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 Entryin the Books of Account of the recipient.
