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GST Guide
GST Guide to Reverse Charge Mechanism
GST Guide to Reverse Charge Mechanism
Reverse charge mechanism in GST casts a liability on the recipient of goods or services to pay GST. In a regular GST transaction, the liability to pay GST is on the service provider or seller of goods. However, in certain specified transactions, the liability to pay GST is on the recipient of goods or services. The reversal of the GST liability on the receiver is the reverse charge mechanism.
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1) Transactions covered under RCM (reverse charge mechanism)
- Supply of goods or services by an unregistered person to a registered person – Section 9(4) of the CGST Act and section 5(4) of IGST Act.
Supply of goods or services by an unregistered person to a registered person applies only in case of notified goods and services. - Supplies of specified goods or services – Section 9(3) of the CGST Act and section 5(2) of the IGST Act.
The list of goods and services notified here are discussed under point (4). - Supplies of services within a state/inter-state supplies through an electronic ecommerce operator – Section 9(5) of the CGST Act and section 5(5) of the IGST Act.
E-commerce operators who provide a platform for sale of goods and providing services are liable to collect GST on RCM basis. For example, Amazon, Flipkart, Uber, Oyo, Ola, Urbanclap etc.
2) Who is liable to pay GST under RCM
| Supply of goods and services | Liability to pay GST |
|---|---|
| Supply from unregistered to registered | Registered person |
| Supply of specified goods and services | Recipient of the goods or services |
| Supply of services through electronic ecommerce operator | Electronic ecommerce operator or any person representing such electronic ecommerce operator |
3) Payment of GST liability under RCM
GST liability arises upon supply of the goods or services liable for reverse charge. Hence, the RCM liability arises at the time of supply.
Time of supply of goods under RCM:
The time of supply of goods is the earliest of the following events:
-
- Date of receipt of goods
- Date on which the payment is entered in the books of accounts of the recipient or the date on which the payment is debited in his bank account, whichever is earlier
- Date immediately following 30 days from the date of issue of invoice or any other legal document in lieu of invoice by the supplier
If the time of supply cannot still be determined under above procedure, the date of entry of the transaction in the books of accounts of the recipient is the time of supply.
An example of time of supply of goods under RCM:
| Date of invoice | 2020-12-28 00:00:00 |
|---|---|
| Date of entry in books of accounts of recipient | 2021-01-05 00:00:00 |
| Date of receipt of goods (A) | 2021-01-05 00:00:00 |
| Date on which payment is debited from bank account of recipient (B) | 2021-01-10 00:00:00 |
| Date following 30 days from the issue of the invoice (C) | 2021-01-27 00:00:00 |
| Date of supply or Time of supply is (earliest of A, B and C) | 2021-01-05 00:00:00 |
Time of supply of services under RCM:
The time of supply of services is the earliest of the following events:
-
- Date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier
- Date immediately following 60 days from the date of issue of invoice or any other legal document in lieu of invoice by the supplier
If the time of supply cannot still be determined under above procedure, the date of entry of the transaction in the books of accounts of the recipient is the time of supply.
