All About Reverse Charge Mechanism (RCM) Under GST
The Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) framework shifts the responsibility of tax payment from the supplier to the recipient of goods or services. This approach ensures tax compliance, especially in sectors with unorganized suppliers or in cases involving imports.
What is Reverse Charge Mechanism?
Under typical circumstances, the supplier is liable to pay GST on the supply of goods or services. However, under RCM, this liability is transferred to the recipient. This mechanism is designed to:
- Broaden the tax base by including unorganized sectors.
- Provide exemptions to specific supplier categories.
- Ensure taxation on the import of services, as foreign suppliers are beyond India's jurisdiction.
When is Reverse Charge Applicable?
RCM applicability is outlined in Sections 9(3), 9(4), and 9(5) of the Central GST (CGST) Act for intrastate transactions, and Sections 5(3), 5(4), and 5(5) of the Integrated GST (IGST) Act for interstate transactions. The scenarios include:
A. Supply of Specific Goods and Services Notified by CBIC
The Central Board of Indirect Taxes and Customs (CBIC) has specified certain goods and services subject to RCM under Section 9(3) of the CGST Act. For a comprehensive list, refer to the official CBIC notifications.
B. Supply from Unregistered Dealer to Registered Dealer
As per Section 9(4) of the CGST Act, if a registered person purchases goods or services from an unregistered supplier, the recipient must pay GST under RCM. This entails:
- Issuing a self-invoice for the purchases.
- Paying CGST and SGST for intrastate transactions or IGST for interstate transactions.
In the real estate sector, promoters are required to procure at least 80% of their supplies from registered suppliers. If this threshold isn't met, GST at 18% is payable under RCM on the shortfall. Notably, purchases of cement from unregistered suppliers attract a 28% GST under RCM, irrespective of the 80% threshold.
C. Supply of Services Through E-commerce Operators
Section 9(5) of the CGST Act mandates that if a service is supplied through an e-commerce platform, the platform operator is liable to pay GST under RCM. This applies to services such as:
- Passenger transportation via radio-taxi, motor cab, maxi cab, and motorcycle (e.g., Ola, Uber).
- Accommodation services in hotels, guest houses, etc., unless the service provider is liable for GST registration due to turnover thresholds (e.g., Oyo, MakeMyTrip).
- Housekeeping services like plumbing and carpentry, unless the service provider exceeds the registration threshold (e.g., Urban Company).
If the e-commerce operator lacks a physical presence in the taxable territory, a representative must be appointed to handle GST compliance.
Time of Supply Under RCM
A. For Goods
The time of supply is the earliest of:
- Date of receipt of goods.
- Date of payment.
- 30 days after the supplier issues the invoice.
If none of the above can be determined, the date of entry in the recipient's books is considered.
B. For Services
The time of supply is the earliest of:
- Date of payment.
- 60 days after the supplier issues the invoice.
If these cannot be determined, the date of entry in the recipient's books is used.
Registration Rules Under RCM
Individuals or entities liable to pay GST under RCM must register under GST, regardless of the threshold limits of ₹20 lakh or ₹40 lakh, as specified in Section 24 of the CGST Act, 2017.
Who Should Pay GST Under RCM?
The recipient of goods or services is responsible for paying GST under RCM. Key considerations include:
- The supplier's invoice should indicate if tax is payable under RCM.
- The recipient can claim Input Tax Credit (ITC) on the GST paid under RCM, provided the goods or services are used for business purposes.
- Composition dealers must pay tax at standard rates under RCM and are not eligible to claim ITC.
- GST compensation cess may apply to the tax payable under RCM.
Input Tax Credit (ITC) and Reverse Charge Mechanism (RCM)
Under the Reverse Charge Mechanism (RCM) in India's Goods and Services Tax (GST) framework, the responsibility to pay tax shifts from the supplier to the recipient of goods or services. This mechanism ensures tax compliance, especially in transactions involving unregistered dealers.
Input Tax Credit (ITC) under RCM
Recipients can claim ITC on GST paid under RCM, provided the goods or services are used for business purposes. However, it's important to note that the tax paid under RCM cannot be settled using ITC; it must be paid in cash. Once paid, the recipient can avail of the ITC to offset future GST liabilities. This approach ensures that businesses are not unduly burdened by the tax and can maintain smooth cash flow operations.
Registration Requirements under RCM
Entities liable to pay tax under RCM must register under GST, regardless of their turnover. This mandatory registration ensures that all businesses, even those below the typical threshold, comply with GST regulations when engaged in transactions subject to RCM. The objective is to broaden the tax base and prevent tax evasion by bringing more businesses into the formal economy.
