Reverse Charge Mechanism is not a new concept for taxation system in India. Reverse Charge Mechanism was also prevailing in the service tax regime before introduction of GST in India. It is well aware to us that under indirect taxation system, it is the supplier who is liable to collect the tax from the recipient of goods or services and deposit the same to tax authorities. However, in some cases, the Government has been given power to notify certain goods or services where the supplier shall not be liable to pay tax rather the recipient of goods or services shall deposit the tax to the tax authorities. This mechanism in known as 'Reverse Charge Mechanism' or RCM in short. RCM has also been introduced under GST law. The definition of 'Reverse Charge' is given in Section-2(98) of the CGST Act, 2017.
RCM stands for Reverse Charge Mechanism
Normally under GST, the supplier of goods or services is liable to pay GST on supply of goods or services. But, in some cases, the liability to pay GST has been cast upon the recipient of goods or services in the GST laws. This mechanism is known as “Reverse Charge Mechanism”. The definition of ‘Reverse Charge Mechanism’ has been given below:
Section- 2(98) of CGST Act, 2017
‘Reverse Charge’: - 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 under section 9(3) or 9(4) of CGST Act or under section 5(3) or 5(4) of IGST Act.
Section-9(4) of CGST Act, 2017 (corresponding section- 5(4) of IGST Act) has been a matter of worry for every businessman since introduction of GST in India on 1st July, 2017. Initially, Section-9(4) provided for levy of GST from recipient of goods or services under reverse charge if he procures such goods or services from an unregistered supplier. Further, section 24 of the CGST Act, 2017 provides that a person who is required to pay tax under reverse charge shall be required to register under GST Act compulsorily irrespective of the threshold limit of turnover. This has an impact that either the registered taxpayers would have stopped procuring goods from unregistered business entities or they would have forced them to register under GST so as to avoid RCM provisions. Thus, the RCM provisions of section 9(4) could have severe setback to small and marginal businesses in India.
Looking into the hardships arising due to section 9(4), the Central Government issued an Exemption Notification No. 8/2017- CT dated 28th June 2017. This notification was effective from 1st July, 2017. This notification exempted supplies of goods or services or both received by a registered person from any unregistered person from applicability of section-9(4) but subject to limit of Rs. 5,000 per day. Thus, if a registered person is receiving supplies of goods or services or both from unregistered person up to an aggregate amount of Rs. 5,000 per day, he shall not be liable to pay GST under RCM. Please note that this was only a partial exemption. If the supplies from unregistered person is more than Rs. 5,000 in aggregate, the liability to pay GST under RCM was still there.
List of Goods under RCM in GST
Following goods have been notified by the Central Government where the recipient of goods shall be liable to pay GST under RCM:-
Sr. No. | Description of supply of Goods | Supplier of Goods | Recipient of Goods |
1 | Cashew nuts (not shelled or peeled) | Agriculturist | Any registered person |
2 | Bidi Wrapper Leaves (tendu), Tobacco Leaves | Agriculturist | Any registered person |
3 | Silk Yarn | Manufacturer of silk yarn from raw silk or silk worm cocoons | Any registered person |
4 | Lottery | State Government, Union Territory or local authority | Lottery distributor or selling agent |
5 | Raw Cotton | Agriculturist | Any registered person |
6 | Used vehicles, seized and confiscated goods, old and used goods, waste and scrap | Central Government, State Government, Union Territory or local authority | Any registered person |
7 | Purchase of priority sector lending certificate | Registered person | Any registered person |
List of services under RCM in GST
Following is the list of services where the recipient of services shall be liable to pay GST under reverse charge:-
Sr. No. | Description of supply of services | Supplier of services | Recipient of services | GST Rates |
1 | Goods Transport Agency (GTA) services by road | Goods Transport Agency | Any factory, society, cooperative society, registered person under GST, body corporate, partnership firm including AOP, casual taxable person located in the taxable territory | 5% |
Note:
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2 | Legal services provided directly or indirectly, by advocate including a senior advocate or firm of advocates | An individual advocate including a senior advocate or firm of advocates | Any business entity located in the taxable territory shall be liable under reverse charge @ 18%. | 18% |
Note: -
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3 | Services provided by an arbitral tribunal to a business entity | An Arbitral Tribunal | Any business entity located in the taxable territory. | 18% |
