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    Published Thu, 14 Jan 2021 | Updated Wed, 17 Mar 2021 Goods and Service Tax

    Key points

    • What is Reverse Charge Mechanism (RCM)?
    • Comparison between reverse charge and forward charge under GST
    • Goods and Services notified under RCM category
    • Condition for claiming Input Tax Credit (ITC) for the tax paid on Goods and/or Service under RCM
    • Documents required for Goods/Services required to be maintained for RCM supplies
    • Frequently Asked Questions (FAQ’s)

     

    What is a Reverse Charge Mechanism (RCM)?

    Under the Goods and Service Tax (GST) regime, a normally registered taxpayer supplying goods and/or service is liable to pay tax. In other words, a registered supplier making taxable supplies is liable to collect GST from the recipient and pay to the Government.  Under the reverse charge mechanism, the recipient of goods and/or services have to pay the tax to the government directly.
     

    Comparison between reverse charge and forward charge under GST

     

    Basis Reverse Charge Forward Charge
    Assessment The recipient has to self-assess the tax and the supplier will not charge GST in the invoice   The supplier has to assess the tax and transfer ITC to the recipient
    Payment to Government The recipient is liable to make payment to the Government Supplier is liable to make payment to Government
    Registration The recipient has to register under GST The supplier has to register under GST
    Due date of Payment Monthly Monthly
    Mode of Payment By using Electronic Cash Ledger, the recipient cannot use his electronic credit ledger for payment of GST on such supply, but after payment of GST under RCM, he can take an input tax credit as per the provisions of ITC By using:
    Electronic Credit Ledger
    Electronic Cash Ledger

               

    Goods and Services notified under RCM category


    GST shall be paid by the recipient of goods and services or both, on a reverse charge basis, in the following cases:

    • Supply of goods or services or both, notified by Government on the recommendation of GST Council.
    • Supply of specified categories of goods or services or both by an unregistered supplier to a specified class of registered persons. Any registered taxpayer receiving any taxable goods and/or services from unregistered suppliers shall be required to pay GST under the reverse charge mechanism.

     

    Goods notified by CBIC on which tax has to be paid on reverse charge basis under section 9(3) of CGST Act,2017 and 5(3) of IGST Act, 2017

    Goods Supplier of Goods Recipient of Goods
    Cashew nuts, not shelled or peeled Agriculturist Any registered person
    Bidi wrapper leaves (tendu) Agriculturist Any registered person
    Tobacco leaves Agriculturist Any registered person
    Silk yarn Any person who manufactures silk yarn from raw silk or silkworm cocoons for the supply of silk yarn Any registered person
    Raw Cotton Agriculturist Any registered person
    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 provisions of subsection 1 of section 11 of the Lotteries (Regulations) Act, 1998 (17 of 1998).
    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
    Priority Sector Lending Certificate Any registered person Any registered person

     

    Services notified by CBIC on which tax has to be paid on reverse charge basis under section 9(3) of CGST Act,2017 and 5(3) of IGST Act, 2017

    Sr. no. Nature of Service Supplier Recipient
    1. Supply of services in relation to transportation of goods by road (GTA). ** Goods transport agency (GTA) who has not paid tax at the rate of 12% (i.e. CGST 6% & SGST 6%)
    • Any factory registered under or governed by the factories act, 1948.
    • 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.
    • Any Co-Operative society established by or under any other law.
    • Any person registered under the CGST Act, IGST Act, SGST Act or UTGST Act.
    • Anybody corporate established by or under any other law.
    • Any partnership firm whether registered or not under any law including association of persons
    • Any casual taxable person
     
    However, reverse charge mechanism shall NOT apply to services provided by a GTA by way of transport of goods in a goods carriage by road to:
    • A department/establishment of the Central government/State Government Union Territory or
    • Local Authority of
    • Governmental agencies
     
    Which has taken registration under the CGST, Act only for the purpose of deducting tax under section 51 and not for making a taxable supply of goods or services.
     
    2
     
    Legal Services Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly Any business entity located in the taxable territory
    3 Arbitral tribunal An arbitral tribunal Any business entity located in the taxable territory
    4 Sponsorship services Any Person Anybody Corporate or Partnership Firm Located in the taxable territory
    5 Government Services Central Government, State government, a Union territory or local authority
    Services Excludes:
    • Renting of Immovable property
    • 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 the central government, state government, or union territory or local authority.
    • Service in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport
    • Transport of goods or passengers.
     
