Reverse Charge Mechanism (RCM)

By: Vaidehi Nalwaya - 22nd July, 2021

Introduction

RCM or Reverse Charge Mechanism is a concept under which the receiver of the goods or any service is entitled to pay the tax instead of the supplier of goods and services. Unlike the standard tax regime wherein the supplier of the goods or services, collects the tax from the consumers and deposits the same after regulating the output tax liability with the available input tax credit (ITC), in Reverse charge mechanism (RCM) the liability for tax payments shifts from the supplier to the receiver of the goods and services. In simple terms, in Reverse Charge Mechanism, the tax chargeability gets reversed, hence the receiver is responsible to pay the taxes instead of the supplier. In the reverse-charge mechanism, the taxable individual who is offering the goods and services is liable to pay the GST. However, there are some exceptional cases like imports and other kinds of supplies wherein the receiver of goods or a service is responsible to pay the GST instead of the goods or service provider.

When is Reverse Charge Mechanism Applicable

Usually, the RCM is applicable when there is an Intra State supply of goods and services. It is levied by the unregistered supplier to the registered individual when the value of the good or service exceeds Rs 5000 per day. Mentioned herewith are the instances wherein the Reverse charge is applicable:

A. When the Unregistered dealer supplies goods or services to a Registered dealer

When the suppliers who are not registered under the GST act, supplies goods to a GST registered individual is, then Reverse Charge would apply. In such a case, the GST would directly be paid by the recipient of the good or service to the Government instead of the supplier of the same. Hence, the registered person who is entitled to pay the GST under the reverse charge has to do his self-invoicing for the respective purchase made by him. In the case of Inter-state buying, the buyer has to pay the IGST and in the case of Intrastate purchases, he has to pay the CGST and SGST.

B. In case of services offered through the e-commerce mechanism

In case if any individual has availed the services by the e-commerce operator, then the E-Commerce operator is accountable for the reverse charge. Therefore, he will be obligated to pay the GST. The most suitable example is UrbanClap, a renowned E-commerce service provider of plumbing, electricians, teachers, beauticians etc. In this case, UrbanClap is responsible to collect the GST from the customers and accordingly pay the same to the government. In case if they are not physically present in the taxable territory, then their representative is required to fulfil all the tax payment conditions. And in case if they do not have any representatives, then the E-commerce operator has to hire a representative who would be held liable to pay the GST.

C. In case of the supply of goods and services specified by the Central Board of Excise and Customs (CBEC)

Lastly, the supplier has to pay the reverse charge on the goods and services enlisted by the CBEC. Click here to view the list of those goods and services.

Goods under Reverse Charge Mechanism

• Cashew Nuts, Not Shelled or peeled

• Bidi wrapper leaves (tendu)

• Tobacco leaves

• Silk yarn

• Raw cotton

• Supply of lottery

• Used vehicles, seized and confiscated goods, old and used goods, waste and scrap

Services under Reverse Charge Mechanism

• Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient.

• Goods Transport Agency Services.

• Legal Services by advocate.

• Services supplied by an arbitral tribunal to a business entity.

• Services provided by way of sponsorship to anybody corporate or partnership firm.

• Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, -

  • Renting of immovable property, and

  • Services specified below-

    1. 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;

    2. Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

    3. Transport of goods or passengers

• Services supplied by a director of a company or a body corporate to the said company or the body corporate.

• Services supplied by an insurance agent to any person carrying on insurance business.

• Services supplied by a recovery agent to a banking company or a financial institution or a nonbanking financial company.

• 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.

• 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.

• Supply of services by the members of Overseeing Committee to Reserve Bank of India.

Time of Supply Under the Reverse Charge Mechanism

It is very essential to ascertain the time of supply of the GST for the levy of Reverse Charge, since the GST must be paid to the Govt within a time span of 20 days from the end of the month in which the services were offered.

Time of supply in case of Goods

In the case of Goods, the time of supply of reverse charge would be the earliest of the following

1. The date of receipt of goods, or

2. The date of payment, or

3. Date immediately after 30 days from the date of issue of invoice by the supplier.

Time of supply in case of Services

In the case of services, the time of supply of reverse charge would be the earliest of the following:

• The date of payment, or

• The date immediately after 60 days from the date of issue of invoice by the supplier.

Invoicing /Billing rules under the Reverse Charge Mechanism

Under the reverse charge mechanism, the recipient or buyer of the goods or services receives an invoice on receipt of goods or services from the supplier. Further, they also generate a payment voucher at the time of making payment to the supplier.

The registered recipient or the buyer of the good or service can also issue a consolidated invoice at the end of a month for supplies if the total value of such supplies exceeds Rs 5,000 in a day.

Key points under the Reverse Charge Mechanism

1. Each individual who pays tax under the reverse charge mechanism must compulsorily register themselves under the GST even if the turnover does not exceed the threshold.

2. The GST covered under the reverse charge must be submitted to the government on every 20th of the next month.

3. The reverse charge mechanism will be applicable only to intrastate transactions.

4. In case if any advance payment is made for the reverse charge supplies then it will also be chargeable under the GST act. Therefore, the person making the advances is required to pay the taxes on the reverse charge basis.

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