An example of time of supply of services under RCM:
| Date of invoice | 2021-01-08 00:00:00 |
|---|---|
| Date of entry in books of accounts of recipient | 2021-01-10 00:00:00 |
| Date on which payment is debited from bank account of recipient (A) | 2021-02-10 00:00:00 |
| Date following 60 days from the issue of the invoice (B) | 2021-03-09 00:00:00 |
| Date of supply or Time of supply is (earliest of A and B) | 2021-02-10 00:00:00 |
4) List of goods and services under RCM
The list of goods notified under RCM are:
| Sl. No. | Tariff Item, Sub-heading, or Chapter | Description of Supply of Goods | Supplier of Goods | Recipient of Supply |
|---|---|---|---|---|
| 1 | 801 | Cashew nuts, not shelled or peeled | Agriculturist | Any registered person |
| 2 | 1404 90 10 | Bidi wrapper leaves(tendu) | Agriculturist | Any registered person |
| 3 | 2401 | Tobacco leaves | Agriculturist | Any registered person |
| 4 | 5004 to 5006 | Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn | Any registered person |
| 4A | 5201 | Raw cotton | Agriculturist | Any registered person |
| (Effective from 15-11-2017) | ||||
| 5 | – | Supply of lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent. |
| Explanation. – For the purposes of this entry, lottery distributor or selling agent has the same meaning as assigned to it in clause (c) of Rule 2 of the Lotteries (Regulation) Rules, 2010, made under the 2 provisions of sub-section (1) of Section 11 of the Lotteries (Regulations) Act, 1998. | ||||
| 6 | Any Chapter | Used vehicles seized and confiscated goods, old and used goods, waste and scrap | Central Government, State Government, Union territory or a Local authority. | Any registered person |
| (Effective from 13-10-2017) | ||||
| 7 | Any Chapter | Priority Sector Lending Certificate | Any registered person | Any registered person |
| (Effective from 28-5-2018) |
The list of services notified under RCM are:
| Sr. No. | Category of Supply of Services | Supplier of Service | Recipient of service |
|---|---|---|---|
| 1 | Goods Transport Agency (GTA) Services: | Goods Transport Agency | (a) any factory registered under or governed by the Factories Act, 1948; or |
| Supply of Services by a Goods Transport Agency who has not paid central tax @ 6% in respect of transportation of goods by road to – | (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; or | ||
| (a) any factory registered under or governed by the Factories Act, 1948; or | (c) any cooperative society established by or under any law; | ||
| (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; or | (d) any person registered under CGST/IGST/ | ||
| (c) any cooperative society established by or under any law; or | SGST/UTGST Act; or | ||
| (d) any person registered under CGST/ | (e) anybody corporate established, by or under any law; or | ||
| IGST/SGST/or UTGST Act; or | (f) any partnership firm whether registered or not under any law including association of persons; or | ||
| (e) anybody corporate established, by or under any law; or | (g) any casual taxable person located in the taxable territory. | ||
| (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. | |||
| “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) Department or Establishment of the Central Government 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 (12 of 2017) only for the purpose of deducting tax under Section 51 and not for making a taxable supply of goods or services.” | |||
| 2 | Advocate/Legal Services | An individual advocate including a senior advocate or firm of advocates. | Any business entity located in the taxable territory. |
| Services provide by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly. | |||
| Explanation. – ‘Legal service’ means any service provided in relation to advice, consultancy or assistance in any manner and includes representational services before any Court, Tribunal or Authority. | |||
| 3 | Arbitration services | Arbitral Tribunal | Any business entity located in the taxable territory. |
| Services supplied by an arbitral Tribunal to a business entity. | |||
| 4 | Sponsorship services | Any person | Anybody corporate or partnership firm located in the taxable territory. |
| Service provided by way of Sponsorship Service to anybody corporate or partnership firm. | |||
| 5 | Government services: | Central Government, State Government, Union territory or local Authority | Any business entity located in the taxable territory. |
| Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding the following: | |||
| (A) renting of immovable property service, and | |||
| (B) services specified below: | |||
| (i) services by the Department of posts by way of speed post, life insurance, express parcel post 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. | |||
| 5A | Services by the Government: 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 (with effect from 25-1-2018. | 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 by the Director: 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 | A company or a body corporate located in the taxable territory |
| 7 | Insurance Agent Service: Services provided by an insurance agent to person carrying on insurance business. | An Insurance Agent | Any person carrying on insurance business, located in the taxable territory. |
| 8 | Recovery Agent Service: Services provided by a recovery agent to a banking company or a financial institution or a non-banking financial company. | A Recovery Agent | Banking company or financial institution or a non-banking financial company, located in the taxable territory. |
