The taxes on supply of Goods and Services is often paid by the supplier of the products or services. The chargeability is reversed under the Reverse Charge Mechanism (RCM), making the recipient of the products or services responsible for paying the tax.

The purpose of shifting the burden of GST payments to the recipient is to tax the import of services, exempt some groups of suppliers, and expand the taxation of other unorganized sectors (since the supplier is based outside India).

It may be noted that the underlying principle of an indirect tax is that burden of tax has to be ultimately passed on to the recipient.

In most cases, it is the supplier's responsibility to pay the tax and comply with the law (i.e., register for GST, pay the tax to the government, file returns, etc.), however he may be able to recover it from the recipient. However, under the reverse charge method, the recipient is now legally responsible for depositing GST and fulfilling compliance obligations, such as registering for GST, depositing the tax with the government, and filing returns, etc on behalf of the Supplier

Supply of Goods where the Recipient is responsible for paying GST

The recipients of the goods must pay the entire GST on a reverse charge basis for the following categories of goods supply:

• Goods like cashewnuts [not shelled/peeled]
• Bidi wrapper leaves
• Tobacco leaves
• Raw cotton (when supplied by an agriculturist to any registered person)
• Supply of lottery (when supplied by State Government, Union Territory or any local authority to lottery distributor or selling agent)
• Silk yarn (when supplied by manufacturer of silk yarn to any registered person)
• Used vehicles
• Seized and confiscated goods
• Old and used goods
• Waste and scrap (when supplied by Central Government, State Government, Union Territory or any local authority to any registered person) etc. are taxable under reverse charge.

Supply of Services where tax is payable by the Recipient

For the following types of service supply, the recipients of the services are required to pay the entire tax on a reverse charge basis:

1. Supply of services by a Goods Transport Agency (GTA) who has not paid integrated tax at the rate of 12% in respect of transportation of goods by road to

(a) any factory registered under or governed by the Factories Act, 1948; or

(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; or

(c) any co-operative society established by or under any law; or

(d) any person registered under the CGST Act or the IGST Act or the SGST Act or the UTGST 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.

2. Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly to any business entity located in the taxable territory.

“Legal service” means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.

3. Services supplied by an arbitral tribunal to a business entity.

4. Services provided by any person by way of sponsorship to any body corporate or partnership firm.

5. Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, -

• Renting of immovable property,
• 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.

6. Services supplied by Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under CGST Act, 2017

7. Services supplied by any person by way of transfer of development rights (TDR) or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter.

8. Long term lease of land (30 years or more) by any person against consideration in form of upfront amount (called as premium, salami, cost, price, development charges or by any other name) and/or periodic rent for construction of a project by a promoter.

9. Services supplied by a director of a company/ body corporate to the said company/ body corporate.

10. Services supplied by an insurance agent to any person carrying on insurance business.

11. Services supplied by a recovery agent to a banking company or a financial institution or a non- banking financial company.

12. 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 section 13(1)(a) of the Copyright Act, 1957 relating to original dramatic, musical or artistic works to a music company, producer or the like.

13. 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.

14. Supply of services by the members of Overseeing Committee to Reserve Bank of India (RBI).

15. Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership (LLP) firm to bank or non-banking financial company (NBFCs).

16. Services provided by business facilitator to a banking company.

17. Services provided by an agent of business correspondent to business correspondent.

18. Security services (services provided by way of supply of security personnel) provided to a registered person.

19. Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate.

20. Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India.

Time of Supply Under RCM

A. Time of Supply in case of Goods

In case of reverse charge, the time of supply for goods shall be the earliest of the following dates:

• The date of receipt of goods
• The date of payment
• The date immediately after 30 days from the date of issue of an invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

For Example,

• Date of receipt of goods 15th April 2022
• Date of invoice 1st May 2022
• Date of entry in books of receiver 18th April 2022

The time of supply of goods, in this case, will be 15th April 2022

B. Time of supply in case of Services

In case of reverse charge, the time of supply shall be the earliest of the following dates:

• The date of payment
• 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, the time of supply shall be the date of entry in the books of account of the recipient.

For Example,

• Date of payment 15th July 2022
• Date immediately after 60 days from the date of issue of the invoice (Suppose the date of the invoice is 15th May 2022, then 60 days from this date will be 14th July 2022)
• Date of entry in books of receiver 16th July 2022

The time of supply of service, in this case, will be 14th July 2022.

Rules for Registration under RCM

According to Section 24 of the CGST Act of 2017, anyone subject to the reverse charge mechanism and required to pay GST must compulsorily register for GST. GST Registration threshold limits of Rs.20 lakh or Rs.40 lakh, as the case may be, will not apply to them.

Under RCM, Who should pay GST?

GST should be paid by the recipient of the goods or services under RCM. However, in order to comply with GST regulations,  the person supplying the goods must mention in the tax invoice whether tax is payable under RCM.

When paying GST under RCM, the following things need to be considered:

• The recipient of goods or services can avail of the ITC on the tax amount paid under RCM only if such goods or services are used for business or furtherance of business.
• A composition dealer should pay tax at the normal rates and not the composition rates while discharging liability under RCM. Also, they are ineligible to claim any input tax credit of tax paid.
• GST compensation cess can apply to the tax payable or paid under the RCM.

What is self-invoicing?

When purchasing products or services from an unregistered supplier, which is classified a reverse charge, self-invoicing is required. This is due to the fact that your supplier is unable to send you a GST-compliant invoice, making you responsible for paying taxes on their behalf. As a result, self-invoicing is required in this scenario.

Exemptions to RCM

There are a few cases that are exempted from Reverse Charge under GST -

• Exempted goods or services- If the goods or services are exempted from GST then the Reverse Charge would not be applicable.
• If the aggregate value of the goods & services does not exceed the amount of Rs.5000 a day, then such transactions will be exempted from the provisions of reverse charges.

Frequently Asked Questions

Que 1 - What happens if the recipient of goods or services is not a registered dealer but is still compelled to pay tax under reverse charge?

Ans - The threshold of Rs. 20 lakh or Rs. 40 lakh, as the case may be, does not apply to any taxpayers who are compelled to pay tax under the reverse charge; instead, they must all register for GST.

Que 2 - Who will issue RCM invoice?

Ans - The recipient of the goods, services & supplies will issue self-made invoices for RCM transactions, irrespective of the supplier being an unregistered person.

If the supply is liable to RCM, then the recipient will have to issue the invoices for himself & declare them in their GSTR-1 & GSTR-3B.

Que 3 - What if an Input Service Distributor (ISD) receives supplies liable to reverse charge?

Ans - An ISD cannot make purchases liable to reverse charge. If the ISD wants to procure such supplies and take the reverse charge paid as ITC, the ISD should register as a regular taxpayer.

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