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All about Reverse Charge Mechanism – RCM under GST

Reverse Charge Mechanism (RCM), Background, ITC, Time of supply, Tax Invoice, Payment of Tax, ITC Credit, Period of Availment, Registration, Return, Other important Issues

Services leviable under Reverse Charge Mechanism – RCM

They are governed by Section 9(3) of CGST Act and Section 5(3) of IGST Act whereby the Government may impose the Reverse Charge Mechanism (RCM) on the categories of goods or services or both that GST council has recommended from time to time.

Henceforth all the provisions of the Act shall become applicable to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Notification No. 13/2017- Central Tax (Rate) dated 28th June 2017 and Notification No.4/2017-Central Tax (Rate)

Under GST [only the recipient could be made liable in such scenario] but if we compare the GST provisions with the Service Tax law, there under Section 68(2) service tax shall be paid by such person in respect of taxable services as may be notified by the Central Government and [Any person even other than the recipient could be made liable]

Communication between GST Buyers and Suppliers on the GST portal

In GST there is no concept of Partial RCM whereas in Service Tax Partial Reverse Charge was applicable on services like renting of MV, WC, etc.

Reverse Charge Mechanism (RCM) is applicable to Goods as well as Services.

Under GST Act, RCM is on supplies received from Unregistered supplier whereas under Service Tax there was no RCM on Services received from Unregistered Service provider.

Availment of ITC

As per Section 41(1), every registered person is entitled to take the credit of eligible ITC as self-assessed in his return and such amount shall be credited in his/her electronic credit ledger on a provisional basis and the said ITC shall be utilized only for the payment of self-assessed output liability in the GSTR.

Rule 4(7) of Cenvat Credit Rule 2004 says Cenvat credit in respect to Input services shall be allowed on or after the day on which the invoice, challan referred to in rule 9 is received provided such service tax is paid.

List of Goods and Services under Reverse Charge Mechanism (RCM)

SERVICES

List of Services under RCM as per Notification No. 13/2017- Central Tax (Rate) and Notification No. 10/2017- Integrated Tax (Rate) dated 28th June 2017.

S.No.Particulars
1Goods Transport Agency
2Legal Services/ Arbitration
3Sponsorship
4Government services
5Renting of Immovable property by government
6Long term leas of land (more than 30 years)
7Transfer of Development Right
8Director
9Insurance Agent
10Recovery agent to banking Co./ NBFC
11Transfer/ permitting use of copyright by music composer, photographer, artist, original literary work or publisher
12Security services
13Renting of motor vehicle
14Lending of securities under lending scheme of SEBI

Notification No. 10/2017- Integrated Tax (Rate)

S.No.Particulars
1Services other than OIDAR services provided from Non-taxable territory
2Services of transportation of goods by vessel from place outside India up to customs station clearance of India.

GOODS

As per Notification No.4/2017-Central Tax (Rate) dated 28th June 2017, Goods specified under RCM are as follows:

S.No.Particulars
1Supplied by Agriculturist Cashew Nuts, not shelled or peeledBidi wrapper leavesTobacco leavesRaw Cotton  
2Supply of silk yearn on manufacture by raw silk or silk warm cocoons
3Supplied by Government or Local authority Suppl of lotteryUsed vehicles, seized and confiscated goods, old and used goods, waste and scrapPriority sector lending certificate  

Notification No.8/2017-Central Tax (Rate) dated 28th June 2017, CG exempt from CGST u/s 9(4) for intra-state supplies of goods or services or both received by the registered person from an unregistered supplier of value not exceeding Rs.5,000/- per day.

On 29th January 2019 another Notification No. 01/2019 – Central Tax (Rate) issued to rescinds the earlier Notification No.8/2017 dated 28th June 2017, except with respect to things done or omitted to be done before such rescission.

Further, from 1st February 2019, it was stated that the provision of Section 9(4) be applicable on specified goods and services instead of all goods and services.

Reverse Charge Mechanism (RCM) on E-Commerce Operator (ECO)

As per Section 9(5) of CGST “The Government may on the recommendation of the council specify the categories of services the tax on which shall be paid by the ECO for Intra-State and Inter-State supplies through it and all the provisions of this Act shall accordingly on ECO.

