RCM (Reverse Charge Mechanism)

 

Reverse Charge Mechanism (RCM)

                                                                                                                      Date : 05 - Jul - 2020

 

What is the Reverse Charge Mechanism(RCM) under GST?

Reverse Charge Mechanism is the process of payment of GST by the receiver instead of the supplier. In this case, the liability of tax payment is transferred to the recipient/receiver instead of the supplier.

Note: In the notification, the government has finally imposed the reverse charge mechanism starting from 1st February 2019 as per the GST acts and amendments. Also to note that the up to INR 5000 exemptions will be removed effectively.

Reverse Charge Mechanism is applicable in case of :

·        Imports

·        Purchase from unregistered dealer.

·        Supply of notified goods and services

This reverses the scenario as the person who is receiving the goods and services need to pay the taxes. If the receiver is purchasing goods from unregistered providers, there needs to be a GST paid on their behalf. A payment voucher needs to be issued from the supplier to the recipient. The recipient must be a registered person as per Section 2(94) of the CGST Act,2017.

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

·        under sub-section (3) or sub-section (4) of section 9, or

·        under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act

 

Current Situation in Reverse Charge Mechanism (RCM)

In the present scenario, the reverse charge mechanism is applicable in service tax for services like Insurance Agent, Manpower Supply, Goods Transport Agency, etc. Unlike Service Tax, there is no concept of partial reverse charge. The recipient has to pay 100% tax on the supply.

In the earlier government scenario, it was hard to collect service tax from the numerous unorganized sectors just similar to goods transportation. The effort has been made to place the services as per the existing regime and Compliances and tax collections will, therefore, be increased through reverse charge mechanism. Currently, there is no reverse charge mechanism on the What is Mixed and Composite Supply Under GST?, the reverse charge may be applicable for both goods and services.

 

RCM Provisions Under GSTR Forms – GSTR 1 – GSTR 2

This system is being carried forward from the VAT regime. In case the supplier is registered, but the goods or services come under reverse charge mechanism, the input tax credit cannot be claimed by the supplier as the tax is not credited by him but the receiver is paying the taxes. In the case of importers of goods, taxes need to be paid under reverse charge mechanism to the Government on the import. This is in addition to the import duties. The details of the charges pertaining to the inward supply of goods or services are to be mentioned in the GSTR1. The details of inward supply are stated in the form GSTR 2. A person who is liable to pay tax under reverse charge mechanism needs to be registered under GST irrespective of the turnover. The goods/service supplier gets the input tax credit that is paid under the reverse charge. The only condition is that the input tax credit is used only for the furtherance of business.

The list of services to be included under reverse charge mechanism are :-

ü  Goods Transport Agency

ü  Recovery Agent

ü  Director of a company or body corporate

ü  An individual advocate or firm of advocates.

ü  An insurance agent

Services Covered under Reverse Charge Mechanism (RCM) under GST
Sr.	Services	Provider of service	Recipient of Service
1	Taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non-assessees online recipient (OIDAR)#	Any person who is located in         a non- taxable territory	Any person located in the taxable territory other than non-assessee online recipient (Business Recipient)
2	Services provided or agreed to be provided by a goods transport agency (GTA) in respect of transportation of goods by road	Goods Transport Agency (GTA)	(a) any factory registered under or governed by the Factories Act, 1948;
			(b) any society registered under the Societies Registration Act, 1860 or under any other law
			for the time being in force in
			any part of India;
			(c)  any co-operative society established by or under any law;
			(d) any person registered under CGST/SGST/UTGST Act;
			(e)  any body corporate established, by or under any law; or
			(f)   any partnership firm whether registered or not under any law including association of persons.
			(g) Casual taxable person
3	Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services directly or indirectly	An individual advocate or firm of advocates	Any business entity.
4	Services provided or agreed to be provided by     an arbitral tribunal	An arbitral tribunal	Any business entity.
5	Sponsorship services	Any person	Anybody corporate or partnership firm.
6	Services provided or agreed to be provided by Government or local authority excluding :-	Government or local authority	Any business entity.
	(1) renting of immovable property, and
	(2) services specified below-
	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 Government;
	services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
	transport of goods or passengers.
7	Services provided or agreed to be provided 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	A company or a body corporate.
8	Services provided or agreed to be provided by an insurance agent to any person carrying on insurance business	An insurance agent	Any   person            carrying on insurance business.
9	Services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company	A recovery agent	A banking company or a financial institution or a non- banking financial company.
10	Services by way of transportation of goods by a vessel from a place outside India up to the customs  station of clearance in India	A person located in non-taxable territory to a person located in non-taxable territory	Importer as defined under clause (26) of section 2 of the Customs Act, 1962.
11	Transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works	Author or music composer, photographer, artist, etc.	Publisher, Music company, Producer
12	Radio taxi or Passenger Transport Services provided through electronic commerce operator	Taxi driver or Rent a cab operator	Any person
13	Services provided by business facilitator (BF) to a banking company	Business facilitator (BF)	A banking company,
			located in the taxable territory
14	Services provided by an agent of business correspondent (BC) to business correspondent (BC)	An agent of business	A business correspondent, located in the taxable territory
		correspondent (BC)
15	Security services (services provided by way of supply of security personnel) provided to a registered person:	Any person other than a body corporate	A registered person,
	Provided that nothing contained in this entry shall apply to :-		located in the taxable territory
	(i) (a) a Department or Establishment of the Central Govt. or State Government or Union territory; or
	(b) local authority; or
	(c) Governmental agencies;
	which has taken registration under the Central Goods and Services Tax Act, 2017 only for the purpose of deducting tax under section 51 of the Act and not for making a taxable supply of goods or services; or
	(ii) a registered person paying tax under section 10 of the said Act.

