In-Depth Guide to Reverse Charge Mechanism under GST: Everything you need to know in 2021

In-Depth Guide to Reverse Charge Mechanism under GST: Everything you need to know in 2021

Reverse Charge Mechanism or RCM, we often use these terms in GST but what does it mean and how it can be helpful to you. Read the entire article to know everything about RCM concept.

What is Reverse Charge Mechanism under GST?

Under Forward Charge Mechanism or FCM, supplier of goods or services, supplies to the receiver and then pays tax to the government.

Under Reverse Charge Mechanism the supplier of goods or services, supllies to the receiver and then receiver only pays tax to the government rather than supplier.

In-Depth Guide to Reverse Charge Mechanism under GST: Everything you need to know in 2021

Reason behind concept of Reverse Charge Mechanism under GST (RCM)

In indirect taxes, the ultimate burden of paying tax is upon recipient only and the same is applicable in the RCM but under RCM the compliance burden is also shifted on recipient whereas under forward charge mechanism supplier take care of all the compliance procedure of paying tax to government, filing GST returns, etc.

There are following two main reason behind RCM such as;

1. To avoid tax evasion in case of transaction between registered dealer and unregistered dealer

2. To make unregistered person free from tax compliances.

When reverse charge mechanism under GST is applicable?

Section 9(3) & 9(4) of CGST Act, 2017 and section 5(3) & 5(4) of IGST Act, 2017 specifies the applicability of RCM.

Following are the circumstances where reverse charge mechanism will be applicable;

1. Supply from unregistered person to registered person [Section 9(4) and 5(4)]

If any supplier is not registered under GST and supplies goods or services to the registered person then reverse charge will be applicable. This means that registered person who is recipient is required to pay tax to the government.

For Inter-state purchases, the receiver requires to pay IGST and for Intra-state purchases, CGST and SGST needs to be paid by the recipient under RCM.

2. Supply of certain goods and services specified by CBIC

Following is the list of notified goods and services where GST is payable as per RCM basis. But this list can be amended by CBIC as per the requirement.

a) Notified Goods under RCM under GST


Sr. No.

Category of Supply of Goods

Supplier of Goods

Recipient of Services

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

Any registered person

5

raw cotton

Agriculturist

Any registered person

6

lottery ticket

State Government

Selling agent

7

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

8

Purchase of priority Sector Lending Certificate

Banks / Financial Institution

Any registered person

9

Cement

Any person

Promoter/ Builder

b) Notified services under RCM under GST

Sr. No.
Category of Supply of Services

Supplier of Services

Recipient of Services

1










Services of Goods Travel Agency (GTA)

Goods Transport Agency (GTA)

Any factory, society, co-operative society, registered person, body corporate, partnership firm, casual taxable person located in the taxable territory

10(a) RCM on GTA services not applicable if GTA opts to pay the tax on forwards charge mechanism at the rate of 12%

2

Legal Services of the advocate

An individual advocate including a senior advocate or firm of advocates

Any business entity located in the taxable territory

3

Services of an arbitral tribunal to a business entity

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

Director’s services (except remuneration)

A director of a company or a body corporate

The company or a body corporate located in the taxable territory

6

Services of insurance Agent

An insurance agent

Any person carrying on insurance
business, located in the taxable
territory

7

Services of Recovery Agent

A recovery agent

A banking company or a financial institution or a non-banking financial company, located in the taxable territory

8

Services of overseas Committee

Members of Overseeing Committee constituted by the Reserve Bank of India

Reserve Bank of India.

9

Services of an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section

Author or music composer, photograph her, artist, or the like

Publisher, music company, producer or the like, located in
the taxable territory

Note: Author can exercise the option to pay GST on the service relating to original literary works under forward charge w.e.f. 01.10.2019

10

Services by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project.

Any person

Promoter

11

Long term lease of land (30 years or more) 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

Any person

Promoter

12

Services of an individual Direct Selling Agents (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

13

Services of a business facilitator (BF)

Business facilitator (BF)

A banking company,
located in the taxable territory

14

Services of business correspondent (BC)

An agent of business
correspondent (BC)

A business correspondent, located in the taxable territory

15

Security services

Any person other than a body corporate

A registered person,
located in the taxable territory

16

w.e.f. 01.10.2019 Services of hiring of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration paid by service recipient,

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 per cent. to the service recipient

Any body corporate located in the taxable
territory.

17

w.e.f. 01.10.2019 Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of 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.

3. Time of Supply under Reverse Charge Mechanism under GST

A. Time Of Supply in case of Goods

In case of reverse charge mechanism, the time of supply shall be earliest of the following;

  • the date of receipt of goods, Or
  • the date of payment, Or
  • 31st day from Date of Issue of Invoice

In case not able to determine time of supply, the time of supply shall be the Date of Entry in the Books of Accounts of the recipient.

B. 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, Or
  • 61st day from date of issue of invoice

In case not able to determine the time of supply, the time of supply shall be the Date of Entry in the Books of Account of the recipient.

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