Reverse Charge Mechanism

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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.

In accordance with section 9(3) of the CGST / SGST (UTGST) Act, 2017 / section 5(3) of the IGST Act, 2017, the govt may, on the recommendations of the Council, by notification, specify categories of supply of products or services or both for which the recipient of such goods or services or both shall pay the tax on a reverse charge basis
According to section 9(4) of the CGST / SGST (UTGST) Act, 2017 / section 5(4) of the IGST Act, 2017, the tax on the availability of taxable goods or services or both by unregistered supplier to a registered person shall be paid by the registered recipient on a reverse charge basis.
In accordance with notification no.9/2017-Central Tax (Rate) dated 28.06.2017, the provisions of section 9(4) of the CGST Act, 2017 won't apply to supplies made to a TDS deductor. Consequently, government entities that are TDS Deductors under Section 51 of the CGST Act are exempt from paying GST under reverse charge for purchases from unregistered vendors.

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:

Each tax invoice must indicate whether the tax on the invoiced supply is subject to reverse charge. Similarly, this must be indicated on both the receipt voucher and therefore the refund voucher if tax is due on reverse charge.
Every registered person must keep and maintain records of all supplies subject to reverse charge tax payment.
Any amount payable pursuant to a reverse charge must be deducted from the electronic cash ledger. In other words, input decrease cannot be used to satisfy a reverse charge liability. However, after discharge of reverse charge liability, the recipient, if otherwise qualified, may claim credit for the identical .
In table 4B of the GSTR-1, information at the invoice level for all supplies subject to reverse charge must be provided separately, categorized by rate.
Advance payments made for reverse charge supplies also are subject to the GST. On a reverse charge basis, the one that made the advance payment must pay tax.

Supply of products according to RCM:

Sl 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
5	Raw cotton	Agriculturist	Any registered person
6	Supply of lottery	State Government, Union Territory or any local authority	Lottery distributor or selling agent
7	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

Description of Supply of Services under RCM:

Sl No	Description of supply of Service	Supplier of service	Recipient of service
1	Any 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 territory	Any person located in the taxable territory other than nontaxable online recipient.
2	GTA Services	Goods 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
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 non-banking financial company, located in the taxable territory
10	Services 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 India	A person located in non-taxable territory	Importer, as defined in clause (26) of section 2 of the Customs Act, 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.
13	Services provided by business facilitator (BF) to a banking company	Business facilitator (BF)	A banking company, located in the taxable territory
14	Services 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.
15	Security 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 corporate	A registered person, located in the taxable territory.

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