 

 

 

Goods notified by Government on which GST shall be paid on Reverse Charge Basis

 

Sr No.	Description of Goods	Supplier of Goods	Recipient of Goods
1	Cashew nuts, not shelled or peeled	Agriculturist	Any registered person
2	Bidi wrapper leaves (tendu)	Agriculturist	Any registered person
3	Tobacco Leaves	Agriculturist	Any registered person
4	Silk yarn	Agriculturist	Any person who manufactures silk yarn from raw silk / silk worm cocoons for supply of silk yarn
5	Supply of lottery	State Government,	Lottery distributor or selling agent
		Union Territory or
		any local authority
6	Used vehicles, seized and confiscated goods, old and used goods, waste and scrap	Central Government,	Any registered person
		State Government, Union territory or a local authority
7	Raw cotton	Agriculturist	Any registered person
8	Priority Sector Lending	Any registered person	Any registered person
	Certificate

 

Points to be noted:

No partial reverse charge will be applicable under GST. 100% tax will be paid by the recipient if the reverse charge mechanism applies.

ü  In the case of B2B import of other services, the tax shall be payable by the recipient of services

ü  In the case of B2B import of goods, the tax shall be payable by the recipient of goods

 

Exception: GST is not required to be paid on receipt of security service by a Department or Establishment of the Central Government or State Government or Union territory or by a local authority or by a Governmental agencies which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 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 or by a registered person paying tax under section 10 of the said Act.

The person paying tax under reverse charge on the above mentioned services are eligible to take GST credit provided their outward supply is taxable under GST. Further, the person whose outward supply is covered under the aforesaid reverse charge notification need not registered under GST law.

The Scenario Where Reverse Charge Will Be Applicable under GST

Supply by Unregistered Dealer:

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. The tax will be paid by the registered dealer and all the provisions of the act will be applicable to him as if he is the supplier of the goods or services The concept behind this to prevent tax evasion since it would be almost impossible to collect tax from the unregistered dealer. It would increase tax compliance and promotes transparency. Input credit will be allowed to the registered dealer of the tax paid by him under the reverse charge mechanism.

 

For Services Provided by E-commerce Operator

In case of services provided by e-commerce operators, liability to pay tax lies on the recipient of services. If the assessee has no physical presence in the taxable area, then the representative of such 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.

 

Liability of Registration Under RCM (Reverse Charge Mechanism)

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 annual threshold Limit is 20 lakhs (10 lakhs in case of Hill states and North Eastern State).

Note: In the GST council meeting, states were given liberty to imposed double threshold limit for registration i.e. 40 lakh up from the earlier INR 20 lakh.

 

Time of Supply

Under GST, time of supply means a particular point in time when the goods or services are rendered or supplied. It allows us to find out the tax rate, value and due dates for filing returns. Under Reverse Charge Mechanism, the receiver is entitled to pay GST. However, the time of supply for supplying of goods and services under reverse charge is varying from the supplies which are under forwarding charge.

 

How to Find Out Time of Supply under Reverse Charge Mechanism (RCM)?

(a) In the case of Goods: 

Time of supply in case of supplying goods when tax payable under Reverse Charge, whichever is earliest from the following dates:-

§  the date of the receipt of goods;

§  the date of payment as entered in the books of account of the recipient;

§  the date on which the payment is debited in his bank account, whichever is earlier;

§  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

Note: 

However, if it is not possible to find out the time of supply in mentioned above cases than the time of supply will be considered the date of entry in the books of account of the recipient of the supply.

