In case of supply of goods and services, there is a huge sector of unorganized suppliers who are not registered under GST. Hence, it becomes difficult for the government to track and collect taxes from such suppliers. Some sectors are inherently prone to non-compliance. As a result, a significant part of the economy remains outside the tax system, leading to significant revenue loss. The Reverse Charge Mechanism was introduced to solve this issue, where the responsibility to pay GST falls on the buyer, not the supplier. This broadens the tax base, and the government can collect taxes on the supplies that otherwise would escape the GST system.
Reverse Charge Mechanism Vs. Normal Charge Mechanism
Under normal circumstances, the supplier is responsible for collecting GST from the buyer and depositing it with the government. However, in the case of reverse charge, this responsibility shifts to the buyer. The buyer, instead of paying GST to the supplier, deposits it directly with the government, while paying only the sale consideration (net of GST) to the supplier.
Types of Reverse Charge Scenarios
The Reverse Charge Mechanism is applicable in following scenarios under GST law:
1. In case of supply of specified Goods and Services
Section 9(3) of the CGST/SGST (UTGST) Act, 2017 and Section 5(3) of the IGST Act, 2017 specifies that notified goods and services will fall under Reverse Charge Mechanism. For this the central government on GST council recommendation issues notifications where they specify goods and services on which reverse charge will be applicable. In addition, the notification also specifies conditions and exceptions for applicability of Reverse Charge for each entry of goods and services.
2. Where a registered person receives taxable supplies from an unregistered supplier.
Section 9(4) of the CGST/SGST (UTGST) Act, 2017 and Section 5(4) of the IGST Act, 2017 govern this scenario. Where a registered person buys taxable goods or services from an unregistered supplier, the registered person must pay the tax under the reverse charge mechanism.
3. Intra-state supplies of services by e-commerce operator
Where specified services are provided intra-state through e-commerce platforms, tax on such services will be paid on reverse charge basis. Hence, the e-commerce operator whose platform is used for providing such services shall be liable to pay tax.
Registration Requirements for Reverse Charge
The usual turnover thresholds for GST registration do not apply to persons liable under reverse charge. Therefore, any person liable to pay tax under reverse charge must compulsorily register under GST, regardless of their turnover.
Time of Supply in Reverse Charge Mechanism
The time of supply refers to the point of supply. Under the Reverse Charge Mechanism, the time of supply provisions vary for goods and services.
Time of Supply for Goods Under Reverse Charge
The time of supply for goods will be earliest of the following:
1. The date of receipt of goods.
2. The date of payment as per the books of accounts or the date of debit in the bank account, whichever is earlier.
3. 30 days from the date of issue of the invoice by the supplier.
Example: Suppose a company receives goods on August 1st, but the payment is made on July 25th. Since July 25th is the earliest date in this case, the same shall be the time of supply.
Time of Supply for Services Under Reverse Charge
For services, the time of supply is the earliest of the following:
1. The date of payment as per the books of accounts or the date of debit in the bank account, whichever is earlier.
2. 60 days from the date of issue of the invoice by the supplier.
Example: A company receives a service invoice on September 1st, 2023 and makes the payment on October 10th, 2023. Since October 10th, 2023 is the earliest event, the same would be the time of supply.
If it is not possible to determine the time of supply using the above methods, the time of supply is the date of entry in the books of the recipient.
Compliances Applicable in Case of Reverse Charge Mechanism
The recipient of goods or services must adhere to the following critical compliances along with payment of taxes under Reverse Charge Mechanism:
1. Self-Invoicing by Recipient
A recipient must do self-invoicing when making purchases from unregistered supplier and when such purchases fall under Reverse Charge Mechanism.
2. Issue of Payment Voucher
Where a recipient is liable to pay taxes under reverse charge, he should also issue payment voucher to the supplier at the time of making payment.
3. Mentioning RCM on Tax Invoices
Under Reverse Charge Mechanism, every tax invoice should mention whether the tax is payable on a reverse charge basis. Also, the same must be mentioned on receipt vouchers and refund vouchers.
4. Maintaining Proper Records
Recipients must maintain accurate and detailed records of all supplies liable to reverse charge. This includes ensuring that all relevant entries are updated in the books of accounts.
5. Payment of RCM through Electronic Cash Ledger
Reverse charge Liability must be paid from the Electronic Cash Ledger. It cannot be offset against ITC. However, once the tax is paid, the recipient can claim ITC for the same amount in the next tax period.
6. Furnishing Invoice-Level Information in GSTR-1
It is necessary to report the supplies subject to reverse charge at an invoice level in Table 4B of the GSTR-1 form.
Goods and Services Covered Under RCM
On the recommendation of GST Council, Government notifies goods and services for applicability of Reverse Charge Mechanism. RCM provisions under such scenario are governed by section 9 (3) of the CGST/SGST (UTGST) Act and section 5 (3) of the IGST Act.
