The Reverse Charge Mechanism is a mechanism which was introduced to cater to the non-taxable supplies in the GST regime.
It is applicable on account for two reasons: firstly, it provides a mechanism for suppliers of goods and services who do not have an obligation to register for tax purposes under the GST law;
secondly, it may be used by certain classes of businesses who have been given exemptions from registration as well as taxable status under the GST law and are required by that very same law to charge tax on their transactions otherwise they would not qualify for an exemption.
What is RCM or Reverse Charge Mechanism?
Reverse Charge Mechanism is a mechanism to collect tax on goods and services.
It is applicable when there is a transaction between two parties, one of which is an unregistered person and the other one is a registered person.
RCM is applicable when supplying goods or services from an unregistered person to a registered person with an Input Tax Credit (ITC).
In such situations, GST will be levied on a reverse charge basis by deducting input tax credit from output tax liability.
Applicability of RCM
The reverse charge mechanism applies to supplies of services below Rs. 20 lakhs in value and is made by an unregistered person.
If you're a taxpayer, you can use the normal credit mechanism for your purchases from suppliers (i.e., those who don't have GST registration).
Suppliers who are not registered under GST but make supplies above Rs 20 lakhs will also be subject to reverse charges on their input services and capital goods used for making such supplies.
This means that if your business is a manufacturer or trader, then even though your revenue may exceed Rs 20 lakhs per year but only some part of it comes from taxable supplies like manufacturing raw materials into finished goods;
other parts include non-taxable services like maintenance work etc., then only those parts qualify as taxable under reverse charge rules while rest remain exempt from this levy.*
RCM: Time of Supply
The time of supply is when the goods or services are delivered. The supplier must issue a tax invoice and account for GST.
The buyer is required to pay GST and claim ITC, while the seller must also issue a tax invoice and account for GST.
Reverse charge: Time of supply for Goods
The taxable person shall pay tax on the supply of goods and/or services if the following conditions are satisfied:
- The purchaser is registered under GST and not liable to pay tax on a reverse charge basis.
- The supplier has been notified by way of a written communication from the purchaser that he has been granted exemption from payment of taxes in respect of supplies made to him under the reverse charge mechanism. The notification can be given by an authorised officer or any other person authorised by Central Government or State Government through their orders published in the official gazette (or) website (or) any other mode as may be specified by them from time-to-time
Reverse Charge: Time of supply for Services
The time of supply of service has been defined in section 6(2) of the CGST Act, 2017.
For example, if an architect provided service to a client on January 1st 2018, then the supply will be considered as having taken place on December 31st 2017.
This means that the architect has to pay tax on his income earned during this period before January 1st 2018.
The reverse charge mechanism will also apply for services provided through repairing or maintenance, where goods are supplied along with such services (such as repairing/servicing/maintaining machinery).
Who is required to register?
- Those who are liable to pay GST on a reverse charge basis.
- Those who are not liable to pay GST but have received supplies from unregistered persons in India or outside India and they supply these goods/services in India (except if they are a local authority).
Who can register?
- Any person who the government of India has given an authorisation number. This includes:
- Local authorities (i) Central Government; (ii) State Government; (iii) Union Territory Administration/Local Authorities;
- Government agencies engaged in defence production, atomic energy generation or research, space exploration programmes etc.;
- Banks and financial institutions whose turnover exceeds Rs 1 crore per annum in case of banks and Rs 10 lakhs per annum in case of other financial institutions
Who Should Pay GST Under RCM?
First and foremost, you must be registered under GST. If you're not, there's no question of paying a reverse charge.
If your business is not liable to pay tax but has been registered under GST, then RCM does not apply to its sales transactions.
This means that if Company XYZ Ltd., which is registered under GST but doesn't have any monthly turnover threshold (MUT) or annual turnover threshold (AUT), sells goods worth Rs 10 lakhs during April 2018-March 2019,
then it will neither be required nor eligible for RCM because it doesn't have any liability towards Central Excise/Service Tax/VAT etc., which would make them eligible for RCM.
If Company ABC Pvt Ltd., which is also registered under GST but has an AUT of less than Rs 20 lakhs per annum in the whole year 2018-19,
then again, this company will only come under Reverse Charge Mechanism.
However, there are some grey areas here: What if Company XYZ Ltd., mentioned above, sells goods worth Rs 10 lakhs from April 2018-March 2019?
That means it earned gross receipts upto Rs 20 lakhs over 12 months ending March 31st 2020; technically speaking, this should mean that we can now apply RCM on them since they've crossed the MUT limit!
RCM: Real Estate Sector
The following are the real estate sectors which are covered under RCM:
- Construction of buildings or civil works for sale to a buyer where the builder acquires the land from any state or central government authority, not from any person.
- Sale of immovable property by way of lease, sub-lease, assignment etc., if it is used for residential purposes or commercial establishment; or used as office space/shops/showrooms etc.; or used for industrial purposes including warehousing activities; or land with ancillary structures like building material storage yard etc., provided these are accessory to such immovable property being sold as part of a composite transaction (i.e., sale).
