Reverse charge mechanism or RCM under GST

Welcome. In this post, we will be discussing Reverse Charge Mechanism or RCM.  We will be discussing the following topics:

What is Reverse Charge Mechanism? – An introduction

Normally under Goods and Services Tax commonly known as GST, a supplier of goods or services will collect the taxes from the recipient of such goods or services and pay those taxes to the Government. This is called Forward Charge. But under Reverse Charge Mechanism (commonly known as RCM) the recipient himself liable to pay taxes to the government.

Reverse Charge Mechanism RCM 1 - Forward Charge

Definition of Reverse charge as per GST Law:

As per Section 2(98) of Central Goods and Services Tax Act, 2017 (hereinafter referred as CGST Act, 2017), “Reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9.

Why use Reverse Charge Mechanism?

India is a country where there are organized as well as unorganized sectors. The Government faces huge difficulty in collection of taxes from these unorganized sectors, which requires continuous monitoring for better tax compliance. Hence, the Government has introduced Reverse Charge Mechanism.

Categories of Taxpayer under GST Law based on Levy

There are two cases of Reverse charge under GST law:

Reverse Charge Mechanism RCM 3 - Categories of Taxpayers

  • Notified Categories of supply of goods or services under section 9(3) of CGST Act, 2017
  • Supply of Taxable goods or services by an unregistered person to a registered person. Registered person will be liable to pay tax as specified in Section 9(4) of CGST Act, 2017

I. Notified Categories of supply of goods or services under section 9(3) of CGST Act, 2017

Sl. No Description of service
1 Import of Service
2 Goods transport agency services, who has not paid GST rate of 12%
3 Services by Advocate (legal services) to any business entity
4 Services supplied by an arbitral tribunal to a business entity
5 Services provided by way of sponsorship to any body corporate or partnership
6 Services provided by Government (Other than renting, speed post, express parcel post, life insurance, and agency services) to any business entity
7 Services provided by Government by way of Renting of Immovable property to any person registered under GST
8 Services supplied by a director of a company or a body corporate to the said company or the body corporate
9 Services supplied by an insurance agent to any person carrying on insurance business
10 Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company
11 Transportation of goods from outside India to India by a person located in non-taxable territory by Vessel

Illustrations:

  1. Import of Service:

Consider a company Inertia Ltd. During their regular course of business, they take help from a consultant who stays outside India.  They pay $1000 to the consultant every month.

Since Inertia Ltd is procuring services from outside India, such service can be referred as Import of service. Hence, Inertia Ltd has to remit GST by itself to the Government on a reverse charge basis.

  1. Goods Transport Agency:

A company, Amazing Ltd has hired GTA WeDeliver for transportation of materials from its factory to their customers. Let us consider 3 separate cases and see if and how reverse charge will be applicable.

  • The GTA has charged 12% GST along with its charges – Since WeDeliver has charged 12% GST in its invoice, there is no liability on Amazing Ltd for payment of GST on a reverse charge basis.
  • GTA has not charged GST in its invoice – Since WeDeliver has not charged GST in its invoice, Amazing Ltd has to remit the GST on such GTA charges on a reverse charge basis.
  • GTA has charged 5% GST along with its charges – Liability to pay tax is on the receiver of GTA service when GTA is not charging GST @ 12%. So, Amazing Ltd has to remit GST on such GTA charges on a reverse charge basis, even though WeDeliver has charged GST @ 5%.
  1. Advocate – Legal services:

A company Indian Infotech has procured the services of MSS and Co., an advocate firm with respect to filling a writ petition in the High court.

The advocate service is a notified service for remitting taxes by the recipient under reverse charge mechanism. Since Indian Infotech has taken legal service from a firm of advocates, the company has to remit the taxes to the government on such service on a reverse charge basis.

II. Supply of Taxable goods or services by an unregistered person to a registered person

Reverse Charge Mechanism RCM 4 - Supply by URP to RP

  • In respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by the recipient on a reverse charge basis.
  • For all procurement of goods or services or both from unregistered dealers (a person who is not registered under GST Act), there is a levy of GST on Reverse Charge Basis.
  • Important points to remember while paying tax under RCM u/s 9(4):
    • The transaction should be supply
    • Such supply should be taxable
    • Supplier is unregistered
    • You have to pay tax on the transaction value
    • The rate of tax depends on the supply of goods or services
  • However, an exemption has been given for paying taxes by a registered person for procurement from an unregistered person from 13th October 2017 to 30th Sept 2018.

Time of Supply for Reverse Charge – When the tax should be paid to the government?

Time of supply is useful in determining when the liability will arise for payment of taxes to the government. So in case of Reverse Charge, time of supply will be the earliest of following:

Reverse Charge Mechanism RCM 5 - Time of Supply

Illustration:

Our old company, Amazing Ltd has hired GTA WeDeliver & Co for transportation of materials from factory to its customer. GTA has not charged GST in its invoice. However, GTA has charged Rs 1 Lakh for it services and invoice is dated 1st January 2018. The tax rate is at 5%. Let us consider 2 cases:

  • Date of payment to WeDeliver & Co is 10th February 2018

Goods Transport Agency being a service, time of supply in case of reverse charge i.e., the period to which GST has to be remitted is the date of payment to the vendor or 61st day from the date of Invoice, whichever occurs early.

Therefore, in the present case:

  • Date of payment – 10th Feb 2018 or
  • 61st Day from the date of Invoice – 2nd March 2018

10th Feb 2018 occurs earlier.

Since, time of supply is on 10th Feb 2018, GST liability on RCM has to be remitted by 20th March 2018.

  • Date of payment to WeDeliver & Co is 25th March 2018

In this case,

  • Date of payment – 25th March 2018 or
  • 61st Day from the date of Invoice – 2nd March 2018

2nd March 2018 occurs first.

Since, time of supply is on 2nd March 2018, remittance RCM has to be before 20th April 2018.

What taxes should be paid? IGST or CGST and SGST?

Payment of Tax on reverse charge follows this principle:

When Location of Supplier & Place of Supply

  • Is in same State then Intra-State Supply – CGST + SGST
  • Is in different State then Inter-State Supply – IGST

This brings us to the end of this post. If you have any questions, drop them in the comment section below.

This blog was written by:
Indirect Tax Team
Shekar & Yathish, Chartered Accountants, Bangalore.
Queries can be posted at – info@ca-sny.com

P.S. We will be updating more posts on RCM, ITC and all things GST. Follow us on our Facebook page to get immediate updates when we publish.

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