The Reverse Charge Mechanism in GST: A Must-Know for Businesses

The collection of Goods and Services Tax (GST) is typically the responsibility of the goods or services supplier, who is required to collect the tax from the recipient and remit it to the government. However, there are instances where it is the recipient of goods or services who is responsible for paying the GST instead of the supplier. This is known as Reverse Charge Mechanism (RCM).

Understanding the Concept of RCM under GST

The Reverse Charge Mechanism is designed to address specific scenarios where the supplier may be an unregistered person, a non-resident, or a person engaged in certain specified categories of supplies. By shifting the tax liability to the recipient, the government aims to ensure the timely and accurate collection of GST, while also promoting compliance among businesses.

Legal Provisions Governing RCM

Sections 9(3) and 9(4) of the Central Goods and Services Tax ( CGST ) Act, 2017 deals with the provisions related to Reverse Charge Mechanism.

• Section 9(3) of the CGST Act empowers the government to specify categories of goods or services on which tax shall be paid on a reverse charge basis.
• Section 9(4) initially mandated RCM on the supply of goods or services or both by an unregistered supplier to a registered person.

Goods Notified for RCM under Section 9 (3) of CGST Act:

S. No.	Goods	Supplier	Recipient
1	Unshelled or unpeeled cashew nuts	Farmer	Any registered individual
2	Leaves for bidi wrappers	Farmer	Any registered individual
3	Tobacco leaves	Farmer	Any registered individual
4	Silk yarn	Any person who produces silk yarn from raw silk or silk worm cocoons	Any registered individual
5	Raw cotton	Farmer	Any registered individual
6	Lottery Tickets	State Government/ Union Territory/ Any Local Authority	Lottery distributor or selling agent
7	Pre-owned vehicles, seized and confiscated goods, old and used items, waste and scrap	Central Government/ State Government/ Union Territory/ Any Local Authority	Any registered authority

Services Notified for RCM under Section 9(3) of CGST Act:

S. No.	Description of Supply of Service	Supplier of Service	Recipient of Service
1	Any service supplied by a person located in a non-taxable territory to a person in the taxable territory, excluding nontaxable online recipients.	Any person in a non- taxable territory	Any person in the taxable territory, except nontaxable online recipients.
2	Services supplied by Goods Transport Agencies (GTA) who have not paid the 12% integrated tax rate	Goods Transport Agencies (GTA)	Factories, societies, cooperative societies, registered persons, body corporates, partnership firms, casual taxable persons; located in the taxable territory
3	Legal services supplied by individual advocates or firms to business entities	Individual advocates, including senior advocates or firms	Business entities located in the taxable territory
4	Services supplied by an arbitral tribunal to business entities	An arbitral tribunal	Business entities located in the taxable territory
5	Services supplied by sponsorship to corporate bodies or partnership firms	Any person	Corporate bodies or partnership firms located in the taxable territory
6	Services supplied by the Central Government, State Government, Union territory or local authority to business entities excluding renting of immovable property and specific services.	Central Government/ State Government/ Union Territory/ Any Local Authority	Business entities located in the taxable territory
6A	Services supplied by the Central Government, State Government, Union territory or local authority through renting of immovable property to persons registered under the CGST Act.	Central Government/ State Government/ Union Territory/ Any Local Authority	Persons registered under the CGST Act
7	Services supplied by directors of company or members of body corporate to the respective company or the body corporate	Company directors or members of a body corporate	The company or body corporate located in the taxable territory
8	Services supplied by insurance agents to businesses carrying out insurance operations	Insurance agents	Businesses carrying out insurance operations located in the taxable territory.
9	Services supplied by recovery agents to banking companies, financial institutions, or non-banking financial companies.	Recovery agents	Banking companies, financial institutions, or non-banking financial companies located in the taxable territory.
10	Services supplied by persons in non-taxable territories for the transportation of goods by vessel from outside India to a customs station in India.	Persons located in non-taxable territories	Importers located in the taxable territory, as defined in Clause (26) of Section 2 of the Customs Act, 1962.
11	Services supplied by authors, music composers, photographers, artists, or similar individuals for transfer or use of copyrights under Section 13(1) (a) of the Copyright Act, 1957 to publishers, music companies, producers, or similar entities.	Authors, music composers, photographers, artists, or similar individuals	Publishers, music companies, producers, or similar entities located in the taxable territory.
12	Services supplied by members of the Overseeing Committee to the Reserve Bank of India.	Members of the Overseeing Committee constituted by the Reserve Bank of India	Reserve Bank of India

Applicability of RCM under GST

The reverse charge mechanism applies to a wide range of transactions, including the procurement of goods or services from unregistered suppliers, the import of services, and the purchase of specific goods and services from registered suppliers. The list of transactions covered under the RCM is regularly updated by the government, so it's essential to stay informed about the latest changes.

Examples of Transactions Covered under the RCM

To illustrate the application of the reverse charge mechanism, let's consider a few examples:

1. Procurement of goods from an unregistered supplier
2. Import of services from a non-resident service provider
3. Purchase of specified services, such as legal, accounting, or consulting services, from a registered supplier

In each of these cases, the recipient of the goods or services becomes responsible for paying the GST under the reverse charge mechanism.

Advantages and Disadvantages of the RCM under GST

The reverse charge mechanism offers both advantages and disadvantages for businesses. On the one hand, it helps to ensure the timely collection of GST and promotes compliance among suppliers. However, it also places an additional administrative burden on the recipient, who must accurately calculate, pay, and report the GST under the RCM.

Compliance Requirements for Businesses under RCM

Businesses subject to the reverse charge mechanism must fulfill specific compliance requirements, such as:

1. Correctly identifying the transactions covered under the RCM
2. Accurately calculating the GST liability
3. Timely payment of the GST to the government
4. Proper documentation and record-keeping
5. Reporting the RCM transactions in the relevant GST returns

Failure to comply with these requirements can result in penalties and other legal consequences.

Input Tax Credit under RCM

Businesses can claim Input Tax Credit (ITC) on the GST they pay under RCM, but only if the goods or services are used for their business operations.

This means you can't claim ITC on purchases unrelated to your business activities. Businesses registered under the Composition Scheme are not eligible to claim ITC.

Time of Supply for RCM

The period in which you owe GST under RCM depends on whether you're dealing with products or services.

For goods, you owe GST on the earliest of these two dates:

• The day you receive the goods.

• 30 days after the supplier issues their invoice.

For services, you owe GST on the earlier of these two dates:

• The date you pay for the service.

• 60 days after the supplier issues their invoice.

In conclusion, the reverse charge mechanism under GST is a critical component of the tax regime that requires careful attention and understanding. By familiarizing yourself with the key provisions, compliance requirements, and recent updates, you can ensure that your business remains compliant, minimize tax risks, and optimize your overall tax planning.

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