Services includes:

  • Transportation of passengers by a radio-taxi, motor-cab, maxi cab, and motorcycle by any person.
  • Providing accommodation in hotels, inns, guest houses, clubs, or other commercial places meant for residential or lodging purposes by any person (except who is liable for registration u/s 22(1) of the CGST Act.
  • Services by way of housekeeping, such as plumbing, carpentering, etc. by any person except who is liable for registration u/s 22(1) of CGST. [added w.e.f 22nd August 2017]

Provided that where an ECO does not have a physical presence in the TT [taxable territory], any person representing such ECO for any purpose in the TT shall be liable to pay tax.

Provided further in the absence of physical presence of ECO in TT, they have to appoint a representative for the compliance purpose.

Time of Supply under Reverse Charge Mechanism (RCM)

Section 3(3) states that “The time of supply shall be earliest of:

(a)Payment entered in books of recipient or date of payment in bank;

(b) 60 days from the date of issue of invoice or any other document.

Note: In other cases, the date of entry in the books of account of the recipient of the supply.

In case of supply by associated enterprises where the supplier is located outside India:

  • Date of entry in the books of account of the recipient; or
  • Date of payment [whichever is earlier]

Tax Invoice

Following are the key points in relation to Tax Invoice under RCM

  1. Section 31 of CGST Act read with Rule 46, every registered person should mention in its tax invoice whether the said goods or services are taxable under RCM.
  2. Recipient to issue Self-Invoice u/s 31(3)(f) in case of the unregistered supplier.
  3. Section 31(3)(f) specifically mentions that the self-invoice to be generated at the time of receipt of supply.
  4. Registered person to issue a payment voucher at the time of making payment to the supplier who is liable to pay tax u/s 9(3)/ 9(4).

Payment of RCM

  • The amount available in the electronic ledger can be utilized only for payment of output tax liability as per section 49(4).
  • RCM has to be discharged only in cash, as it is not an output tax liability for the recipient.
  • As per Rule 36(1)(b), ITC of RCM is available on the basis of Self Invoice, subject to payment of tax.

Input Tax Credit under RCM

Supplier is restricted to avail the ITC subject to apportionment of credit and blocked credits u/s 17(2)/17(3).

The value of exempt supplies u/s 17(2) shall include supplies u/s 17(3).

Recipient shall avail the ITC in term of Section 16 subject to actual payment of tax to the government.

Period of Availment of ITC paid under RCM

Central Board of Indirect Taxes & Customs had issued a Press release on Clarification regarding Annual Returns & Reconciliation Statement dated 3rd July 2019, clarified that if the amount of reverse charge in respect of any previous financial year paid in a subsequent financial year then the amount of ITC is available in the subsequent period only.

For example, if the amount of ITC of RCM is relevant for the financial year 2018-19 and the tax is paid in the subsequent financial year 2019-20, the ITC on such payment of tax would have been availed in the financial year 2019-20 only.

[ITC can be claimed in the month of payment itself]

Accordingly, details to be declared in the annual return of the financial year 2019-20 instead of the financial year 2018-19.

However, in case of deviation in turnover on account of such adjustment, the same is to be reported along with the reason in Form GSTR-9C under Reconciliation Statement.

 Registration

Registration under GST is mandatorily for the person liable to pay tax under the RCM and E-commerce operator liable to pay tax under RCM.

Exemption from Registration

As per Notification No. 5/2017 – Central Tax dated 19th June 2017, the person supplying services or goods or both u/s 9(3) on which the total tax is to be paid under RCM, then such class of persons exempted from registration effective from 22nd June 2017.

GST Return

SupplierThe registered supplier shall update the information in relation to the tax invoices chargeable under RCM in Column 4B of GSTR-1
RecipientPerson liable to pay tax under RCM, shall furnish taxable value and tax amount on inward supplies in Column 3.1(d) and avail ITC thereon in Table 4.

Other Important related issues

IssueParticulars
Recipient making advance paymentPay RCM in advance
Composition Dealer falling under RCMDischarge Tax at normal rates and not to avail ITC on same.
Value of SuppliesGrossed up with the TDS
HSN/SAC codeUnder the same HSN/SAC which is applicable if such supplies are under forward charge.
Supplies under RCMNot included in the definition of aggregate turnover as per  Section 2(6) of CGST
What if supplier has paid the tax inadvertentlyThe recipient is not liable to pay tax. Since there is no revenue loss and tax cannot be levied twice on the same transaction. Lilason Breveries Ltd. Vs CCE, Bhopal [2009 (9) TMI 275 – CESTAT, New Delhi  
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