| 9 | Copyright Service | Music composer, photographer, artist, or the like. | The Music company, producer or the like, located in the taxable territory. |
| Supply of Services by a 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 dramatic, musical or artistic works to a music company, producer or the like. | |||
| 9A | Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of subsection (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher. | Author | Publisher located in the taxable territory: |
| ( Sl.10 & 10A changes carried vide Notification No.22/2019-C.T (Rate) dated 30.09.2019 with effect from 1’st October,2019 | Provided that nothing contained in this entry shall apply where: | ||
| (i) the author has taken registration under the Central Goods and Services Tax Act,2017 (12 of 2017), and filed a declaration , in form at annexure I, within the time limit prescribed therein, with the jurisdictional CGST or SGST commissioner, as the case may be, that he exercises the option to pay central tax on the service specified in column (2), under forward charge in accordance with Section 9 (1) of the Central Goods and Service Tax Act, 2017 under forward charge, and to comply with all the provisions of Central Goods and Service Tax Act, 2017 (12 of 2017) as they apply to a person liable for paying the tax in relation to the supply of any goods or services or both and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option; | |||
| (ii) the author makes a declaration, as prescribed in Annexure II on the invoice issued by him in Form GST Inv-I to the publisher. ”; | |||
| 10 | Reserve Bank Services: | Members of Overseeing Committee constituted by the Reserve Bank of India. | Reserve Bank of India |
| Supply of services by the members of Overseeing Committee to (Reserve Bank of India Effective from 13-10-2017) | |||
| 11 | Services by DSAs: | 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. |
| 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) Effective from 27-7-2018). | |||
| 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: | Any person other than a body corporate. | A registered person, located in the “taxable territory.” |
| Provided that nothing contained in the entry shall apply to - | |||
| (i)(a) Department or Establishment of the Central Government or State Government or Union territory; or | |||
| (b) local authority; or | |||
| (c) Government 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 (ii) a registered person paying tax under Section 10 of the said Act. | |||
| Sl. No. 12 to 14 vide Notification No. 29/2018-C.T. (Rate) dated 31-12-2018. w.e.f. 1-1-2019) | |||
| 15 | Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate. | Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6% to the service recipient. | Any body corporate located in the taxable territory”. |
| Notification No.29/2019-Central Tax (Rate), dated 31.12.2019. | |||
| 16 | Services of lending securities of Securities under Lending scheme, 1997 (Scheme). Securities and Exchange Board of India (SEBI), as amended. | Lender i.e., a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the scheme of SEBI. | Borrower i.e., a person who borrows the securities under the Scheme through an approved intermediary of SEBI) |
| Sl.16 changes have carried vide Notification No.22/2019-C.T (Rate) dated 30.09.2019 with effect from 1’st October, 2019. | |||
| 17 | Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. | Any person located in a non-taxable territory. | Any person located in the taxable territory other than non-taxable online recipient. |
| 18 | Services supplied by a person located in non-taxable territory 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 a non-taxable territory. | Importer, as defined in Sec 2(26) of the Customs Act,1962, located in the taxable territory |
5) RCM on real estate transactions
Purchases of inputs in real estate development
As per notification no. 3/2019, at least 80% of the inputs and input services used for real estate development should be bought from a GST registered supplier.
In case the value of the input and input services purchased from a registered supplier falls short of 80%, the promoter of real estate becomes liable to pay GST on the shortfall. Thus, the GST liability on non-GST inputs is on the promoter on reverse charge basis. The inputs are liable for GST at 18%. In case of purchase of cement from non-GST supplier, the GST liability is at 28%.
The promoter can claim ITC on the reverse charge GST paid while discharging their output GST liability.
The promoter should maintain project-wise account of inward supplies from registered and unregistered supplier and calculate tax payments on the shortfall at the end of the financial year and also submit the same in the prescribed form (Annexure IV of notification no. 3/2019) electronically on the common portal by end of the quarter following the financial year. The tax liability on the shortfall of inward supplies from unregistered person so determined shall be added to his output tax liability in the month not later than the month of June following the end of the financial year.
The GST liability under RCM on cement received from unregistered person should be paid in the month in which cement is received.
6) ITC available on GST paid under RCM
The recipient of the goods or services is eligible to claim ITC on the GST paid on inputs/input services on RCM basis. The condition is that such goods and services should be used for the purpose of the business or profession, and the GST under RCM payment should be in cash.
Also, such ITC cannot be used to discharge RCM liability on goods and services. It can be only for other output GST liability.