As you know, the Goods and Services Tax (GST) is levied on both goods and services and is a kind of indirect tax imposed on an individual or a company placed on the ultimate consumption of goods and services.
In general, the seller of goods or services is obligated to pay the GST as per the GST Act. However, in some instances, such as imports and other declared supplies, the obligation is levied on the recipient and thus is known as the Reverse Charge Mechanism or RCM.
What is a Reverse Charge Mechanism (RCM)
According to Section 2(98) of the CGST Act of 2017, “Reverse-Charge” refers to the duty to pay tax by the recipient of a supply of goods or services or both rather than the provider of such goods or services or both.
In simple terms, Reverse Charge Mechanism (RCM) is a system in which the recipient of goods or services is required to pay the Goods and Services Tax (GST) rather than the provider. Here, the obligation for tax payment burden is moved to the recipient or receiver rather than the provider, hence the name.
When is the Reverse Charge Mechanism Applied?
In RCM, the scenario is reversed since the person receiving the products and services must pay the taxes. If the recipient purchases products from unregistered suppliers, GST must be paid on their behalf.
The provider must provide the recipient with a payment voucher. According to Section 2(94) of the CGST Act of 2017, the beneficiary must be a registered person.
Reverse charge situations for intrastate transactions are governed by Sections 9(3), 9(4), and 9(5) of the Central GST and State GST Acts.
In addition, reverse charge situations for inter-state transactions are governed by sections 5(3), 5(4), and 5(5) of the Integrated GST Act.
The Reverse Charge Mechanism is relevant in the following situations:
- Supply of notified goods and services specified by CBIC
- Purchase from an unlicensed/ unregistered dealer
- Supply of Services via e-commerce operator
Let’s delve deeper for a better view and understanding.
Supply of notified goods and services specified by CBIC
The Central Board of Indirect Taxes and Customs (CBIC) has produced a list of products and services for which reverse charge is applicable, in accordance with the authority granted in section 9(3) of the CGST Acts. When you plan of a pvt ltd company registration, you must cross-check your products or services with this list for future reference and benefits.
Purchase from an unlicensed/ unregistered dealer
According to Section 9(4) of the CGST Act, if a seller who is not registered for GST delivers products to a person who is registered for GST, a Reverse Charge will be applied in such a case.
This means that instead of the provider, the recipient will be liable for paying the GST. For transactions made, the registered buyer who is required to pay GST under reverse charge must self-invoice.
Under the reverse charge mechanism for intra-state sales the purchaser must pay CGST and SGST. In addition, in the event of interstate purchases, the buyer is required to pay the IGST. The government publishes a list of items and services that are subject to this regulation on a regular basis.
The government issued an order mandating promoters to obtain 80 percent of their inward supplies from licensed suppliers in the real estate industry. If purchases from registered dealers fall short by 80%, the promoter shall charge 18% GST on the reverse charge to the amount of inbound supply that falls short by 80%.
If the promoter purchases cement from an unregistered supplier, however, he must pay a 28 percent tax. Regardless of the 80 percent calculation, this calculation must be completed.
On TDR or floor space index delivered, the promoter is obligated to pay reverse charge GST. Even though a landowner does not engage in land-related operations on a regular basis, the transfer of development rights by such an individual to the promoter is subject to GST since it is considered a provision of service under Section 7 of the CGST Act.
In addition, when one developer sells TDR to another, the reverse charge is subject to 18 percent GST.
Supply of Services via e-commerce operator
Any organization can employ e-commerce operators as an aggregator to sell products and deliver their services. According to Section 9(5) of the CGST Act, if a service provider utilizes an e-commerce operator to deliver specified services, the reverse charge will be applied to the e-commerce operator, and he will be required to pay GST.
This includes services such as:
- Providing lodging services at hotels, inns, guest houses, clubs, campgrounds, or other commercial establishments that cater to residential or lodging needs. Unless the person providing the service through an electronic commerce operator is required to register due to a turnover threshold that exceeds the limit. Oyo and MakeMyTrip are two examples.
- Transportation services by motor cabs, radio-taxis, maxi cabs, and motorbikes. Ex- Ola and Uber.