    Any business entity located in the taxable territory.
    6 Government Services The central government, State government, Union Territory, Local Authority by way of renting of immovable property Any registered person in the taxable territory.
    7 Floor Space Index (FSI) Transfer of developmental rights or floor space index (including Additional FSI) for construction of a project by any person. Promoter
    8 Long term lease of Land Any person having a long term lease of land ( 30 years of more) against consideration in the form of the upfront amount and or periodic rent for construction of a project Promoter
    9 Director Services Director of company or body corporate Company or body corporate
    10 Insurance Services Insurance Agent Any person carrying insurance business
    11 Recovery agent services Recovery Agent A banking company or financial institutions or non-banking financial institutions located in the taxable territory
    12 Copyright and development rights issues A music composer, photographer, artists A music company, producer, or the like, located in the taxable territory
    13 Copyright service by Author Author by way of transfer or permitting the use or copyright relating to original literary works to a publisher Publisher located in the taxable territory
    14 Services to RBI Members of Overseeing committee Reserve Bank of India
    15 Individual direct selling agents Individual direct selling agents other than a body corporate, partnership, or limited liability partnership firm A banking company or non-banking financial company, located in the taxable territory
    16
     
    Business facilitator Business Facilitator A banking company located in the taxable territory
    17
     
    Business correspondent An agent of business correspondent A business correspondent located in the taxable territory
    18 Security Services Security services provided by way of supply of security personnel A registered person
     
    The service is not applicable on:
    • A Department or establishment of the Central Government or State Government or Union Territory
    • Local authority
    • Governmental agencies have taken registration under the CGST Act, 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.
    • A registered person paying tax under the composition scheme.
    19 Import of services Any person from a non-taxable territory Any person other than non-taxable online recipient
    20 Import of Goods by vessel A person located in non-taxable territory Importer

     

    ** Tax on GTA services can be paid by the supplier at their option but if the same is not paid by the supplier then tax is payable under reverse charge by the recipient. GTA Services are taxable at the following 2 rates:

    1. 5% by the recipient of such services when payable under reverse charge OR in the scenario where the supplier of GTA services has opted to pay tax on the same provided GTA has not taken the input tax credit (ITC) on goods and services used in supplying GTA services or
    2. 12% where GTA opts to pay GST at a said rate on all the services of GTA supplied by it. In this case, there is no restriction on availing ITC on goods and services used in supplying GTA services GTA.

     

    Tax Payable by the Electronic Commerce Operator on Notified Services (NN 17/2017 CT(R) dated 28.06.2017 and NN 14/2017 IT (R) dates 28.06.2017


    There are such cases where the tax on specified services is required to be paid by Electronic Commerce Operator when such services are supplied through it. The Government has notified the following categories of services the tax on supplies of which shall be paid by the ECO:

    1. Services by way of transportation of passengers by radio-taxi, motor cab, maxi cab, and motor cycle;
    2. Services by way of providing accommodation in hotels, inns guest houses, clubs, campsites or other commercial places meant for the residential or loading purposes, except where the person supplying such services through electronic commerce operator is liable for registration under section 22(1) of the CGST Act.
    3. Services by way of house-keeping, such as plumbing, carpentering etc., except where the person supplying such services through electronic commerce operator is liable for registration under section 22(1) of CGST Act.

    Condition for claiming Input Tax Credit (ITC) for the tax paid on Goods and/or Service under RCM


    Under RCM, the supplier cannot claim the input tax credit on GST paid on goods and services that attract tax on a reverse charge basis. Thus, it is the recipient who claims the benefit of the input tax credit on goods or services that are liable to tax on a reverse charge basis. Therefore, payment of any tax amount liable to be paid under reverse charge mechanism shall be made through Electronic Cash Ledger of the recipient only. Also, the recipient can avail credit for the tax paid on goods or services subject to reverse charge only if such goods or services are used or would be used for business purposes by him.
    Further, the composite dealer falls under the reverse charge mechanism then the dealer cannot claim any credit of tax paid. The tax rate for the supplies received by the composition dealer is normal applicable rates and not at the composition rates.

    Documents required for Goods/Services required to be maintained for RCM supplies
    Recipient of services need to maintained below documents for to claim an input tax credit under GST

    • The recipient needs to raise a self- invoice.
    • Self-invoice shall contain details of Supplier of Goods or Services
    • Details of RCM payments need to be provided in GST returns 

    Frequently Asked Questions (FAQ)
     
    Q: Does aggregate turnover include the value of inward supplies received on which RCM is payable?
     No, as per section 2(6) of CGST Act, 2017, Aggregate turnover does not include the value of inward supplies on which tax is payable on a reverse charge basis.
     
    Q: In case the supplier has paid GST which, was payable by the recipient on the reverse charge, is the recipient discharged from the liability to pay tax on the reverse charge?
    No, even if the supplier has paid tax on the supplies on which tax is payable under RCM must be paid by the recipient.
     
    Q: Is the condition to pay the supplier within 180 days applicable to supplies covered by reverse charge?
    No, the second proviso to Section 16(2) of the act days does not apply to supplies on which tax is payable on a reverse charge basis.

     

    Also Read ThisRefund Claims Under GST

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