What is Reverse Charge Mechanism in GST?
In general, the Supplier of service/goods pays GST to the government on the supply made by him. This is called forward charge. In case of Reverse Charge Mechanism (“RCM”), the receiver of service/goods pays the GST amount directly to the government for the goods/ services received by him, instead of paying it to the supplier and then the supplier depositing. Such amount of tax deposited under reverse charge by receiver is eligible for input credit in the month subsequent to the month of payment of tax.
The liability to pay tax lies on the receiver in case of reverse charge. Even if the supplier of the service under reverse charge pays GST to the government, the liability of the receiver is not met. Such supplier who paid GST on RCM, can benefit out of it only by way of applying for refund and he cannot claim input on such tax paid. The receiver’s liability will still be considered as not discharged.
Unlike Service tax, Reverse charge Mechanism does not have separate provisions in the GST Act. It is declared as a notified supply under Notification number 4/2017 – Central Tax rate in case of goods and Notification number 13/2017 – Central Tax rate in case of services, as amended from time to time.
Import of Service:
The import of services even for personal consumption would qualify as supply and therefore would be liable to tax. This would not be subject to the threshold limit for registration, as tax would be payable in case of import of services on reverse charge basis, requiring the importer of service to compulsorily obtain registration. However, the GST law has ensured that persons who are not engaged in any business activities will not be required to obtain registration and pay tax under reverse charge mechanism, and in turn, requires the supplier of services located outside India, to obtain registration for the OIDAR (Online information and database access and retrieval) services only.
Example: Mr. A is doing business and imports service for personal use, reverse charge mechanism will be applicable. Whereas Mr. B is a salaried individual and does no other business and imports service for personal use, then reverse charge mechanism is not applicable.
Import of Goods:
Customs act will govern the taxes on import of goods and accordingly IGST on import of goods will be paid by the importer.
Key Points to be noted:
- No partial reverse charge will be applicable under GST. 100% tax will be paid by the recipient if reverse charge mechanism applies.
- All taxpayers required to pay tax under reverse charge have to mandatorily obtain registration and the threshold exemption is not applicable on them.
- Payment of taxes under reverse charge cannot be made with utilisation of input tax credit and has to be made in cash
- The recipient can take the credit of tax paid on inward supplies liable to reverse charge once the recipient makes payment of tax in cash.
- When the supplier of the services covered under RCM is unregistered, the receiver of service is still liable to pay GST to the government.
The goods and services that are covered under reverse charge mechanism is listed below:
Goods covered under RCM in Notification number 4/2017, 36/2017 and 11/2018 – Central Tax rate
|Tariff item, sub-heading, heading or Chapter||Description of supply of Goods||Supplier of goods||Recipient of supply|
|0801||Cashew nuts, not shelled or peeled||Agriculturist||Any registered person|
|1404 90 10||Bidi wrapper leaves (tendu)||Agriculturist||Any registered person|
|2401||Tobacco leaves||Agriculturist||Any registered person|
|5004 to 5006||Silk yarn||Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn||Any registered person|
|Supply of lottery||State Government, Union Territory or any local authority||Lottery distributor or selling agent. Explanation.- For the purposes of this entry, lottery distributor or selling agent has the same meaning as assigned to it in clause (c) of Rule 2 of the Lotteries (Regulation) Rules, 2010, made under theprovisions of sub section 1 of section 11 of the Lotteries (Regulations) Act, 1998 (17 of 1998).|
|Any Chapter||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|
|Any Chapter||Priority Sector Lending Certificate||Any registered person||Any registered person|
Services covered under RCM in Notification number 10/2017 Integrated tax rate and 13/2017, 33/2017, 29/2018 and 22/2019 – Central Tax rate
Items coloured in yellow are there in both Central tax rate and Integrated tax rate.
Items in bold are recent amendments applicable from 01 October 2019.
|Category of Supplier of Services||Supplier of Service||Recipient of Service|
|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 non taxable online recipient.|
|Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road to- (a) any factory registered under or governed by the Factories Act, 1948(63 of 1948);or (b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or (c) any co-operative society established by or under any law; or (d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or (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; or (g) any casual taxable person||Goods Transport Agency (GTA)||(a) Any factory registered under or governed by the Factories Act, 1948(63 of 1948); or (b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or (c) any co-operative society established by or under any law; or (d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or theState Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or (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; or (g) any casual taxable person; located in the taxable territory|
|Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity.||An individual advocate including a senior advocate or firm of advocates.||Any business entity located in the taxable territory.|
|Services supplied by an arbitral tribunal to a business entity.||An arbitral tribunal.||Any business entity located in the taxable territory.|
|Services provided by way of sponsorship to any body corporate or partnership firm.||Any person||Any body corporate or partnership firm located in the taxable territory.|
|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- (i) 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; (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.|
|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.|
|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|
|Services supplied by a recovery agent to a banking company or a financial institution or a nonbanking financial company.||A recovery agent||A banking company or a financial institution or a non-banking financial company, located in the taxable territory.|
|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.||A person located in nontaxable territory||Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory.|
|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 under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original dramatic, musical or artistic works to a music company, producer or the like.||Music composer, photographer, artist, or the like||Music company, producer or the like, located in the taxable territory|
|Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 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, –(i) the author has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017), and filed a declaration, in the form at Annexure I, within the time limit prescribed therein, with the jurisdictional CGST or SGST commissioner, as the case may be, that he exercises the option to pay central tax on the service specified in column (2), under forward charge in accordance with Section 9 (1) of the Central Goods and Service Tax Act, 2017 under forward charge, and to comply with all the provisions of Central Goods and Service Tax Act, 2017 (12 of 2017) as they apply to a person liable for paying the tax in relation to the supply of any goods or services or both and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option;(ii) the author makes a declaration, as prescribed in Annexure II on the invoice issued by him in Form GST Inv-I to the publisher|
|Supply of services by the members of Overseeing Committee to Reserve Bank of India||Members of Overseeing Committee constituted by the Reserve Bank of India||Reserve Bank of India|
|Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs).||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|
|Services provided by business facilitator (BF) to a banking company||Business facilitator (BF)||A banking company, located in the taxable territory|
|Services provided by an agent of business correspondent (BC) to business correspondent (BC).||An agent of business correspondent (BC)||A business correspondent, located in the taxable territory|
|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, – (i)(a) a Department or Establishment of the Central Government or State Government or Union territory; or (b) local authority; or (c) Governmental agencies; which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services; or (ii) a registered person paying tax under section 10 of the said Act.
|Any person other than a body corporate||A registered person, located in the taxable territory.|
|Services provided by way of renting of a motor vehicle provided to a body corporate.||Any person other than a body corporate, paying central tax at the rate of 2.5% on renting of motor vehicles with input tax credit only of input service in the same line of business||Any body corporate located in the taxable territory.|
|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.”.|
The recent amendment in the reverse charge mechanism that will be applicable to most of the corporates include services received by a body corporate from a rent a cab service provider who are not corporates but charges GST at the rate of 5% and takes ITC only on similar line of business. This amendment is coming into effect from 01 October 2019.
Refer Notification no.22/2019, Central Tax (Rate) for amendments with effect from 01 October 2019.
reference: Visit https://www.incometax.gov.in/
For more blogs and recent updates, visit https://arunbalaji.co.in/knowledge-center/