Guide to Reverse Charge Mechanism (RCM) in GST

What is the reverse charge?

Reverse charge is a mechanism under the Goods and Services Tax (GST) system where the recipient of the goods or services is liable to pay the tax instead of the supplier. In other words, the liability to pay tax shifts from the supplier to the recipient under reverse charge. The reverse charge mechanism applies when the supplier is an unregistered or registered dealer who falls under the specified categories per the GST law. The purpose of reverse charge is to ensure that tax evasion is prevented and the government can collect tax revenue effectively.

When is a reverse charge applicable?

A reverse charge is applicable under GST when the recipient of goods or services is liable to pay the tax instead of the supplier. In other words, a reverse charge applies when the supplier is not required to pay tax on the supply, and the recipient becomes responsible for paying the tax. Reverse charge is applicable in the following cases:

1. Supply from an unregistered dealer to a registered dealer: When a registered dealer purchases goods or services from an unregistered dealer, the registered dealer is liable to pay the tax under reverse charge.
2. Goods or services covered under notified categories: The government may notify specific goods or services where a reverse charge applies. For example, legal services provided by an advocate who is not a senior advocate are covered under reverse charge.
3. Import of goods or services: Reverse charge applies on the import of goods or services into India.

It’s important to note that the threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for particular category states) for GST registration does not apply to the applicability of reverse charge.

Requirements under the reverse charge mechanism

Under the reverse charge mechanism, the recipient of goods or services is responsible for paying the tax on behalf of the supplier. As per the GST law, certain goods and services are notified under the reverse charge mechanism, and in such cases, the recipient is required to fulfill specific requirements, which include:

1. Registration: The recipient of goods or services liable to pay tax under the reverse charge mechanism must register for GST, irrespective of the threshold limit.
2. Tax payment: The recipient must pay the tax on the goods or services received under the reverse charge mechanism.
3. Compliance: The recipient is required to comply with all the provisions of the GST law, including the filing of returns, payment of tax, and maintenance of records.
4. Invoice: The recipient must issue a tax invoice or a bill of supply, as applicable, for the goods or services received under the reverse charge mechanism.
5. Record keeping: The recipient must maintain records of all the transactions related to goods or services received under the reverse charge mechanism.
6. Input tax credit: The recipient can claim an input tax credit for the tax paid under the reverse charge mechanism, subject to the conditions and restrictions specified under the GST law.

Time of supply for goods and services under reverse charge

Under the GST regime, the time of supply for goods and services under the reverse charge mechanism is determined as follows:

1. Time of supply for goods under reverse charge: When the recipient receives the goods or the supplier issues the invoice, whichever is earlier.
2. Time of supply for services under reverse charge: a) If the service invoice is issued within the prescribed time, then the time of supply will be the date of the invoice or the date of payment, whichever is earlier. b) If the service invoice is not issued within the prescribed time, then the time of supply will be the payment date.

It’s worth noting that the time of supply for goods and services under the reverse charge mechanism differs from the time of supply for goods and services under the regular tax regime.ITC (Input Tax Credit) can be claimed on the tax paid under the reverse charge mechanism. However, certain conditions need to be fulfilled to claim ITC on reverse charge:

1. The goods or services on which reverse charge is applicable should have been used or intended to be used for the furtherance of business.
2. The recipient of the goods or services should have received the tax invoice or debit note.
3. The recipient should have filed the GST return showing the receipt of goods or services on which a reverse charge is applicable.

Once these conditions are met, the recipient can claim the ITC on the tax paid under reverse charge in their GST return.

ITC on reverse charge

ITC (Input Tax Credit) can be claimed on the tax paid under the reverse charge mechanism. However, certain conditions need to be fulfilled to claim ITC on reverse charge:

1. The goods or services on which reverse charge is applicable should have been used or intended to be used for the furtherance of business.
2. The recipient of the goods or services should have received the tax invoice or debit note.
3. The recipient should have filed the GST return showing the receipt of goods or services on which a reverse charge is applicable.

Once these conditions are met, the recipient can claim the ITC on the tax paid under reverse charge in their GST return.

Exemptions under reverse charge

Under the reverse charge mechanism, certain exemptions are provided by the government, where the recipient is not required to pay tax under reverse charge. Some of the exemptions are:

1. Intra-state supply of goods or services by an unregistered supplier to a registered person eligible for the composition scheme.
2. Supplies of goods or services by a registered supplier to a registered person who is not eligible for the input tax credit.
3. Supplies of goods or services by a registered supplier to a registered person who is not required to pay tax under reverse charge.
4. Supplies of goods or services by a registered supplier to a registered person exempt from tax under the GST Act.
5. Supplies of goods or services by a registered supplier to a registered person are liable to pay tax under reverse charge, but the value of such supplies does not exceed Rs. 5000 in a day.

It is important to note that these exemptions are subject to change based on the government’s notification.

Supplies of goods under reverse charge mechanism:

S.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)	Agriculturist	Any registered person
3.	Tobacco leaves	Agriculturist	Any registered person
4.	Silk yarn	Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn	Any registered person
4A.	Raw cotton	Agriculturist	Any registered person.
5.	Supply of lottery	State Government, Union Territory or any local authority	Lottery distributor or selling agent
6.	Used vehicles, seized and confiscated goods, old and used goods, waste and scrap	Central Government, State Government, Union territory or a local authority	Any registered person

Supplies of services under reverse charge mechanism:

S.No.	Description of supply of goods	Supplier of goods	Recipient of goods
1.	Any service supplied by any person who is 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.
2.	GTA Services	Goods Transport Agency (GTA) who has not paid integrated tax at the rate of 12%	Any factory, society, co- operative society, registered person, body corporate, partnership firm, casual taxable person; located in the taxable territory
3.	Legal Services by advocate	An individual advocate including a senior advocate or firm of advocates	Any business entity located in the taxable territory
4.	Services supplied by an arbitral tribunal to a business entity	An arbitral tribunal	Any business entity located in the taxable territory
5.	Services provided by way of sponsorship to any body corporate or partnership firm	Any person	Any body corporate or partnership firm located in the taxable territory
6.	Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, – (1) renting of immovable property, and (2) services specified below- (i) 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; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers.	Central Government, State Government, Union territory or local authority	Any business entity located in the taxable territory
7.	Services supplied by a director of a company or a body corporate to the said company or the body corporate	A director of a company or a body corporate	The company or a body corporate located in the taxable territory
8.	. Services supplied by an insurance agent to any person carrying on insurance business	An insurance agent	Any person carrying on insurance business, located in the taxable territory
9.	Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company	A recovery agent	A banking company or a financial institution or a nonbanking financial company, located in the taxable territory
10.	Services supplied by a person located in nontaxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India	A person located in non-taxable territory	Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory
11.	Supply of services by an author, 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 literary, dramatic, musical or artistic works to a publisher, music company, producer or the like	Author or music composer, photograph her, artist, or the like	Publisher, music company, producer or the like, located in the taxable territory
12.	Supply of services by the members of Overseeing Committee to Reserve Bank of India	Members of Overseeing Committee constituted by the Reserve Bank of India	Reserve Bank of India.