| 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 or silk worm cocoons for supply of silk yarn | Any registered person |
| 4A | Raw cotton | Agriculturist | Any registered person |
| 5 | Supply of lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent |
| 6 | 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 |
| 7 | Priority Sector Lending Certificate | Any registered person | Any registered person |
List of Services covered under RCM
| S. No. | Category of supply of services | Supplier of service | Recipient of service |
| 1 | Services provided or agreed to be provided by a goods transport agency (GTA) in respect of transportation of goods by road | Goods Transport Agency (GTA) | (a) any factory registered under or governed by the Factories Act, 1948; (b)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; (c) any co-operative society established by or under any law; (d)any person registered under CGST/SGST/UTGST Act; (e) any body corporate established, by or under any law; or (f) any partnership firm whether registered or not under any law including association of persons. (g) Casual taxable person |
| 2 | Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly | An individual advocate or firm of advocates | Any business entity. |
| 3 | Services provided or agreed to be provided by an arbitral tribunal | An arbitral tribunal. | Any business entity located in the taxable territory. |
| 4 | Sponsorship services | Any person | Any body corporate or partnership firm located in the taxable territory |
| 5 | 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 as specified below- (i) services by the Department of Posts; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers | Central Government, state government, Union territory or local authority. | Any business entity located in the taxable territory. |
| 5A | Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017 (12 of 2017). | Central Government, State Government, Union territory or local authority. | Any person registered under the CGST Act, 2017. |
| 5AA | Renting of a residential dwelling to a registered person | Any persons | Any GST registered person |
| 5B | Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter. | Any person | Promoter |
| 5C | Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount or periodic rent for construction of a project by a promoter. | Any person | Promoter |
| 6 | Services supplied 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 | The company or a body corporate located in the taxable territory |
| 7 | Services supplied by an insurance agent to any person carrying on insurance business | An insurance agent | Any person carrying on insurance business, located in the taxable territory |
| 8 | Services supplied by a recovery agent to a banking company/ financial institution or an NBFC | A recovery agent | Recipient located in the taxable territory. |
| 9 | Supply of services by a music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered u/s 13(1)(a) of the Copyright Act, 1957 relating to original dramatic, musical or artistic works | Music composer, photographer, artist, or the like | Music company, producer, or the like, located in the taxable territory |
| 9A | Supply of services by an author 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 works to a publisher. | Author | Publisher located in the taxable territory Provided that nothing contained in this entry shall apply where, (1) the author is a registered person under GST and filed a declaration, that he exercises the option to pay tax under forward charge and he shall not withdraw the option within 1 year from the date of exercising option; (2) the author makes a declaration to issue the invoice to the publisher in Form GST Inv-I. |
| 10 | Supply of services by the members of Overseeing Committee to RBI | Members of the Overseeing Committee constituted by the RBI | RBI |
| 11 | Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or LLP to bank or NBFC | Individual DSAs other than a body corporate, partnership or LLP | A banking company or a NBFC, located in the taxable territory. |
| 12 | Services provided by business facilitator (BF) to a banking company. | Business facilitator (BF). | A banking company, located in the taxable territory. |
| 13 | Services provided by an agent of business correspondent (BC) to business correspondent (BC). | An agent of BC | A BC located in the taxable territory. |
| 14 | Security services (services provided by way of supply of security personnel) provided to a registered person Provided that nothing contained in this entry shall apply to, – (1) The below persons registered only for the purpose of making TDS u/s 51 but not for supply of goods or services (i) a Department or Establishment of the Central Government or State Government or Union territory; (ii) local authority; (iii) Governmental agencies. (2) person registered under Composition Scheme u/s 10. | Any person other than a body corporate. | A registered person, located in the taxable territory. |
| 15 | Services provided by way of renting of a motor vehicle provided to a body corporate. | Any person other than a body corporate, who opts to pay tax at the rate of 5% and he is eligible to claim ITC | Any body corporate located in the taxable territory |
| 16 | Services of lending of securities under Securities Lending Scheme, 1997 of SEBI | 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 | Borrower i.e. a person who borrows the securities under the Scheme |
The list of services under IGST are same as that of CGST Act. In addition following services are notified under IGST act
| 1 | Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient | Any person located in a non-taxable territory | Any person located in the taxable territory other than the non-taxable online recipient |
Proposed Amendments Under Reverse Charge Mechanism
The GST Council brings several initiatives in its council meetings held from time to time. Also, it issues clarifications on existing provisions and introduces new goods and services under the Reverse Charge Mechanism (RCM). Let’s explore the key updates:
1. Reverse Charge on Renting of Commercial Property (Proposed in 54th GST Council Meeting held on 9th September, 2024)
Previously, unregistered persons often did not collect GST on rented commercial properties, causing significant revenue loss. Now, if a registered person rents commercial property from an unregistered person, the registered recipient must pay GST under the reverse charge mechanism.
2. Treatment of Ancillary/Intermediate Services by Goods Transport Agencies (GTA) (Clarified in 54th GST Council Meeting held on 9th September, 2024)
The GST Council clarified the tax treatment of ancillary GTA services such as loading, unloading, packing, unpacking, and temporary warehousing provided during goods transportation. If the GTA issues a consignment note for these services, they become a part of a composite supply. These will attract GST at the same rate as the transportation service and fall under RCM.
3. Supply of Metal Scrap by Unregistered Dealers Property (Proposed in 54th GST Council Meeting held on 9th September, 2024)
Now a registered buyer will pay GST under reverse charge, if he purchases metal scrap from an unregistered dealer. Additionally, a 2% TDS will apply. Now metal dealers will require additional registration as TDS deductors. Until now, TDS was limited to the Government, PSUs, and local bodies. Now it extends to B2B metal scrap transactions too.
4. Introduction of a Reverse Charge Mechanism Ledger
In the recent meeting, the GST Council introduced the Reverse Charge Mechanism (RCM) Ledger. Taxpayers will have the chance to declare their opening balance for this ledger by 31st October, 2024.
Conclusion
Compliance with the Reverse Charge Mechanism (RCM) can be a hassle for registered buyers. In addition to managing their own supplies, they must also handle RCM compliance, which effectively doubles the compliance burden. Therefore, adopting Automated software solutions by businesses can streamline this process by generating payment vouchers and creating self-invoices. Additionally, these tools aid in the accurate calculation of tax liability, timely filing of GST returns, and proper reconciliation. Furthermore, updates like the RCM liability ledger can also seamlessly integrate into businesses with the help of such softwares.
