Reverse Charge mechanism in GST – list, rate, accounting entries in India

Overview

Goods & Services Tax, is a well-known taxation system that rolled out in July 2017 and is well-known among businesses and individual dealers/suppliers who have registered themselves under the system to avail of its benefits and further follow compliances. However, there are certain terms under GST that are difficult to understand therefore, it becomes important to comprehend to find your way around them. One of such important concepts is the Reverse Charge Mechanism (RCM) under GST.

Normally, the GST tax payments are done on a forward charge basis, in which the business or supplier collects taxes from the purchaser/buyer and is under the obligation to deposit such taxes to the Government. However, in the case of a reverse charge mechanism, it is the recipient/purchaser of goods or services who will be under an obligation to deposit taxes to the Government on behalf of the supplier of goods/services instead of the Business/Supplier of Goods/ Services after taking the benefit of the input tax credit). The concept of the Reverse Charge Mechanism has been derived from the VAT taxation regime.

Even in cases where the individual supplier is registered under the GST mechanism but still, the goods and services come under Reverse Charge Mechanism, he shall not be able to avail of the ITC as it is the purchaser/buyer who is paying taxes. For instance, in the case of the Reverse Charge Mechanism of importer of goods taxes are required to be paid by the Importer to the Government in addition to the customs duties.

It is mandatory and not optional for a person to get registered under GST who is liable to pay taxes on a reverse charge basis. He may also claim and avail ITC for the taxes so paid but such goods/services must be used in the furtherance of the business. Before moving forward, let’s take a closer look at the meaning & definition of RCM as provided under GST Act 2017. Please read further to find out more.

Meaning & Definition of RCM

Thus, Reverse Charge Mechanism (RCM) under GST is a tax-payment mechanism under which the role of the Supplier and the Buyer of Goods/services concerning tax collection and other compliances changes reversely. As defined under 2(98) of CGST Act 2017, “reverse charge” means the obligation to make payment of tax by the recipient of goods/services or both instead of the liability to pay tax by the recipient of the supply of goods or services or both instead of the supplier of such goods or services or both in a manner as defined under 9(3) &9(4) of the CGST Act and 5(3) or 5(4) of the Integrated Goods and Services Tax Act.

Further, Section 9(4) of the CGST Act states “If a recipient registered under GST makes purchases from an unregistered supplier, then it becomes obligatory on the recipient to complete the liabilities instead of the supplier under Reverse Charge Mechanism. Therefore, under the reverse charge, the chargeability of GST will be reversed. The Reverse Charge Mechanism is primarily applicable in the case of –

• Goods Imported from outside the country by the importer;
• A registered person makes purchases from the unregistered supplier;
• Supply of goods and services expressly under RCM provisions.

Thus, in such cases, the receiver needs to pay GST for which he can claim ITC from the GST Department. For claiming ITC the supplier must issue a payment voucher to the receiver who shall be registered under Section 2(94) of the CGST Act, 2017.

Time of Supply under RCM

Time of Supply is the particular point of time when the goods or services are either supplied or are considered to be supplied for GST taxation purposes. It allows assessing to determine the tax rate, total tax liability and the due date of submission of returns as the time of supply varies depending upon the type of charge-forward charge or reverse charge.

i. Time of Supply for Goods

ii. Time of Supply for Services

When are the circumstances under which the Reverse Charge Mechanism is applicable?

i. Supply of Goods/Services received from an Unregistered Dealer

Where a person registered under GST purchases goods/avails services from an unregistered dealer or supplier, the reverse charge mechanism shall be applicable for, the transaction. In such cases, the supplier receiving goods /services shall make payment of taxes directly to the GST Department by way of a self-invoice for the purchase. In the case of intra-state transactions, the buyer will pay CGST+SGST/UTGST, whereas in the case of inter-state transactions IGST will be charged. This concept would be introduced to eliminate tax evasion as there may be chances that unregistered dealers may avoid submission of taxes to the Government and to ensure tax compliance and promote transparency. This additional compliance under the Act will encourage registered persons to buy/procure goods/services from the registered dealer and in any other case to strictly adhere to compliances. Therefore, in a transaction between a registered and an unregistered dealer, the registered supplier/dealer will be under an obligation to submit taxes and avail ITC on them. The Government of India notified that the promoters shall be liable to submit GST on a reverse charge basis on the transfer of development rights (TDR) or floor space index supplied on or after 1st April 2019.

Even in cases, where the owner of the premises (rented premises) is not engaged in the business of land-related activities, any transfer of development rights by such an individual owner to the promoter shall be subjected to GST as “Supply of service under section 7 of CGST Act” 2017. In cases of outward supplies of TDR rights by one registered developer under GST to the other, GST shall be charged at the rate of 18% on RCM.

