GST Reverse Charge Mechanism (RCM) basically means that the GST is to be paid and deposited with the Govt by the recipient of Goods/ Services and not by the supplier of Goods/ Services.
Under the normal mechanism of levy of GST, the receiver of goods/services pays the GST to the supplier of goods/ services and such supplier then deposits the GST with the Govt. (after taking the benefit of input tax credit).
However, under the Reverse Charge Mechanism, the GST is paid and deposited by the recipient with the Govt. on behalf of the supplier of service. The normal mechanism of levy of GST and the Reverse Charge Mechanism has been explained below with the help of this Infographic.
When is GST Reverse Charge Mechanism applicable?
GST Reverse Charge Mechanism (also known as RCM) is not applicable under normal circumstances. It is only applicable under the circumstances which are specifically mentioned in Section 9(4) and Section 9(3) which have been mentioned below.
It is important to note that the Reverse Charge under Section 9(4) i.e. for transactions with Unregistered Dealers is currently not applicable as it has been suspended till 30th Sept 2019.
Reverse Charge under Section 9(3) i.e. for Transactions for specified goods and services are still applicable and Reverse Charge would continue to be levied.
Reverse Charge under Section 9(4) – Supply from Unregistered to Registered Person
If a person not registered under GST supplies Goods or Services to a person who is registered under GST, then in such cases – Reverse Charge Mechanism would get applicable i.e. the GST would be required to be paid by the Registered Person directly to the Govt on behalf of the supplier.
However, in case of supply of exempt goods or services, GST under Reverse Charge Mechanism shall not be applicable. This can be explained with the help of an example.
Example 1: A registered person hires an Auto Rickshaw for commuting from one place to another, then in such cases – Section 9(4) would not be applicable since the transportation of passenger by auto rickshaw is an exempted service.
Example 2: A registered person stays in a hotel whose room tariff is less than Rs. 1000. Section 9(4) would not be applicable since the services by a hotel having declared value less than Rs. 1000 per day or equivalent is an exempt service.
It is pertinent to note here that the provisions of Reverse Charge under Section 9(4) are applicable only for supplies within the same state. The provisions of Reverse Charge under this Section are not applicable to Inter-state supplies as inter-state supplies cannot be made by unregistered suppliers.
To make an inter-state supply, the 1st condition is that the supplier should be registered under GST. And if the supplier is registered, the provisions of Reverse Charge under Section 9(4) would not apply and the normal mechanism of levy of GST would apply.
Example 3: Rajat (based in New Delhi) provides Consultancy Services to Sachin (based in Bangalore) and charges Rs. 20,000 for the same. Rajat is not registered under GST but Sachin is registered. Would the provisions of Reverse Charge apply in this case?
Solution: In the above mentioned case, as Mr. Rajat is providing an inter-state service, he would be required to mandatorily get registered under GST. Without getting registered – he cannot provide inter-state service. Only registered persons can provide inter-state service.
To provide inter-state service, Mr. Rajat would be required to get registered. And once, he gets registered, this would be a transaction between Rajat and Sachin both of whom are registered under GST and therefore the provisions of Section 9(4) won’t apply for the levy of GST.
Exemption to Reverse Charge under Section 9(4)
Reverse Charge provisions would not be applicable if the aggregate value of such supplies of goods or services or both received by a taxable person from any or all the suppliers, who are not registered, does not exceed Rs. 5,000 in a day (Notification No. 08/2017 dated 28/06/2017).
In other words, if the total supply of goods or services from unregistered persons does not exceed Rs. 5,000 in a day, then the provisions of reverse charge would not be applicable.
Example 4: Karan Batra (Registered under GST) gets his website redesigned from Rajan based in New Delhi (unregistered person based) on 15th July 2017 for Rs. 4,000. He does not get any other service/good from any other unregistered supplier on 15th July 2017.
In such a case, the provisions of Reverse Charge would not be applicable as the aggregate value of such supplies for unregistered dealers is less than Rs. 4000 in a single day.
Example 5: Karan Batra gets his website redesigned from Rajan based in New Delhi (an unregistered person under GST) on 15th July for Rs. 4000. He also hires Sahil, a digital marketer based in New Delhi (Unregistered under GST) for promotion of his website on 15th July for Rs. 3000.
In such a case, the provisions of Reverse Charge would be applicable as the aggregate value of such supplies is Rs. 7000 which is more than Rs. 5,000 in a day.
Reverse Charge under Section 9(3) – Goods & Services notified by Govt for levy of Reverse Charge Mechanism
Reverse Charge Mechanism is also applicable on certain goods and services which are notified by the Govt. Reverse Charge under Section 9(3) is applicable for both inter-state as well as same state transactions. The goods and services on which GST shall be levied under the Reverse Charge Mechanism have been mentioned below.