For a comprehensive understanding of RCM and its implications, you can refer to the official GST Council's guide on Reverse Charge Mechanism.
List of Goods and Services Notified Under RCM
List of Goods Notified Under RCM
| S.No. | Description of Goods | Supplier | Recipient | GST Rate |
|---|---|---|---|---|
| 1 | Cashew nuts, not shelled or peeled | Agriculturist | Registered Person | 5% |
| 2 | Bidi wrapper leaves (tendu) | Agriculturist | Registered Person | 18% |
| 3 | Tobacco leaves | Agriculturist | Registered Person | 28% |
| 4 | Silk yarn | Manufacturer | Registered Person | Nil |
| 5 | Raw cotton | Agriculturist | Registered Person | 5% |
| 6 | Supply of lottery | State Government, Union Territory, or Local Authority | Lottery Distributor or Selling Agent | 28% |
| 7 | Used vehicles, seized and confiscated goods, old and used goods, waste and scrap | Central Government, State Government, Union Territory, or Local Authority | Any Registered Person | Applicable Rate |
| 8 | Priority Sector Lending Certificate (PSLC) | Any Person | Any Registered Person | Nil |
List of Services Notified Under RCM
| S.No. | Category of Supply of Services | Supplier of Service | Recipient of Service | GST Rate |
|---|---|---|---|---|
| 1 | Services provided by a goods transport agency (GTA) in respect of transportation of goods by road to specified entities. | Goods Transport Agency (GTA) | Specified recipients such as factories, societies, cooperative societies, registered persons, body corporates, partnership firms, or casual taxable persons. | 5% or 12% |
| 2 | Legal services, including representational services before any court or tribunal. | Individual advocate or firm of advocates | Any business entity located in the taxable territory. | 18% |
| 3 | Services provided by an arbitral tribunal. | Arbitral tribunal | Any business entity located in the taxable territory. | 18% |
| 4 | Sponsorship services provided to any body corporate or partnership firm. | Any person | Any body corporate or partnership firm located in the taxable territory. | 18% |
| 5 | Services supplied by the Central Government, State Government, Union Territory, or local authority to a business entity, excluding certain services. | Central Government, State Government, Union Territory, or local authority | Any business entity located in the taxable territory. | Applicable Rate |
| 6 | Services provided by a director of a company or body corporate. | Director | The company or body corporate located in the taxable territory. | 18% |
| 7 | Services provided by an insurance agent. | Insurance agent | Any person carrying on insurance business, located in the taxable territory. | 18% |
| 8 | Services provided by a recovery agent. | Recovery agent | Banking company, financial institution, or non-banking financial company located in the taxable territory. | 18% |
| 9 | Transportation of goods by a vessel from a place outside India up to the customs station of clearance in India. | Person located in non-taxable territory | Importer as defined under clause (26) of section 2 of the Customs Act, 1962, located in the taxable territory. | 5% |
| 10 | 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. | Author or music composer, photographer, artist, etc. | Publisher, music company, producer, or the like, located in the taxable territory. | 12% |
| 11 | Supply of services by the members of Overseeing Committee to Reserve Bank of India. | Members of Overseeing Committee | Reserve Bank of India. | Exempt |
| 12 | Services provided by business facilitator (BF) to a banking company. | Business facilitator | Banking company located in the taxable territory. | 18% |
| 13 | Services provided by an agent of business correspondent (BC) to business correspondent. | Agent of business correspondent | Business correspondent located in the taxable territory. | 18% |
| 14 | Security services (services provided by way of supply of security personnel) provided to a registered person, with exceptions. | Any person other than a body corporate | A registered person located in the taxable territory. Exceptions include certain government departments and local authorities. | 18% |
| 15 | Services provided by way of renting of a motor vehicle designed to carry passengers to a body corporate, with conditions. | Any person other than a body corporate, who opts to pay tax at the rate of 5% and does not avail input tax credit. | Any body corporate located in the taxable territory. | 5% |
| 16 | Services of lending of securities under Securities Lending Scheme, 1997 of SEBI. | Lender (a person who deposits securities registered in his name or in the name of any other person duly authorized on his behalf with an approved intermediary for the purpose of lending under the Scheme) | Borrower (a person who borrows the securities under the Scheme through an approved intermediary of the Scheme) | 18% |
| 17 | Services provided by way of renting of residential dwelling to a registered person. | Any person | Registered person located in the taxable territory. | 18% |
| 18 | Services provided by way of transfer of development rights or Floor Space Index (FSI). | Any person | Promoter (Builder/Developer) | Applicable Rate |