Further for registered businesses/individual suppliers engaged in real-estate activities, the Govt. of India notified that it shall be compulsory for the promoters of the businesses to make 80% of their business purchases from registered dealers only. If the purchases from the registered supplier will shortfall this 80% limit, the promoters shall be required to pay GST @18% on a reverse charge basis on the balance amount. However, in the case of inward supplies from an unregistered supplier, the promoters shall be required to pay taxes of @28% which shall be irrespective of the total 80% calculation.

ii. Supply through E-commerce Services

Sec. 2(45) of the CGST Act 2017 defines an ‘E-commerce operator’ as the person who either owns, operates, or manages any digital/electronic facility/platform for the purposes of e-commerce. Further, Section 9(5) of the CGST Act 2017 states that “where a service provider offers his services through an e-commerce operator, the e-commerce operator will be liable to pay taxes on a reverse charge basis and shall pay taxes accordingly.

Accordingly, most businesses in India have an online presence to attract their customers and sell their products through their digital platforms or popular e-commerce aggregator platforms like Myntra, Amazon, Flipkart, Nykaa, etc. Therefore, every e-commerce service provider who sells his goods/services or both through e-commerce platforms shall be required to undertake registration compulsorily and make payment of GST through RCM. All types of businesses can use e-commerce operators as an aggregator to sell products or provide services.

Some common examples include-

i. Transportation services offered to passengers through auto-vehicles such as a radio-taxi, motor cab, maxi cab, and motorcycle through Ola, Uber, Rapido, etc.

ii. Hotel & Travel Accommodation services offered to customers for booking rooms in hotels, inns, guest houses, clubs, campsites, or other commercial places intended for residential or lodging purposes, except in cases where the person making the supply of services through the e-commerce operator is himself liable for registration due to turnover limits such as Oyo, Clear trip and MakeMyTrip.

iii. Housekeeping & Maintenance services being offered through the online platform for services such as plumbing, carpentering, repair services, etc. except in cases where the person making the supply of services through an e-commerce operator is itself liable for registration for reaching the threshold turnover limit for registration under GST such as UrbanClap, Housecall pro, etc. Due to this reason UrbanClap is liable to collect taxes and make payments to the Govt. itself and not under RCM.

However, in cases where the e-commerce provider doesn’t have any physical presence in the taxable territory of India, in that case, the authorized representative of the e-commerce operator in India shall be subject to the collection and payment of GST to the Government, or for other applicable compliances under GST. In case there is no such representative, such an operator shall be required to appoint a representative in India.

iii. Supply of Notified Goods & Services under RCM

The CBIC (Central Board of Indirect Taxes and Customs) has notified a list of goods or services that shall be compulsorily under RCM irrespective of the turnover limit. The list of such notified goods/services has been provided below-

Supply of Specific Services under RCM-

It is important to note that-

• Reverse Charge cannot be partially applicable to supplier or receiver. In the above cases, 100% tax will be paid by the recipient where the RCM is applicable.
• In the case of B2B import of other goods or services or both, the tax shall be payable by the recipient of goods or services as the case may be.

Liability of Registration under Reverse Charge Mechanism (RCM):

Under section 24 of the CGST Act 2017, every business/individual dealer receiving goods/services under RCM must mandatorily obtain registration under GST irrespective of the limit of aggregate annual turnover in the previous financial year.

Manner of Payment of GST under the Reverse Charge Mechanism

The recipient of goods or services under RCM shall be able to avail ITC on the taxes so paid, but such ITC shall have limited uses. As provided under sec. 49(4) of CGST Act’2017, such ITC could be utilized in the payment of output taxes and not for any other purposes. If the recipient of goods/services happens to be a composite dealer, he shall be ineligible to avail any ITC on taxes paid and shall be required to pay taxes under rates for the regular GST scheme. Further, the recipient shall mention the fact about the tax being paid under RCM in the tax invoice.

Applicability of GST Compensation Cess:

Businesses/individual dealers making GST payments on a reverse charge basis shall also be liable for paying GST Compensation Cess under RCM. The objective of the GST Compensation cess is to compensate states for the losses incurred by the states due to the abolishment of various taxes and the introduction of GST. The GST Compensation Cess shall be applicable for five years from the date of implementation of GST.

Important features of RCM under GST

i. Supply of Goods and services notified under section 9(3) or section 9(4) of the CGST Act 2017, must be registered under the GST.

ii. Businesses submitting taxes under RCM must submit their tax liability to the Government either on or before the 20th of next month.

iii. The details related to the supply of goods/services shall not be on an auto-population basis for GST payments under RCM in GSTR 2 and the details related to supplies shall be required to be entered manually on the GST portal.

iv. The recipient of goods/services making tax payment on an RCM basis shall be eligible to avail ITC for the goods/services received and used in the furtherance of the business. However, in case of goods/services received from any Governmental authority and in case goods received from a person registered under the composition levy no ITC shall be available to the receiver.

v. RCM under GST shall be also applicable for payments made in advance or in installments.