Reverse Charge on Goods under Section 9(3)
The Goods on which GST shall be levied under Reverse Charge have been announced vide Notification No. 04/2017 dated 28th June 2017 and these have been mentioned below for ready reference.
|S. No.||Description of Supply of Goods||Supplier of Goods||Recipient of Supply|
|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 worm cocoons for supply of silk yarn||Any registered person|
|5||Supply of Lottery||State Govt., Union Territory or Local Authority||Lottery Distributer or Selling Agent|
Reverse Charge on Services under Section 9(3)
The Services on which GST shall be levied under Reverse Charge have been mentioned below for ready reference.
|S. No.||Description of Supply of Services||Supplier of Goods||Recipient of Supply|
|1.||Any service supplied by any person who is located in a non-taxable territory.||Any person located in Non-taxable territory.||Any person located in taxable territory other than non-taxable online recipient|
|2||Supply of Services by a Goods Transport Agency (GTA)||Goods Transport Agency (GTA)||– Any factory registered under or governed by the Factories Act 1948, or
-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
-Any co-operative society established by or under any law, or
-Any person registered under CGST Act or SGST Act or IGST Act or UTGST Act, or
-Any body co-operate established, by or under any law, or
-Any partnership firm whether registered or not under any law including association of persons, or
-Any Casual taxable person
Located in the taxable territory.
|3||Services provided by an individual advocate including a Senior Advocate by way of Representational Services before any Court, Tribunal or Authority by way of Legal Services, to a Business Entity||Any Individual Advocate including a Senior Advocate or firm of Advocates||Any Business entity located in the taxable territory.|
|4||Services provided by an Arbitral Tribunal to a Business Entity||Any Arbitral Tribunal||Any Business entity located in the taxable territory.|
|5||Sponsorship Service||Any Person||A Body Corporate or Partnership Firm located in the taxable territory|
|6||Services provided by the Govt. ,or Local Authority excluding:-
-Renting of Immovable Property, and
-Service specified below
-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 Central Govt., State Govt., or Union Territory or Local Authority
-Services in relation to an aircraft or a vessel, inside or outside the precincts of an airport or a port
-Transport of Goods or Passengers
|Central Govt., State Govt., Union Territory or Local Authority||Any Business entity located in the taxable territory|
|7||Services provided or agreed to be provided 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|
|8||Services provided or agreed to be provided by an Insurance Agent||An Insurance Agent||Any Person carrying on the Insurance Business|
|9||Services provided or agreed to be provided by a Recovery Agent||A Recovery Agent||A Banking Company or a Financial Institution or a NBFC|
|10||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 customs station of clearance in India.||A person located in non-taxable territory.||Importer, as Clause 26 of Section 2 of the Customs Act, 1962 located in the taxable territory.|
|11||Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use of a copyright covered under Section 13(1)(a) of the Copyright Act 1957||Author or Music Composer, Photographer, Artist etc||Publisher, Music Company, Producer|
Time of Supply for Reverse Charge under GST
For the levy of Reverse Charge under GST, it is very important to ascertain the time of supply as GST would be required to be deposited with the Govt within 20 days from the end of the month in which the services were provided.
Time of supply in case of supply of Goods
In case of Reverse Charge, the time of supply would be the earliest of the following
- The date of receipt of goods, or
- The date of payment, or
- The date immediately after 30 days from the date of issue of invoice by the supplier.
If it is not possible to determine the time of supply under (a), (b) or (c) above, the time of supply shall be the date of entry in the books of accounts of the recipient.
Example 6: Determine the Time of Supply in the below mentioned case of supply of goods:-
- Date of Receipt of Goods: 14th Oct
- Date of Payment: 19th Dec
- Date of Invoice: 1st Nov
- Date of entry in Books: 18th Oct
Solution: In the above mentioned case the time of supply would be 14th Oct. However, in case (a), (b), (c) are not available, the date of entry in the books i.e. 18th Oct would be considered.
Time of supply in case of supply of Services
In case of Reverse Charge, the time of supply would be the earliest of the following
- The date of payment, or
- 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 under (a) or (b) above, the time of supply shall be the date of entry in the books of accounts of the recipient.
Example 7: Determine the Time of Supply in the below mentioned case of supply of goods:-
- Date of Payment: 10th August
- Date of Invoice: 21st July
- Date of entry in Books: 1st August
Solution: In the above mentioned case the time of supply would be 10th August. However, in case (a), (b) are not available, the date of entry in the books i.e. 1st August would be considered.
Date of Payment
For the purpose of computation of Date of Supply, the Date of Payment shall be earlier of the following:-
- The date on which the payment is debited from his bank account or
- The date on which the recipient entered the payment in his books
Other Relevant Points regarding levy of Reverse Charge Mechanism (RCM)
- All persons procuring goods or services notified under Section 9(3) or Section 9(4) are mandatorily required to obtain GST Registration.
- GST levied under the Reverse Charge mechanism should be deposited with the Govt by the 20th of the next month.
- GST paid under the Reverse Charge mechanism would be available for Input Tax Credit if such goods and/or services are used in the furtherance of business. The service recipient (i.e. who pays reverse charge) can avail input tax credit.
- The details of GST paid under Reverse Charge Mechanism (RCM) would not be auto-populated in the GSTR 2 and these details would be required to be manually furnished.
- In cases where RCM is levied, the recipient shall raise an Invoice on self. Invoice shall be issued on a daily basis for all consolidated purchases made during the day on which GST is levied under Reverse Charge. [Section 31(3)(f)]
- At the time of payment to the supplier, the recipient shall also issue a payment voucher for the payment made.
- Input Tax Credit with the recipient cannot be used for payment of Reverse Charge to the Govt.
- A registered person will not loose input tax credit of GST paid under Reverse Charge even if the payment is not made within 180 days.
- Reverse Charge is also applicable to recipients registered under the Composition Scheme. No Credit of RCM is available in such cases.
- RCM is levied on advance payments as well.