Renting of motor vehicles
Rental of motor vehicles is a taxable supply, and the supplier of the vehicle is liable to pay GST.
The person renting out the motor vehicle must register as an interstate dealer under the reverse charge mechanism, i.e., RCM.
Reverse charge on specified goods
The reverse charge mechanism applies to:
- All goods, except those that are exempt from the normal GST taxes (e.g., food items) and those which fall under the ambit of a special tax regime like luxury cars
- Any person is liable to pay tax on any supply of services or sale of goods in India. This includes both individuals as well as companies registered under GST. In the case of an individual who does not have an invoice for his purchases, he must obtain an invoice from his supplier before making payment.
Reverse charge on specified services
Reverse charge is applicable on services provided to recipients in the course of interstate trade or commerce.
The service provider must collect tax as per the reverse charge mechanism and deposit it with the government. The following are some examples:
- Service of transportation of goods by road, rail, air or waterway;
- Services relating to construction or erection work for building construction projects;
- Services relating to project implementation, including project management service etc.;
- Services relating to providing facilities like power supply, water supply and sewerage disposal system for residential complexes where more than 50% of units are sold/ let out on rent through agents/brokers etc., who are not registered under GST but have been given authorisation by state governments (e-GST).
Who is Liable to Pay GST Under RCM?
Only those who are registered under GST should pay GST under RCM. You cannot opt for the reverse charge mechanism if you are not registered under GST.
Even if you are registered under the Goods and Services Tax (GST) but not liable to pay tax on your business transactions,
then also you will have to follow this rule as per Section 54(2)(b), which states that every person who makes a supply of taxable goods or services has an obligation of paying tax on reverse charge basis if he makes any supplies without any invoice or issue invoice with incorrect details of goods/services supplied by him or by any other person on his behalf.
Suppose someone is liable to collect tax from his customers and pay it over to the Government treasury department at regular intervals through a monthly filing process along with full compliance requirements such as maintaining proper books of accounts etc.
In that case, he can apply for registration under the reverse charge mechanism so that he doesn't need to worry about collecting invoice details while making sales transactions or issuing invoices containing incorrect information regarding the quantity he supplied.
RCM & Input Tax Credit (ITC)
Input Tax Credit (ITC) is a mechanism that allows you to claim the taxes paid on your purchases as an input tax credit.
This means that the tax you paid on an item can be used to offset the GST liability of another product or service.
Under RCM, if you are a registered person, you can claim ITC only for those goods you have used in your business.
However, if a dealer has no taxable turnover (i.e., only zero-rated sales), he cannot claim any ITC!
Liability arises to pay GST under RCM
The person in whose name the invoice is issued is liable to pay GST. If the invoice is issued in his/her name, but he/she does not pay it, and it gets cleared as an unpaid bill against him/her,
then he/she shall be treated as a purchaser of goods or services and shall be required to deduct tax at source while making payment.
What are the types of liability?
A registered person can be held liable under one or more of these three heads:
(i) Input Service Distributor (ISD)
(ii) Reverse Charge Mechanism - Taxable Supplier
(iii) Output Service Distributor (OSD).
Compliances under Reverse Charge Mechanism
- Keep records of all invoices issued to customers, suppliers and associates.
- Keep records of all purchases made from other businesses.
- Maintain a record of GST paid on such purchases and the invoice number(s) of such purchase invoices.
- Maintain a record of GST received on sales made to customers, suppliers and associates (reverse charge).
- If any inward or outward supplies have been received/made during the month, keep their details also in this column (e.g., if an inward supply has been received from an unregistered person, then enter his name & PAN along with details like value etc.).
What is Self Invoicing?
Self-invoicing is a mechanism under which the recipient of goods or services can issue an invoice to the supplier.
Under this mechanism, every registered person can issue an invoice against his own purchases, and only those who have opted for self-invoicing will be able to do so.
GST is one of the most important reforms in India's economic history. With a single tax replacing multiple taxes and several compliance procedures for each state,
GST has simplified the taxation process for businesses. While the reverse charge mechanism may seem like an unusual way to collect taxes from consumers,
it has been implemented to streamline tax payments by suppliers who have been unable to comply with other requirements under GST.
FAQs Related to Reverse Charge Mechanism under GST
1. Who is liable to pay GST under Reverse Charge Mechanism?
The supplier who has not paid tax on his inputs and receives an invoice from his client is liable to pay the GST in reverse charge mode. If you are a service provider, you will have to pay tax on your input goods or services at 18% or 28%. You can claim Input Credit on your output if they are used directly or indirectly in providing goods/services. You will also need to maintain records such as invoices received from vendors and bills generated through purchases made so that they can verify their claim on input credit later when required by authorities.
2. What is the time period for supply under RCM?
It depends on whether it is a business-to-consumer (B2C) transaction or business-to-business (B2B) transaction:
For B2C transactions: Date of invoice issued by a supplier
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