Reverse Charge Mechanism under Goods and Services Tax (GST)

Preamble

Usually a supplier of goods or service is a taxable person liable to discharge tax liability under Goods and Services Tax Act (‘GST Act’). However, in exceptional cases, GST legislation stipulates that the liability under the GST Act shall be discharged by recipient instead of supplier of goods or services. This is popularly known as Reverse Charge Mechanism (‘RCM’).

Basics of RCM

Reverse charge applies only when there is a charge on supply. If supply is exempted, nil rated or non-taxable, RCM does not apply in such a case.

Recipient of goods or services discharges GST under RCM as if he is the person liable for paying the tax on supply procured by him. All provisions of the Act including the collection, recoveries and penal provisions apply to the recipient and he is required to pay applicable tax i.e., CGST and SGST/ UTGST, or IGST depending on location of supplier and place of supply. The tax liability needs to be discharged under RCM at applicable rate of tax.

Recipient makes payment on his own account under the recipient’s GSTIN number and is declared in his GST Returns as taxable supplies on which tax liability is discharged.

Once the tax is paid under RCM by the recipient, it becomes an input tax and the recipient (payer of tax under RCM) is entitled to avail Input Tax Credit (‘ITC’) thereof, subject to other provisions contained in Chapter V of CGST Act and Input Tax Credit Rules.

Reverse Charge Mechanism (‘RCM’) in brief

Based on the above, it can be said that reverse charge applies in case of notified supplies of goods and services or in case of supplies by a specified category of suppliers.

RCM on notified goods or services

Recipient of notified goods or services or both is liable to pay CGST under RCM on supply of notified goods or services u/s. 9(3) of CGST Act.

Recipient is liable to discharge GST liability under RCM irrespective of:

• Recipient being registered person or unregistered person;
  or
• Supplier of notified goods or services is registered person or unregistered person.

Notified goods under RCM

Presently, the GST Council has recommended very few goods, i.e., tobacco leaves, cashewnuts in shell, etc. are notified goods for the purpose of RCM. Any person buying tobacco leaves will be liable to discharge GST under RCM on purchase of tobacco leaves.

Notified services under RCM

GST Council has recommended following services on which tax will be payable on RCM:

RCM on procurement of goods or services from unregistered persons

Registered (taxable) person is liable to pay tax under RCM on any goods or services or both procured by him from an unregistered person. Followings are a few illustrations to demonstrate the circumstances in which RCM triggers:

• An unregistered architect (whose turnover is ₹15 lakh) raises an invoice of ₹1 lakh on builder. In such a case, builder being registered person will be liable to pay GST on ₹ 1 lakh under RCM.
• An item of stationery is bought by registered business entity from small unregistered shop. In such a case, such business entity will have to discharge GST under RCM.

Time of supply for RCM

Due date of payment of tax under RCM is linked to the time of supply as prescribed u/ss. 12 and 13 of CGST Act.

Time of Supply for goods

It shall be earliest of following:

• Date of receipt of goods; or
• Date of payment entered in books of account or date of debit in bank, whichever is earlier; or
• Date immediately after 30 days from date of invoice

Where it is not possible to determine time of supply as above, time of supply shall be date of entry in books of account of recipient of supply.

Time of Supply for services

It shall be earliest of following:

• Date of payment entered in books of account or date of debit in bank, whichever is earlier; or
• Date immediately after 60 days from date of invoice

Where it is not possible to determine time of supply as above, time of supply shall be date of entry in books of account of recipient of supply.

Mandatory registration for person liable to pay GST under RCM

Section 24(iii) of CGST Act mandates compulsory registration for persons liable to pay tax under RCM. Threshold limit is not applicable to persons liable to pay under RCM. Person having less than ₹ 20 lakh turnover or supplier of exclusively exempt or non-taxable goods /services will also be liable for GST registration if he is obliged to discharge tax under RCM.

Illustration: Co-operative society availing goods transport agency (‘GTA’) services of nominal value will be liable to pay GST under RCM and consequently, liable to get itself registered irrespective of the fact that such a society is not making any taxable supply or their aggregate turnover is below the threshold limit.

Documentation

Section 31(3)(f) mandates registered person liable to pay GST under RCM to issue an invoice in respect of goods and services received by him from unregistered supplier. Such invoices should contain all particulars as prescribed u/s. 31(1) and 31(2) read with GST Invoice Rules to the extent applicable. This would mean registered person procuring goods and services and paying tax under RCM is obliged to mention HSN Codes and Service Accounting Codes of goods or services procured by him.

However, in terms of proviso to Rule 46 of CGST Rules, a registered person may issue a consolidated invoice at the end of a month in respect of purchases from unregistered suppliers exceeding ₹ 5,000 per day.

Rule 1 of Input Tax Credit Rules provides that a registered person shall avail input tax credit on the basis of an invoice raised in accordance with provisions of section 31(3)(f).

Further, registered person liable to pay GST under RCM shall issue a payment voucher at the time of making payment to supplier.