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4 | Sponsorship services provided to any Body corporate or partnership firm | Any person | Any Body Corporate or partnership firm located in taxable territory. | 18% |
5 | Services supplied by the Central Government, State Government, Union Territory or local authority to a business entity excluding:
| Central or State Government, Union Territory, Local Authority | Any Business Entity located in the taxable territory. | 18% |
5A | Renting of immovable property services by Central Government, State Government, Union Territory or Local Authority to a person registered under GST | Central or State Government, Union Territory, Local Authority | Any person registered under GST | 18% |
5B | Transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project | Any Person | Promoter | 18% |
Note: Notification No. 6/2019- CT (Rate) w.e.f. 01-04-2019: - GST on development rights/ FSI to be paid by promoter w.e.f. 01-04-2019 under reverse charge. | ||||
5C | Long Term Lease (30 years or more) by any person against consideration in the 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. | Any Person | Promoter | 18% |
Note: Notification No. 6/2019- CT (Rate) w.e.f. 01-04-2019: - GST on long term lease by any person for construction project by a promoter shall be payable under reverse charge w.e.f. 01-04-2019 @18%. | ||||
6 | Services supplied by a director of a company or a body corporate to the said company or body corporate | A director | The company or body corporate located in the taxable territory. | 18% |
7 | Services by an insurance agent to any person carrying on insurance business | Insurance Agent | Any person carrying on insurance business | 18% |
8 | Recovery Agent Services to a bank or financial institution or NBFC | Recovery Agent | Bank or Financial Institution or NBFC | 18% |
9 | Copyright services by a music composer, photographer, artist or like 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 | 12% |
9A | Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under the Copyright Act, 1957 relating to original literary works to a publisher | Author of original literary work | Publisher located in the taxable territory. | 12% |
Note: -
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10 | Supply of services by the members of Overseeing committee to RBI | Members of Overseeing Committee constituted by RBI | Reserve Bank of India | 18% |
11 | Supply of services by individual Direct Selling Agents (DSA) other than a body corporate, partnership or LLP to a bank or NBFC | Individual DSA other than a body corporate, partnership or LLP to a bank or NBFC | Banking company or NBFC located in taxable territory | 18% Inserted by Notification No. 15/2018- CT (Rate) dated 26.07.2018 |
12 | Services provided by a business facilitator to a banking company | Business Facilitator | Banking company located in taxable territory | 18% Inserted by Notification No. 29/2018- CT (Rate) dated 31.12.2018 |
13 | Services provided by an agent of business correspondent to business correspondent | An agent of business correspondent | Business Correspondent located in taxable territory | 18% |
14 | Security services (by way of supply of security personnel) | Any person other than body corporate | Registered Person | 18% |
Note: Nothing contained in this entry shall apply to: -
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15 | 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 | Any person other than body corporate, who supplies the service to a body corporate and does not issue an invoice charging CGST @ 6% plus SGST to the service recipient | Any body corporate located in the taxable territory | 5% |
Note: The above entry has been inserted by Notification No. 22/2019- CT (Rate) dated 30.09.2019. It has been further amended Notification No. 29/2019- CT(Rate) dated 31.12.2019. | ||||
16 | Services of lending of securities under Securities Lending Scheme, 1997 of SEBI | 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 | 18% Notification No. 22/2019- CT (Rate) dated 30.09.2019
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All the goods and services notified for RCM purposes have also been notified under IGST Act. Further, the following additional services are also notified under IGST Act for levy of IGST under reverse charge: -
Nature of supply of services | Supplier of services | Recipient of services |
Services supplied by a person located in non-taxable territory by way of transportation of goods by vessel from a place outside India up to the customs station of clearance in India | A person located in the non-taxable territory | Importer located in the taxable territory |
Any service supplied by any person 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 |
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(The views expressed in this article are strictly personal.)
By GST Info Tamil
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