The Reverse Charge Mechanism (RCM) is the process of GST Payment 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.
- 53rd GST Council Meeting Update: To simplify claiming ITC, the Council recommends clarifying that purchases under the RCM from unregistered suppliers follow a specific rule. When the recipient issues the invoice for such a purchase, the relevant financial year for calculating the ITC time limit under section 16(4) of the CGST Act will be the year the invoice is issued.
The Reverse Charge Mechanism is applicable in the case of :
- Imports
- Purchase from an unregistered dealer
- Supply of notified goods and services
This reverses the scenario as the person who is receiving the goods and services needs 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
What is Reverse Charge Mechanism?
The supplier of goods or services pays the tax on supply. Under the reverse charge mechanism, the recipient of goods or services becomes liable to pay the tax, i.e., the chargeability gets reversed.
The objective of shifting the burden of GST payments to the recipient is to widen the scope of levy of tax on various unorganized sectors, to exempt specific classes of suppliers, and to tax the import of services (since the supplier is based outside India).
Applicability of Reverse Charge Mechanism
The reverse charge possibilities for intrastate transactions are governed by Sections 9(3), 9(4), and 9(5) of the Central GST and State GST Acts. In addition, reverse charge possibilities for interstate transactions are governed under sections 5(3), 5(4), and 5(5) of the Integrated GST Act. Let’s get into more information about these scenarios:
- Supply of certain products and services as determined by the CBIC: The CBIC has produced a list of products and services that are subject to reverse charge under the authority granted by section 9(3) of the CGST Act, 2017.
- Supply to a certified dealer from an unauthorized dealer: According to Section 9(4) of the CGST Act, 2017 if a seller who is not registered for GST delivers products to a person who is registered for GST, reverse charge will apply. This means that the recipient will have to pay the GST instead of the provider. The registered buyer who is required to pay GST under reverse charge must self-invoice for transactions made.In the real estate business, the government mandated that promoters purchase 80 percent of their inward supplies from registered suppliers. If purchases from registered dealers fall short by 80%, the promoter must pay GST at 18% on the reverse charge to the amount that inbound supply falls short by 80%. If the promoter buys cement from an unlicensed source, he must pay a 28 percent tax. This computation must be performed regardless of the 80 percent calculation.The promoter must pay reverse charge GST on TDR or floor space index (FSI) issued on or after April 1, 2019. Even though a landowner is not engaged in a regular business of land-related operations, the transfer of development rights by such an individual to the promoter is taxable as a provision of service under Section 7 of the CGST Act, 2017. In addition, when one developer sells TDR to another, GST is levied at 18 percent on the reverse charge.
- Service provision via an e-commerce operator: E-commerce operators can be used as an aggregator by any form of business to sell items or deliver services. According to Section 9(5) of the CGST Act, 2017 if a service provider utilizes an e-commerce operator to deliver specified services, the reverse charge applies to the e-commerce operator, and he must pay GST. This section includes services such as:
- Passengers are transported by radio-taxi, motor cab, maxi cab, and motorbike. For example, Ola and Uber.
- Providing accommodation services in hotels, inns, guest houses, clubs, campgrounds, or other commercial places intended for residential or lodging purposes, unless the person supplying such service through an electronic commerce operator is required to register due to a turnover threshold exceeding the limit. For instance, Oyo and MakeMyTrip.
- Housekeeping services, such as plumbing and carpentry, unless the person providing such services through electronic commerce operators is required to register owing to turnover above the threshold level. For example, Urban Company employs plumbers, electricians, instructors, beauticians, and other professionals.
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 the 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 GSTR 1. 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 the reverse charge mechanism are:
- Goods Transport Agency
- Recovery Agent
- Director of a company or body corporate
- An individual advocate or firm of advocates.
- An insurance agent
RCM on commission charged on global sales by E-Marketplaces
Global e-marketplace deducts commission and other fees from export transactions made by Indian sellers using their platform. E-marketplaces, in general, do not have a permanent establishment in India and are thus classified as being in a ‘non-taxable region’ under the requirements of the CGST/IGST Act.
Is it true that commissions and other charges are subject to RCM under the GST Act?
Because a unified solution is not viable in the case of the whole E-marketplace. In the instance of Amazon USA, we attempted to present facts and situations.
Opinion of Experts
Amazon USA is a facilitator who does not offer goods and services on his behalf; hence it qualifies as an intermediary under Section 2(13) of the IGST Act, 2017.
According to Section 13 of the IGST Act, 2017, the place of supply for Intermediary Services is the ‘Location of Supplier,’ which is the United States of America.
Import of Service is defined in Section 2(11) of the IGST Act, 2017 as follows:
“Services import” refers to the provision of any service, where—
| 1. | The supplier of service is located outside India |
| 2. | The recipient of service is located in India |
| 3. | The place of supply of service is in India |
In our particular example, the place of supply is the United States, which is outside of India (non-taxable area); hence the aforementioned transaction does not qualify as an import of service.
Section 2(109) defines “taxable territory” as the territory to which the Act applies. Section 1(2) goes on to explain that the Act extends to the whole country of India. Thus, in our opinion, the “Supply” with a Place of Supply outside India and a Service Provider outside India is beyond the scope of the CGST Act, 2017 and thus outside the Scope of Supply as stated in Section 7 of the CGST Act, 2017.
As a result, in our opinion, the CGST Act does not enable the government to charge GST on services with a place of supply outside India and a service provider situated in a non-taxable area under RCM, and we find that the present transaction is not subject to the Reverse Charge Mechanism.
However, there is a second point of view on depositing GST, which is supported by some on the basis of RCM Entry No. 1 of Notification No. 10/2017-IGST(R), which is reprinted below:
| Category of Supply of Services | Supplier of Service | Recipient of Service |
| Any service provided by a person residing in a non-taxable region to anyone other than a non-taxable online receiver. | Any individual who resides in a non-taxable territory | Any individual residing in the taxable territory who is not a non-taxable online beneficiary. |
Registration Rules Under RCM
Section 24 of the CGST Act, 2017 states that a person liable to pay GST under the reverse charge mechanism have to compulsorily register under GST. The threshold limits of Rs.20 lakh or Rs.40 lakh, as the case may be, will not apply to them.
Who Should Pay GST Under RCM?
The recipient of goods/services should pay GST under RCM. However, as per the provisions of GST law, the person supplying the goods must mention in the tax invoice whether tax is payable under RCM.
The following points should be kept in mind while making GST payments under RCM:
- The recipient of goods or services can avail of the ITC on the tax amount paid under RCM only if such goods or services are used for business or furtherance of business.
- A composition dealer should pay tax at the normal rates and not the composition rates while discharging liability under RCM. Also, they are ineligible to claim any input tax credit of tax paid.
- GST compensation cess can apply to the tax payable or paid under the RCM.
FAQs
Is Input Tax Credit (ITC) allowed under reverse charge?
Tax paid on a reverse charge basis will be available for ITC if such goods or services are used, or will be used, for business. The recipient, i.e., who pays reverse tax, can avail it as ITC.
What if an Input Service Distributor (ISD) receives supplies liable to reverse charge?
An ISD cannot make purchases liable to reverse charge. If the ISD wants to procure such supplies and take the reverse charge paid as ITC, the ISD should register as a regular taxpayer.
