Reverse Charge Mechanism in GST: Definition, Example, Types, Applicability, Time of Supply

Under GST, implementation of the Reverse Charge Mechanism (RCM) is one of the most important changes. The RCM is a mechanism whereby the recipient of goods or services is liable to pay GST, rather Services provided by way of sponsorship to anybody corporate or partnership firm than the supplier. This is in contrast to the traditional system, where the supplier is responsible for paying GST.

The Goods and Services Tax (GST) was introduced in India on July 1, 2017, as a major revamp of the country’s taxation system. GST aimed to simplify the complex and multi-layered tax structure that existed before its implementation. Since then, GST has undergone several changes and reforms to address various challenges within the system.

The guide is prepared by keeping our readers in mind who are looking for complete information on GST Reverse Charge Mechanism.

What is Reverse Charge Mechanism (RCM)?

The Reverse Charge Mechanism (RCM) is a provision under GST where the liability to pay GST is shifted from the supplier to the recipient of goods or services. It means that the recipient is responsible for paying the GST to the government.

The RCM is applicable in several cases, including

• Imports of goods and services
• Supplies made by unregistered persons
• Supplies of certain goods and services notified by the government

The RCM is intended to ensure that GST is collected on all taxable supplies, regardless of whether the supplier is registered or not. It can also help to level the playing field between registered and unregistered businesses.

Here are some examples of when the RCM would apply:

• A company imports goods from a foreign supplier.
• A business purchases services from an unregistered individual.

In all of these cases, the recipient of the goods or services would be liable to pay GST.

Reverse Charge Mechanism Example

The RCM can be a complex topic, and there are several factors to consider when determining whether or not it applies in a particular case. If you are unsure about whether or not the RCM applies to you, always seek professional advice.

Let’s explore the different types of reverse charge mechanisms under GST in the next section.

Types of Reverse Charge Mechanism

Under RCM, the liability to pay GST is shifted from the supplier to the recipient (buyer) of goods or services. It means that the recipient is responsible for calculating, reporting, and paying the GST to the government on behalf of the supplier. RCM is applicable in the following scenarios.

• • Specified goods and services: section 9(3) of CGST Acts and sections 5(3) of the Integrated GST Act The government may specify certain goods and services for which RCM is applicable, even if the supplier is registered.

A restaurant purchases food from a wholesaler

• Purchase from an unregistered dealer: section 9(4) of the CGST act and sections 5(4) of the Integrated GST Act When a registered taxpayer purchases goods or services from an unregistered supplier, the recipient is required to pay GST under RCM.
• E-commerce operator-based RCM: Section 9(5) of the CGST Act and sections 5(5) of the Integrated GST Act In this type of RCM, the liability to pay GST is shifted to the e-commerce operator when goods or services are supplied through an e-commerce platform. E-commerce operators are responsible for collecting and remitting the GST on behalf of the suppliers registered on their platform.

The specific applicability and conditions for RCM can vary based on government notifications and updates. So businesses and individuals need to stay informed about the latest GST regulations and consult with tax experts. You can also refer to official government resources for precise information regarding RCM applicability.

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Reverse Charge List of Goods

Here are the goods that are subject to the Reverse Charge Mechanism under GST:

1. Cashew Nuts, not shelled or peeled
2. Bidi Wrapper Leaves (Tendu)
3. Tobacco Leaves
4. Silk Yarn
5. Raw Cotton
6. Supply of lottery by State Government, Union Territory or any local authority
7. Used vehicles, seized and confiscated goods, old and used goods, waste and scrap
   by Central Government, State Government, Union territory or a local authority.

Reverse Charge List of Services

1. Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding –
   1. renting of immovable property, and
   2. services 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 Government, State Government or Union territory or local authority;
      • services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
      • transport of goods or passengers.

   by Central Government, State Government, Union territory or local authority to any business entity located in the taxable territory.

2. Services supplied by a director of a company or a body corporate to the said company or the body corporate.
3. Services supplied by an insurance agent to any person carrying on insurance business.
4. Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company.
5. 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 the customs station of clearance in India.
6. Supply of services by 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 13(1)(a) of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer.
7. Supply of services by the members of Overseeing Committee to Reserve Bank of India.
8. Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient.
9. GTA Services Goods Transport Agency (GTA) who has not paid GST at the rate of 12% and has given GTA services to any factory, society, cooperative society, registered person, body corporate, partnership firm, casual taxable person; located in the taxable territory.
10. Legal Services by advocate including a senior advocate or firm of advocates to any business entity located in the taxable territory.
11. Services supplied by an arbitral tribunal to a business entity located in the taxable territory.
12. Services provided by way of sponsorship to anybody corporate or partnership firm.

You can also check the list on Government website :- https://old.cbic.gov.in/resources//htdocs-cbec/gst/Reverse%20charge%20Mechanism.pdf

RCM Applicability

We have already discussed the types of reverse charge mechanisms under GST. Let’s take a more detailed look at this in the next part of the article.

Purchases from Unregistered Dealers:

When a GST-registered dealer purchases goods or services from an unregistered supplier, the liability to pay GST shifts to the buyer. This process is called the Reverse Charge Mechanism (RCM). In this case, the registered buyer must pay GST to the government, instead of the unregistered seller. The buyer must self-invoice the purchase and then pay the RCM on it.

The amount of GST payable under the RCM will depend on whether the transaction is an inter-state or intra-state transaction. For inter-state transactions, the buyer must pay the Integrated GST (IGST). For intra-state transactions, the buyer must pay both Central GST (CGST) and State GST (SGST).

It is important to note that the RCM does not apply to all purchases from unregistered dealers. The government has exempted purchases below INR 5,000 per day from the RCM. This exemption applies to all types of purchases, including goods and services.

