Reverse Charge Mechanism (RCM) Under GST

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RCM

1. What is Reverse Charge Mechanism (RCM)?

Normally, the supplier of goods or services pays the tax on supply. In the case of Reverse Charge, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed.

2. Previous Provisions Relevant Till 31st January 2019

Section 9 (4) of the Central Goods and Service Tax Act, 2017 requires the central tax to be paid by the registered person, on a reverse charge basis, in as much as they have received taxable goods or service or both from an unregistered person.

That means, as per the basic provision, the tax would be payable by the registered person on reverse charge basis on every single rupee transaction of taxable goods or services or both received by the registered person from the unregistered person.

The above said provisions obviously have a very wide impact and would hinder the business of the unregistered person to a large extent. Seeing the complexity of the same, the Central Board of Indirect Taxes and Customs, vide notification no. 8/2017 – Central Tax (Rate) dated 28th June 2017 exempted transactions up to an amount of aggregate value of INR 5,000 per day.

However by another notification no. 38/2017 – Central Tax (Rate) dated 13th October 2017, entire central tax payable by the registered person, on a reverse charge basis, on receipt of taxable goods or services or both from the unregistered person was exempted till 31st March 2018.

The said deadline of exemption till 31st March 2018 was extended various times and vide last notification no. 22/2018 – Central Tax (Rate) dated 6th August 2018 the exemption date was extended till 30th September 2019.

3. Applicable Provisions Effective from 1st February 2019

Recently, through notification no. 02/2019 – Central Tax dated 29th January 2019, the Central Goods and Service Tax (Amendment) Act, 2018 was made effective from 1st February 2019.

With the introduction of the Central Goods and Service Tax (Amendment) Act, 2018, the entire provisions of section 9 (4) was substituted. The provisions of the substituted section 9 (4) are being narrated hereunder –

  • As per the new provisions, instead of coverage of all the registered person, now, the Government shall specify the class of the registered person who shall be liable to pay tax under reverse charge basis;

As per the new provisions, instead of coverage of all the taxable supply of goods or services or both, the Government shall specify categories of goods or services or both on which reverse charge provisions are applicable when such goods or services or both is received from the unregistered person.

4.When is Reverse Charge Applicable?

A. Supply from an unregistered dealer to a registered dealer

If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier.

The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.

For Inter-state purchases the buyer has to pay IGST. For Intra-state purchased CGST and SGST has to be paid under RCM by the purchaser.

B. Services through an e-commerce operator

If an e-commerce operator supplies services then reverse charge will be applicable to the e-commerce operator. He will be liable to pay GST.

For example, Uber provides services of car renting. Uber is liable to pay GST and collect it from the customers instead of the registered service providers.

If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.

C. Supply of certain goods and services specified by CBEC

CBEC has issued a list of goods and a list of services on which reverse charge is applicable.

 

5. Time of Supply under Reverse Charge Mechanism

A. Time of Supply in case of Goods

In case of reverse charge, the time of supply shall be the earliest of the following dates:

  • the date of receipt of goods
  • the date of payment*
  • the date immediately after 30 days from the date of issue of an invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

*This point is no more applicable based this Notification No. 66/2017 – Central Tax issued on 15.11.2017

  1. List of services covered under RCM

Sl. N o. Category of Supply of Services Supplier
of service
Recipient of Service
(1) (2) (3) (4)
1 Supply of Services by a goods transport agency (GTA) who has not paid central tax at the rate of 6%, in respect of transportation of goods by road to-

(a) any factory registered under or governed by the Factories Act, 1948(63 of 1948);or

(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or

(c) any co-operative society
established by or under any law; or

(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State
Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or

(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; or

(g) any casual taxable person

Provided that nothing contained in this entry shall apply to services provided by a goods transport agency, by way of transport of goods in a goods carriage by road, to, –

(a) a Department or Establishment of the Central Government or State Govt. or Union territory; or

(b) local authority; or

(c) 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 and not for making a taxable supply of goods or services.

Goods Transport Agency (GTA) (a) Any factory registered under or governed by the Factories Act, 1948(63 of 1948); or

(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or

(c) any co-operative society
established by or under any law; or

(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or

(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; or

(g) any casual taxable person; located in the taxable territory.

2 Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of
advocates, by way of legal services, to a business entity
An individual advocate including a senior advocate or firm of advocates. Any business entity located in the taxable territory.
3 Services supplied by an arbitral tribunal to a business entity An arbitral tribunal Any business entity located in the taxable territory
4 Services provided by way of
sponsorship to any body corporate or partnership firm
Any person Any body corporate or partnership firm located in the taxable territory
5 Services supplied by the Central Government, State Government, Union territory or local authority to
a business entity excluding, –
(1) renting of immovable property, and(2) services specified below-(i) 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 Central Government, State Government or Union territory or local authority;(ii) services in relation to an
aircraft or a vessel, inside or
outside the precincts of a port or an airport;(iii) transport of goods or passengers.
Central Government, State
Government, Union territory or local authority
Any business entity located in the taxable territory
5A Services supplied by the Central Government, State
Government, Union territory or local authority by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017 (12 of 2017).
Central Government, State
Government, Union territory or local authority
Any person registered under the Central Goods and Services Tax Act, 2017.”
“5B Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter Any person Promoter
5C Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount (called as premium, salami, cost, price, development charges or by any other name) and/or periodic rent for construction of a project by a promoter Any person Promoter
6 Services supplied 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 The company or a body corporate located in the taxable territory
7 Services supplied by an insurance agent to any person carrying on insurance business. An insurance agent Any person carrying on insurance business, located in the taxable territory
8 Services supplied 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, located in the taxable territory
9 Supply of services by an author, music composer, photographer, artist or the like by way of 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 to a publisher, music company, producer or the like.
Author or music composer,
photograph her, artist, or the like
Publisher, music company, producer or the like, located in the taxable territory
10 Supply of services by the members of Overseeing Committee to Reserve Bank of India Members of Overseeing
Committee constituted by
the Reserve Bank of India
Reserve Bank of India.
11 Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs). Individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm. A banking company or a non-banking financial company, located in the taxable territory
12 Services provided by business facilitator (BF) to a banking company  Business facilitator (BF)  A banking company,
located in the taxable territory
13 Services provided by an agent of business correspondent (BC) to business correspondent (BC). An agent of business
correspondent (BC)
A business correspondent, located in the taxable territory
14 Security services (services provided by way of supply of security personnel) provided to a registered person:

Provided that nothing contained in this entry shall apply to, –

(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.

 

 

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