Normally, seller collects GST from Buyers and pays it to the government. But In some cases buyers pay GST directly to the government. This is called reverse charge on GST.
There are two type of reverse charge scenarios provided in law. First is dependent on the nature of supply and/or nature of supplier. This scenario is covered by section 9 (3) of the CGST/SGST (UTGST) Act and section 5 (3) of the IGST Act. Second scenario is covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act where taxable supplies by any unregistered person to a registered person is covered.
As per the provisions of section 9(3) of CGST / SGST (UTGST) Act, 2017 / section 5(3) of IGST Act, 2017, 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. Similarly, section 9(4) of CGST / SGST (UTGST) Act, 2017 / section 5(4) of IGST Act, 2017 provides that the tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient 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.
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NOTE:-
The CBIC has amended the earlier Notification No. 13/2017-Central Tax (Rate) dated 28 June 2017 to state that RCM shall be applicable on renting of motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged.
Reverse Charge is applicable under certain conditions:-
- Supply from an unregistered dealer to a dealer registered
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.
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.
Supply of certain goods and services specified by CBEC
CBEC has issued a list of goods & services on which reverse charge is applicable.
The time of supply of goods and services.
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.
Time Of Supply in case of Services:
In case of reverse charge, the time of supply shall be the earliest of the following dates:
- The date of payment
- The date immediately after 60 days from the date of issue of 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.
For Goods (Reverse charge)
CBEC has notified a list of goods on which reverse charge mechanism will be applicable under GST
| S.No | Description of supply of goods | Supplier of goods | Recipient of goods |
| 1 | Cashew nuts, not shelled or peeled | Agriculturist | Any registered person |
| 2 | Bidi wrapper leaves (tendu) | Agriculturist | Any registered person |
| 3 | Tobacco leaves | Agriculturist | Any registered person |
| 4 | Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn | Any registered person |
| 4A | Raw cotton | Agriculturist | Any registered person |
| 5 | Supply of lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agen |
| 6 | 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 |
For Services (Reverse charges)
CBEC has notified a list of services on which reverse charge mechanism will be applicable under GST
| S. No. | Provider | Recipient |
| 1 | Goods transport agency | Casual Taxable person, body corporate, partnership firm, any society, factory, any person registered under CGST, SGST, IGST Act |
| 2 | Recovery Agent | Banking Company, NBFC or any financial institution |
| 3 | A director of a company or a body corporate | A company or a body corporate |
| 4 | An individual advocate or firm of advocates, An arbitral tribunal | Any business entity |
| 5 | An insurance agent | Any person carrying on insurance business |
More: Illustrative list on which the reverse charge mechanism is applicable for services
Points to be noted:
No partial reverse charge will be applicable under GST. 100% tax will be paid by the recipient if the reverse charge mechanism applies.
(1) In the case of B2B import of other services, the tax shall be payable by the recipient of services
(2) In the case of B2B import of goods, the tax shall be payable by the recipient of goods
Liability of Registration Under RCM (Reverse Charge Mechanism)
Under Reverse Charge Mechanism who is liable to register in the new tax regime?
A person who pays taxes under reverse charge is required to register under GST irrespective of the threshold and annual threshold Limit is 20 lakhs (10 lakhs in case of Hill states and North Eastern State)
Note: In the GST council meeting, states were given liberty to imposed double threshold limit for registration i.e. 40 lakh up from the earlier INR 20 lakh.
In the notification, the government has finally imposed the reverse charge mechanism starting from 1st February 2019 as per the GST acts and amendments. Also to note that the up to INR 5000 exemptions will be removed effectively.
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 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 the GSTR1. 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 Manner of Payment of GST under the Reverse Charge Mechanism
As per section 49(4) of CGST Act’2017, ITC can be used for payment of output tax only. Therefore tax under reverse charge can be paid through cash only without availing the benefit of ITC. The supplier must mention in his tax invoice whether the tax is payable on reverse charge.
Input Tax Credit:
The service recipient can avail Input Tax credit on the Tax amount that is paid under reverse charge on goods and services. The only condition is that the goods and services are used or will be used for business or furtherance of business.
If the composite dealer falls under reverse charge mechanism then the dealer is ineligible to claim any credit of tax paid. The tax will be paid at the normal applicable rates and not at the composition rates.
Registration Requirement under Reverse Charge Mechanism (RCM):
As per Section 24 of CGST Act’ 2017, A person paying tax under the reverse charge mechanism has to compulsorily get registered even if the turnover is below the threshold limit.
Applicability of GST Compensation Cess:
GST Compensation Cess will be applicable on tax paid under reverse charge mechanism also. The purpose is to compensate States for loss of revenue on the implementation of GST. This will be applicable for 5 years from the date GST gets implemented.
Important Points to be Taken Care Under RCM :
- Goods and services notified under section 9(3) or section 9(4) must have person registered under
- Under the reverse charge mechanism, the GST applicable must be submitted to the government on every 20th of next month
- The input tax credit will be available for all the RCM goods and services used for the furtherance of business according to the GST paid. And the service acquiring individual, who is also paying reverse charge can take the benefits of an input tax credit.
- There will be no auto-population of details of the GST paid under the RCM in GSTR 2, but it will be subjected to the manual furnishing of details.
- Wherever the RCM is applicable the invoice must be arranged by the recipient on itself while the invoices along with the consolidated purchases should be issued on a daily basis. on all the GST applicable who are under section 31(3).
- Payment voucher must be issued by the recipient at that at the time period of suppliers payment.
- The ITC is not available for the reverse charge payment to the authority.
- The composition scheme registered individuals also come under the reverse charge, well there will be no credit of RCM be availed.
- The reverse charge mechanism is applicable to payments made in advance also.
Note: If in case, a dealer is unregistered under GST, then he is not allowed to deal in any interstate transactions. For any reverse charge mechanism to applicable, there must be only intra-state transactions.
Conclusion: With the biggest tax reform ready to be implemented, Reverse charge mechanism is not a new concept as we are already dealing with this in the service tax. But imposing a 100% reverse charge is definitely a big change. There are both pros and cons of this reverse charge mechanism but then no accurate conclusion can be drawn currently as to how the society will be impacted by its imposition. On one hand it will definitely be burdensome for the small supply receivers, but on the other hand, it will increase tax compliance for the country as a whole and would increase transparency.
Frequently Asked Questions
Does aggregate turnover include value of inward supplies received on which RCM is payable?
- Refer Section 2(6) of CGST Act. Aggregate turnover does not include value of inward supplies on which tax is payable on reverse charge basis.
What happens if the receiver of goods and/or services is required to pay tax under Reverse Charge but is not a registered dealer?
- All taxpayers required to pay tax under reverse charge have to register for GST and the threshold of Rs 20 Lakhs is not applicable to them.
- Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The recipient (i.e., who pays reverse tax) can avail input tax credit.
What if I make purchases from registered dealer, in that case also I am bound to pay RCM?
- NO. RCM is to be paid only if you have made purchases from an un-registered dealer (except compulsory services like transporters and lawyers). In case of compulsory services RCM is always to be paid even if purchased from registered dealer.
- An ISD cannot make purchases liable to Reverse Charge. If the ISD wants to procure such supplies and take the Reverse Charge paid as credit, the ISD should register as a Normal Taxpayer.
Does aggregate turnover include value of inward supplies received on which RCM is payable?
- Refer Section 2(6) of CGST Act. Aggregate turnover does not include value of inward supplies on which tax is payable on reverse charge basis.
References:-
- Ekeeda – Commerce & Management
- cbic.gov.in
- Cleartax.in
You can find more information at Zeroinfy.in
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