section 9(3) of the CGST Act and certain types of services as per IGST Act subject to reverse charge mechanism. The list of RCM services Under GST along with RCM under GST notifications is as follows:

S.No.Description of Supply of ServiceSupplier of ServiceRecipient 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 territoryAny 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
  • Person registered under CGST, SGST, IGST or UTGST acts
  • 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 advocatesAny 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 tribunalAny business entity located in the taxable territory
5.Services provided by Central or State government, 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, 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)
Central government, state government, union territory or local authorityAny 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)Central government, state government, union territory or local authorityAny 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 personPromoter
5C.Long term lease of land (i.e. 30 years or more) by any person in exchange of a consideration in the form of 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 personPromoter
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 personAny body 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 corporateCompany 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 agentPerson carrying on the insurance business located in the taxable territory
9.Services provided by a music composer, photographer, artist etc. by the way of transfering 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 likeMusic company, producer and the like located in the taxable territory
9A.Services provided by an author by the way of transferring or permitting the use of a copyright specified under clause sub -section (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)AuthorPublisher who is located in the taxable territory

 

Provided that this would not apply to cases where:

 

  • 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 forward charge in accordance with Section 9 (1) of the CGST Act, 2017 under forward 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
  • 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 RBIRBI
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 firmA banking company or an NBFC ;located in the taxable territory
12.Services given 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 given 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 supply of security personnel 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 December, 2018 which shall come into effect from October 1, 2019)
Any person other than a body corporateA registered person located in the taxable territory

2. Supplies From An Unregistered Supplier To An Unregistered Recipient Under GST

As per section 9(4) of the CGST Act 2017, taxable supplies made by an unregistered supplier to a registered recipient under GST shall be subject to reverse charge mechanism. In other words, the registered person in such a case shall be liable to pay GST on reverse charge basis. That is, all the provisions of the GST Act shall be applicable to the registered recipient in a way that he is liable to pay GST in relation to the supply of goods or services received by him.

Therefore, each time a registered person buys supplies from an unregistered supplier, he is liable to pay GST on reverse charge basis. But, where the value of such supplies is less than Rs 5,000, the registered recipient under reverse charge mechanism is exempted to pay GST on such goods and services.

Furthermore, the provisions under section 9(4) of the CGST Act would not be applicable in cases where an unregistered supplier makes supplies to a TDS deductor. In other words, the government companies who deduct TDS as per section 51 of the CGST Act need not pay GST under reverse charge.

3. Supply of Services By E-Commerce Operator

As per section 9(5) of the CGST Act, 2017, services supplied by an e-commerce operator are also subject to the reverse charge mechanism. In other words, if an e-commerce operator supplies services, he shall be liable to collect and pay GST for the services thus supplied.

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

However, in case the electronic commerce operator does not have a physical presence in the taxable territory, person representing such an e-commerce operator shall be liable to pay the tax.

Also, if such an e-commerce operator does not have a representative in the taxable territory, he would be required to appoint a person who would be liable to pay GST for the services supplied.

Time of Supply of Goods Under Reverse Charge Mechanism

Under “reverse charge mechanism”, the time of supply of goods is the earliest of:

  • Date of receipt of goods
  • 30 days from the date of invoice
  • Date of payment

Now the date of payment would be considered the earlier of:

  • Date of debit in the bank account as depicted in the bank statement
  • Or date of recording the payment in the books of accounts by the recipient

Illustration

Gauri is an unregistered trader. She supplies goods to a registered recipient on Feb 1st, 2018. Goods supplied were received by Gaurav at his factory on February 28th, 2018. The invoice for the supply made was issued on February 15th, 2018. However, the payment was made on March 5th, 2018.

This is the case of reverse charge mechanism since the supplier, that is Gauri, is unregistered. Hence, the time of supply would be the earliest of:

  • Date of receipt of goods: In this case, February 28th, 2018 is the date of receipt of goods.
  • 30 days from the date of invoice: March 16th, 2018 is 30 days from the date of invoice
  • Date of payment: March 5th, 2018 is the actual date of payment.

Hence the time of supply of goods would be February 28th, 2018.

Illustration

Time of Supply of Services Under Reverse Charge Mechanism

Under reverse charge mechanism, the time of supply of services shall be the earliest of:

  • 60 days from the date of issue of invoice
  • Date of payment

Now, the date of payment shall be taken as the earlier of :

  • Date of debit in the bank account as shown in the bank statement
  • Or date of recording the payment in the books of accounts by the recipient

Illustration

Kapoor & Co.is an unregistered supplier that offers Accounting services to Sharma Ltd and issues an invoice on September 7, 2018. Since the quality of the services offered was not upto the mark, the payment got delayed and hence it was made on December 16, 2018. The payment was made through cheque and the same was recorded in the books of accounts of the recipient.

Now, the time of supply in the above case shall be the earlier of:

  • 60 days from the date of issue of invoice (September 7, 2018)
  • Date of payment (December 14, 2018)

That is September 7, 2018 would be the time of supply of services.

ITC Under Reverse Charge Mechanism

The supplier of goods and services cannot claim an input tax credit for the goods and services supplied to the recipient under reverse charge. Since the recipient is liable to pay GST for goods and services received under reverse charge mechanism, he can claim an input tax credit for such supplies. However, such supplies must be used as inputs in business.

Provisions with Regards to Supplies under Reverse Charge Mechanism

There is certain compliance with regards to supplies under Reverse Charge Mechanism. This is as follows:

  • Section 31 of CGST act 2017 provides that each tax invoice payable must specify if the tax with regards to the supply so mentioned in the invoice is payable under reverse charge. Further, both the receipt voucher and the refund voucher also need to specify whether the tax payable for such supplies are on reverse charge basis.
  • Every registered person is required to maintain accounts and records of supplies taxable under reverse charge mechanism.
  • Tax payable under reverse charge is paid only by debiting the electronic cash ledger. That is to say, the input tax credit cannot be used to set off the tax liability under reverse charge. But the recipient after discharging the tax liability under reverse charge can claim an input tax credit for the tax paid if he is eligible to claim the same.
  • Details with regards to invoice issued in respect of the supplies made under reverse charge are required to be mentioned separately in Table 4B of GSTR-1.
  • Advance payment made in respect of supplies under reverse charge is also liable for GST. In other words, such a person making advance payment for supplies under reverse charge is required to pay GST on reverse charge basis.

What is Self Invoicing Under Reverse Charge Mechanism?

Section 31 of the CGST Act, 2017 provides that a registered recipient subject to reverse charge mechanism is required to issue an invoice. Such an invoice is in respect of goods and services received by the recipient from the supplier. Further, such a supplier is not registered under GST on the date of receipt of goods and services.

Also, the registered person liable to pay GST under reverse charge mechanism is also required to issue a payment voucher at the time of issuing payment to the supplier of such goods and services.

Conclusion

Thus, reverse charge mechanism requires registered recipients of goods and services to remit tax directly to the authorities if:

  • transacting with unregistered dealers or
  • purchasing specific goods and services listed by the CBEC.

Here is an infographic that explains what is reverse charge mechanism under GST in a simple and easy to understand way.

REVERSE CHARGE MECHANISM UNDER GST

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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