- Housekeeping services, such as plumbing and carpentry are also included in it unless the person providing such services through electronic commerce operators is required to register due to a turnover exceeding the threshold limit. For Example, UrbanClap offers the services of plumbers, electricians, teachers, beauticians, and other professionals. Here, UrbanClap is required to pay GST instead of the registered service providers.
In case the e-commerce operator has no physical presence in the taxable territory, in such cases, a person representing such an electronic commerce operator will be required to pay tax for any reason. If there is no representative, the operator will appoint one who will be responsible for GST.
Who should bear the GST under the RCM?
The person delivering the products must specify on the tax invoice whether tax is payable under the RCM, according to GST rules.
Keep the following points in consideration when processing GST payments under RCM:
- The beneficiary of the goods or services can claim the ITC on the tax amount paid only if the goods or services are used for business or expanding business under RCM.
- Instead of paying composition rates, a composition trader should pay standard rates. In addition, they are ineligible to claim any input tax credits for taxes paid.
- The GST compensation cess can be applied to the RCM tax that is due or paid.
Liability of Registration under Reverse Charge Mechanism (RCM)
According to Section 24 of the CGST Act of 2017, a person paying tax under the reverse charge mechanism is required to register even if their turnover is less than the threshold limit.
Regardless of the threshold and annual threshold, anyone who pays taxes under reverse charge is required to register under GST. The maximum amount is Rs. 20 lakh (10 lakhs in case of Hill states and North Eastern State)
GST council has endowed the states with the authority to impose a double threshold limit for registration, i.e. INR 40 lakh, up from INR 20 lakh previously.
GST Applicability, GST Compensation, Cess Compensation Cess is also levied on taxes paid through the reverse charge mechanism. The objective here is to compensate states for revenue lost as a result of the implementation of GST. This is effective for five years from the date of GST implementation.
The term “time of supply” in the context of GST refers to the specific point in time at which goods or services are rendered or supplied. It enables one to determine the tax rate, the value of the tax, and the filing deadlines for returns.
The recipient is obligated to pay GST under the Reverse Charge Mechanism. The time of supply for supplying goods and services under reverse charge differs from the time of supply for supplying goods and services which come under forwarding charge.
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RCM Input Tax Credit (ITC)
Under the RCM, a supplier cannot obtain ITC for GST paid. The recipient can claim ITC just on GST amount paid under RCM on receipt of goods or services if they are used or will be utilized for business purposes.
The ITC cannot be used to pay reverse charge output GST on goods or services; it must be paid in cash.
What does self-invoicing entail?
When purchasing products or services from an unregistered source, self-invoicing is used. Because your supplier is unable to provide you with a GST-compliant invoice, you will be responsible for paying taxes on their behalf.
A recipient who is obligated to pay tax under sections 9(3) or 9(4) must also deliver a payment voucher to the provider at the time of payment, according to section 31(3)(g).
Role of DailyFiling in Self-invoicing
At DailyFiling we have a highly professional team of expert GST consultants in Jaipur to help you out with self-invoicing.
Our GST software allows you to easily create self invoices for your RCM. All you have to do is follow the simple steps and you are done with your procedure of self-invoicing.
Points to Consider for RCM
- According to RCM, goods, and services notified under sections 9(3) or 9(4) must be delivered by a person who is GST registered.
- According to the GST paid, the input tax credit will be available for all RCM goods and services used for the advancement of business. In addition, the individual who acquires the service and pays the reverse charge can benefit from an input tax credit.
- The applicable GST must be submitted to the government on the 20th of each month under the reverse charge mechanism.
- There will be no auto-population of details of GST paid under the RCM in GSTR 2, but it will be subject to manual filling.
- Where the RCM is applicable, the invoice must be arranged by the recipient on its own, and invoices, along with consolidated purchases, must be issued on a daily basis.
- At the time of supplier payment, the recipient must issue a payment voucher.
- Section 31 applies to all GST payers (3).
- The ITC is not available for the authority’s reverse charge payment.
- Individuals registered under the composition scheme are also subject to the reverse charge, so no RCM credit can be obtained.
- Advance payments are also subject to the reverse charge mechanism.
We at DailyFilings are dedicated to facilitating all your legal procedures handling including providing assistance and guidance for Reverse Charge Mechanism to serve you better.