Reverse Charge (RCM) under GST

Meaning of Reverse Charge Mechanism

As per Section 2(98) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). “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.

Under the Goods and Services Tax (GST) system in India, the Reverse Charge Mechanism (RCM) is a method of tax collection where the recipient of goods or services is liable to pay the tax directly to the government instead of the supplier. In the regular or forward charge mechanism, the supplier is responsible for collecting and remitting the tax to the government. However, in certain specific cases, the responsibility is shifted to the recipient, and this is referred to as the Reverse Charge Mechanism.

RCM is applicable for both goods and services, and it was introduced to widen the tax base and improve tax compliance. The RCM is implemented to ensure that tax is paid even when the supplier may be small, unregistered, or not required to be registered under GST.

Here are some key points to understand about the Reverse Charge Mechanism:

1. Applicability: The RCM is applicable to specific goods or services notified by the government. The Central Board of Indirect Taxes and Customs (CBIC) issues notifications listing the goods and services subject to RCM.
2. Recipient’s Liability: In cases where RCM is applicable, the recipient (buyer) of goods or services is required to pay the applicable GST directly to the government. The recipient must then report and claim this tax liability in their GST return.
3. Input Tax Credit (ITC): When the recipient pays GST under RCM, they are generally eligible to claim Input Tax Credit (ITC) on that GST amount, which can be used to set off against their output tax liability. This helps in neutralizing the effect of RCM on the recipient’s tax liability.
4. Compliance and Reporting: The recipient of goods or services under RCM is required to maintain proper records and report such transactions in their GST returns. The tax liability under RCM should be duly paid within the prescribed timelines through Cash Ledger only

Section 9 covering RCM :

Section 9(3): The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Section 9(4): The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.]

Section 9(5): The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services:

Provided that where an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax:

Provided further that where an electronic commerce operator does not have a physical presence in the taxable territory and also he does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax.

Registration:

A person who is required to pay tax under reverse charge has to compulsorily register under GST and the threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for special category states except J & K) is not applicable to them.

ITC:

A supplier cannot take ITC of GST paid on goods or services used to make supplies on which recipient is liable to pay tax.

Time of Supply:

The Time of supply is the point when the supply is liable to GST. One of the factor relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, recipient is liable to pay GST. Thus time of supply for supplies under reverse charge is different from the supplies which are under forward charge.

In case of supply of goods, time of supply is earliest of

• Date of receipt of goods; or

• Date of payment as per books of account or date of debit in bank account, whichever is earlier; or

• The date immediately following thirty days from the date of issue of invoice or similar other document.

In case of supply of services, time of supply is earliest of

• Date of payment as per books of account or date of debit in bank account, whichever is earlier; or

• The date immediately following sixty days from the date of issue of invoice or similar other document. Where it is not possible to determine time of supply using above methods, time of supply would be date of entry in the books of account of the recipient.

Compliances in respect of supplies under reverse charge mechanism:

• As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge.

• Maintenance of accounts by registered persons: Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge

Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit.

However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.

• Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.

• Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.

List of Goods under Reverse Charges

For RCM of supply of goods under Section 9(3) of the CGST Act and Section 5(3) of the IGST Act refer Notification No. 04/2017-Central Tax (Rate) & Notification No.04/2017-Integrated Tax (Rate) dated 28.06.2017. Please read these Notifications as amended from time to time

List of Services under Reverse Charge

For supply of services covered under RCM, you may refer both the Notification No.13/2017 Central Tax (Rate) dated 28-06-2017 and Notification No.10/2017 Integrated Tax (Rate) dated 28-06-2017. Please read these Notifications as amended from time to time

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