Hope you are getting the key concepts of the GST reverse charge mechanism. If you feel that you need expert guidance to learn GST, Types of GST, and more detailed information. Then check the GST certification course by ICA Edu Skills.

Involvement of E-commerce Operators:

When goods or services are purchased through an e-commerce operator, the reverse charge mechanism (RCM) applies to the operator. It means that the e-commerce operator is liable to pay GST on these transactions.

Here is the list of services under RCM in GST provided through e-commerce platforms:

1. Restaurant services
2. Hotel accommodation services
3. Transportation services
4. Tour and travel services
5. Courier services
6. Packaged food and beverages, and
7. Online Gaming

The RCM is intended to ensure that GST is collected on all taxable supplies made through e-commerce platforms, regardless of whether the service provider is registered under GST. It also helps to level the playing field between registered and unregistered service providers.
In cases where an e-commerce operator does not operate in a specific geographical area, their representative for that area is liable to pay the GST. If the operator does not have a representative in that area, they must appoint someone to act as their representative and pay the GST on their behalf.

The e-commerce operator can claim an input tax credit (ITC) on the GST that they pay under the RCM. It means that they can offset the GST that they pay on their purchases against the GST that they collect from their customers.

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Time to Supply of Goods Under RCM

Under the Reverse Charge Mechanism (RCM), the time of supply of Goods is determined as the earliest of the following:

• Date of receipt of goods
• Date of payment: If the recipient makes the payment for the supply of services, the time of supply is the date of payment.
• 30 days from the date of issue of invoice: If the supplier issues an invoice for the supply of goods, the time of supply is 30 days from the date of issue of the invoice.

The date of payment is defined as the earlier of the following two events:

• Date on which the amount was debited from the bank account: The date on which the amount is debited from the recipient’s bank account, as indicated in the bank statement.
• Date of recording the payment in the books of accounts: The date on which the recipient records the payment in their books of accounts.

Time to Supply of Services Under RCM

Under the Reverse Charge Mechanism (RCM), the time of supply of services is determined as the earliest of the following two events:

• 60 days from the date of issue of invoice: If the supplier issues an invoice for the supply of services, the time of supply is 60 days from the date of issue of the invoice.
• Date of payment: If the recipient makes the payment for the supply of services, the time of supply is the date of payment.

The date of payment is defined as the earlier of the following two events:

• Date on which the amount was debited from the bank account: The date on which the amount is debited from the recipient’s bank account, as indicated in the bank statement.
• Date of recording the payment in the books of accounts: The date on which the recipient records the payment in their books of accounts.

For example, if a supplier issues an invoice for services on January 1, 2023, and the recipient makes payment on March 1, 2023, the time of supply is March 1, 2023.

It is important to note that the time of supply is relevant for determining the due date for payment of GST under the RCM.

Self-invoicing under RCM

Section 31 of the Central Goods and Services Tax Act, 2017 (CGST Act) allows a registered recipient who is subject to the reverse charge mechanism to issue an invoice. This is called self-invoicing.

The self-invoice must contain all the details required for a regular GST invoice, such as

• The GSTIN of the buyer and seller
• The Invoice number
• The Date of the invoice
• The description of goods or services
• The quantity, the rate, and
• The amount of GST

It is important to note that the self-invoice is not a legal document and does not create any liability for the unregistered vendor. The liability to pay GST under the RCM rests solely with the registered buyer.

Key Takeaways

The Reverse Charge Mechanism (RCM) is an important part of India’s Goods and Services Tax (GST) system. It shifts the tax liability from the supplier to the recipient in certain situations.

As GST continues to evolve and adapt to the needs of the economy, staying up-to-date on RCM and other GST provisions is critical for compliance and efficient business operations. Whether you are a business owner, tax professional, or a student, understanding the ins and outs of RCM will help you navigate the complexities of India’s tax landscape effectively.

GST Reverse Charge Mechanism is a fundamental aspect of GST that requires careful attention and understanding. It contributes to the broader goal of a simplified and efficient taxation system in India.

Frequently Asked Questions

1. What is the limit for RCM under GST?

The RCM applied to specified goods and services, and the threshold limit for RCM was not based on turnover. Instead, it was determined by the nature of the goods or services.

However, the specific goods and services subject to RCM could be updated by the government through notifications.

It is important to check the latest GST notifications or consult a tax professional for the most current information on RCM and its applicability.

2. Can we claim a refund of the RCM paid?

Yes, businesses can claim a refund of the GST paid under the Reverse Charge Mechanism (RCM). The RCM paid on goods and services can be claimed as input tax credit (ITC) and offset against the GST liability. This can lead to a reduction in tax payable or a potential refund if the ITC amount exceeds the GST liability.

However, the process and conditions for claiming such refunds may vary. It is important to comply with GST regulations and consult a tax professional for accurate guidance.

3. Is RCM an asset or liability?

The Reverse Charge Mechanism (RCM) is not an asset or liability on a company’s balance sheet. It is a tax mechanism that shifts the GST liability from the supplier to the recipient of goods or services.

4. What if RCM is not paid in GST?

Failure to pay the Reverse Charge Mechanism (RCM) in GST may result in penalties, interest charges, and legal consequences.

5. Why is the RCM cycle important?

The RCM cycle is important because it ensures that the correct party pays the GST. This helps prevent tax evasion and ensures that the government collects the correct revenue. It also provides transparency and accountability in tax compliance.

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Sanjiv Kumar Giri

Qualification: CA Finalist, B.Com (Hons), AMFI
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Mr. Sanjiv Kumar Giri is having more than 15 years of experience in the field of Direct Taxes, GST, and Accounts & Finance.

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