 

If the supplier is located outside India, then the time of supply shall be the earliest from the following :-

§  When the amount is paid i.e. the date of payment’

§  ‘When the recipient records the payment in his books of account’.

 

(b) In the case of services: 

Time of supply in case of supplying services when taxes payable under reverse charge mechanism, whichever is earliest from the following dates:-

§  the date of payment; or

§  the date immediately following after sixty days from the date of issue of the invoice by the supplier; whichever is earlier

However, if it is not possible to find out the time of supply in aforementioned cases, the time of supply will be considered the date of entry in the books of account of the recipient of the supply.

 

There are two types of reverse charge scenarios mentioned in the law. First one is dependent on the nature of supply and nature of supplier. This covered under section 9 (3) of CGST/ SGST (UTGST) Act and section 5 (3) of the IGST Act. Second one taxable supply made by the unregistered person to a registered person covered under section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act.

 

The Manner of Payment of GST under the Reverse Charge Mechanism

As per section 49(4) of CGST Act’2017, ITC can be used for payment of output tax only. Therefore, tax under reverse charge can be paid through cash only without availing the benefit of ITC. The supplier must mention in his tax invoice whether the tax is payable on reverse charge.

 

Input Tax Credit:

The service recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services. The only condition is that the goods and services are used or will be used for business or furtherance of business.

If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim any credit of tax paid. The tax will be paid at the normal applicable rates and not at the composition rates.

 

 

Registration Requirement under Reverse Charge Mechanism (RCM):

As per Section 24 of CGST Act’ 2017, A person paying tax under the reverse charge mechanism has to compulsorily get registered even if the turnover is below the threshold limit.

 

Applicability of GST Compensation Cess:

GST Compensation Cess will be applicable on tax paid under reverse charge mechanism also. The purpose is to compensate States for loss of revenue on the implementation of GST. This will be applicable for 5 years from the date GST gets implemented.

 

Important Points to be Taken Care Under RCM :

ü  Goods and services notified under section 9(3) or section 9(4) must have person registered under GST.

ü  Under the reverse charge mechanism, the GST applicable must be submitted to the government on every 20th of next month

ü  The input tax credit 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.

ü  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.

ü  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).

ü  Payment voucher must be issued by the recipient at that at the time period of suppliers payment.

ü  The ITC is not available for the reverse charge payment to the authority.

ü  The composition scheme registered individuals also come under the reverse charge, well there will be no credit of RCM be availed.

ü  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.

 

Conclusion: 

With the biggest tax reform ready to be implemented, Reverse charge mechanism is not a new concept as we are already dealing with this in the service tax. But imposing a 100% reverse charge is definitely a big change. There are both pros and cons of this reverse charge mechanism but then no accurate conclusion can be drawn currently as to how the society will be impacted by its imposition. On one hand it will definitely be burdensome for the small supply receivers, but on the other hand, it will increase tax compliance for the country as a whole and would increase transparency.

 

 

Q: In reverse charge mechanism, what will be the duration of supply in a matter of purchasing of goods?

A: The duration of supply in a matter of purchasing of goods in reverse charge mechanism will be earlier in the following:

§  The date of receipt of goods or

§  Date on which payment is made or

§  The date immediately following 30 days from the date of issue of invoice

Now take an example that if a taxpayer’s purchase some goods on 25 July and present the bill on 2nd august and for the same the consideration is paid on 28th august than the provision of RCM will deem 25 July as a time of the supply.

 

Q: What will be the case in services for the time of supply in RCM?

A: In this case, the following scenario will be applicable:

The date on which payment is made

The date immediately following 60 days from the date of issue of invoice

 

Q: What will be the case for GST paid in RCM whether the credit will be allowed or not?

A: As per the GST provisions, each taxpayer can take the input tax credit but in order to avail the credit of tax paid, first he has to pay the taxes to avail the credit on all those purchases in the next month. In the provisions it is clearly mentioned that GST credit cannot be availed on food and beverages, building, passenger vehicle even if the tax is paid on R.C.M basis that means the burden of such tax shall be borne by the taxpayer.

 

Q: What changes can RCM bring after the implementation of GST?

A: The RCM can significantly increase the number of taxpayer base in India while it also mentioned that purchases made from an unregistered dealer can prove expensive for the registered dealer. This will be attracting reverse charges in case if any dealers make transactions with an unregistered dealer.

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 Thank you,

Chandra Sekhar Reddy

Author and Sole proprietor,

SCR Gallery

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