Reverse Charge Mechanism

Reverse Charge System (RCM)

Definition:

RCM stands for Reverse Charge Mechanism.

Reverse Charge indicates that the recipient of a supply of products or services, instead of the supplier, is liable for paying tax on notified categories of supply. In most cases, the supplier of products or services is responsible for paying GST. In certain circumstances, like imports and other notified supplies, the recipient could also be held liable under the reverse charge mechanism.

Reverse Charge Scenarios:

In accordance with the law, there are two sorts of reverse charge scenarios. First depends on the character of the supply and/or the nature of the provider. Section 9 (3) of the CGST/SGST (UTGST) Act and Section 5 (3) of the IGST Act govern this example. Section 9 (4) of the CGST/SGST (UTGST) Act and Section 5 (4) of the IGST Act cover taxable supplies from an unregistered person to a registered person within the second scenario.

Registration:

The threshold limit of Rs. 40 lakhs (Rs. 20 lakhs within the state of Telangana) (Rs. 20 lakhs for special category states) doesn’t apply to a person who is required to pay tax under reverse charge and is required to register under GST.

Input decrease (ITC):

A supplier cannot claim ITC for GST paid on goods or services used in the production of taxable supplies. However, after discharge of reverse charge liability, the recipient, if otherwise qualified, may claim credit for the identical.

Payment of GST under RCM:

 Any amount payable under reverse charge is debited from the electronic cash ledger. In other words, input decrease cannot be used to satisfy a reverse charge liability.

Time of Supply:

In reverse charge, the recipient is liable for paying the GST. Therefore, the time of delivery for supplies subject to reverse charge differs from that of supplies subject to forwarding charge.

The earliest of the subsequent dates is the Time of Supply for the Supply of Goods.

The earliest of the subsequent dates is the time of delivery for services.

Where it’s not possible to determine the time of supply using the aforementioned methods, the time of supply would be the date of entry into the recipient’s books of account.

Compliance requirements for RCM:

Supply of products according to RCM:

Sl NoDescription of supply of GoodsSupplier of goodsRecipient of Goods
1Cashew nuts, not shelled or peeledAgriculturistAny registered person
2Bidi wrapper leaves (tendu)AgriculturistAny registered person
3Tobacco leavesAgriculturistAny registered person
4Silk yarnAny person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarnAny registered person
5Raw cottonAgriculturistAny registered person
6Supply of lotteryState Government, Union Territory or any local authorityLottery distributor or selling agent
7Used vehicles, seized and confiscated goods, old and used goods, waste and scrapCentral Government, State Government, Union territory or a local authorityAny registered person

Description of Supply of Services under RCM:

Sl NoDescription of supply of ServiceSupplier of serviceRecipient of service
1Any service supplied by any person who is located in a non-taxable territory to any person other than nontaxable online recipient.Any person located in a non-taxable territoryAny person located in the taxable territory other than nontaxable online recipient.
2GTA ServicesGoods Transport Agency (GTA) who has not paid integrated tax at the rate of 12%Any factory, society, cooperative society, registered person, body corporate, partnership firm, casual taxable person located in the taxable territory
3Legal Services by advocateAn individual advocate including a senior advocate or firm of advocatesAny business entity located in the taxable territory
4Services supplied by an arbitral tribunal to a business entityAn arbitral tribunalAny business entity located in the taxable territory
5Services provided by way of sponsorship to any body corporate or partnership firmAny personAny body corporate or partnership firm located in the taxable territory
6Services 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 authorityAny business entity located in the taxable territory
7Services supplied by a director of a company or a body corporate to the said company or the body corporateA director of a company or a body corporateThe company or a body corporate located in the taxable territory
8Services supplied by an insurance agent to any person carrying on insurance businessAn insurance agentAny person carrying on insurance business, located in the taxable territory
9Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial companyA recovery agentA banking company or a financial institution or a non-banking financial company, located in the taxable territory
10Services supplied by a person located in non taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in IndiaA person located in non-taxable territoryImporter, as defined in clause (26) of section 2 of the Customs Act, 1962, located in the taxable territory
11Supply 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 likeAuthor or music composer, photograph her, artist, or the likePublisher, music company, producer or the like, located in the taxable territory
12Supply of services by the members of Overseeing Committee to Reserve Bank of IndiaMembers of Overseeing Committee constituted by the Reserve Bank of IndiaReserve Bank of India.
13Services provided by business facilitator (BF) to a banking companyBusiness facilitator (BF)A banking company, located in the taxable territory
14Services provided by an agent of business correspondent (BC) to business correspondent (BC).An agent of business correspondent (BC)A business correspondent, located in the taxable territory.
15Security services (services provided by way of supply of security personnel) provided to a registered person:

Provided that nothing contained in this entry shall apply to:

(i)(a) a Department or Establishment of the Central Government or State Government or Union territory; or
(b) local authority; or
(c) Governmental agencies;

which has taken registration under the Central Goods and Services Tax Act, 2017 only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services;

or

(ii) a registered person paying tax under section 10 (ie. Composite Dealer) of the said Act.
Any person other than a body corporateA registered person, located in the taxable territory.

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