Reverse Charge Mechanism Under GST

Published Tue, 21 Mar 2023 Goods and Service Tax

Key points

• What is Reverse Charge Mechanism (RCM)?
• Comparison between reverse charge and forward charge under GST
• Goods and Services notified under RCM category
• Condition for claiming Input Tax Credit (ITC) for the tax paid on Goods and/or Service under RCM
• Documents required for Goods/Services required to be maintained for RCM supplies
• Frequently Asked Questions (FAQ’s)

What is a Reverse Charge Mechanism (RCM)?

Under the Goods and Service Tax (GST) regime, a normally registered taxpayer supplying goods and/or service is liable to pay tax. In other words, a registered supplier making taxable supplies is liable to collect GST from the recipient and pay to the Government.  Under the reverse charge mechanism, the recipient of goods and/or services have to pay the tax to the government directly.

Comparison between reverse charge and forward charge under GST

Goods and Services notified under RCM category

GST shall be paid by the recipient of goods and services or both, on a reverse charge basis, in the following cases:

• Supply of goods or services or both, notified by Government on the recommendation of GST Council.

• Supply of specified categories of goods or services or both by an unregistered supplier to a specified class of registered persons. Any registered taxpayer receiving any taxable goods and/or services from unregistered suppliers shall be required to pay GST under the reverse charge mechanism.

Goods notified by CBIC on which tax has to be paid on reverse charge basis under section 9(3) of CGST Act,2017 and 5(3) of IGST Act, 2017

Services notified by CBIC on which tax has to be paid on reverse charge basis under section 9(3) of CGST Act,2017 and 5(3) of IGST Act, 2017

** Tax on GTA services can be paid by the supplier at their option but if the same is not paid by the supplier then tax is payable under reverse charge by the recipient. GTA Services are taxable at the following 2 rates:

1. 5% by the recipient of such services when payable under reverse charge OR in the scenario where the supplier of GTA services has opted to pay tax on the same provided GTA has not taken the input tax credit (ITC) on goods and services used in supplying GTA services or
2. 12% where GTA opts to pay GST at a said rate on all the services of GTA supplied by it. In this case, there is no restriction on availing ITC on goods and services used in supplying GTA services GTA.

Tax Payable by the Electronic Commerce Operator on Notified Services (NN 17/2017 CT(R) dated 28.06.2017 and NN 14/2017 IT (R) dates 28.06.2017
There are such cases where the tax on specified services is required to be paid by Electronic Commerce Operator when such services are supplied through it. The Government has notified the following categories of services the tax on supplies of which shall be paid by the ECO:

1. Services by way of transportation of passengers by radio-taxi, motor cab, maxi cab, and motor cycle;
2. Services by way of providing accommodation in hotels, inns guest houses, clubs, campsites or other commercial places meant for the residential or loading purposes, except where the person supplying such services through electronic commerce operator is liable for registration under section 22(1) of the CGST Act.
3. Services by way of house-keeping, such as plumbing, carpentering etc., except where the person supplying such services through electronic commerce operator is liable for registration under section 22(1) of CGST Act.

Condition for claiming Input Tax Credit (ITC) for the tax paid on Goods and/or Service under RCM

Under RCM, the supplier cannot claim the input tax credit on GST paid on goods and services that attract tax on a reverse charge basis. Thus, it is the recipient who claims the benefit of the input tax credit on goods or services that are liable to tax on a reverse charge basis. Therefore, payment of any tax amount liable to be paid under reverse charge mechanism shall be made through Electronic Cash Ledger of the recipient only. Also, the recipient can avail credit for the tax paid on goods or services subject to reverse charge only if such goods or services are used or would be used for business purposes by him.
Further, the composite dealer falls under the reverse charge mechanism then the dealer cannot claim any credit of tax paid. The tax rate for the supplies received by the composition dealer is normal applicable rates and not at the composition rates.

Documents required for Goods/Services required to be maintained for RCM supplies
Recipient of services need to maintained below documents for to claim an input tax credit under GST

• The recipient needs to raise a self- invoice.
• Self-invoice shall contain details of Supplier of Goods or Services
• Details of RCM payments need to be provided in GST returns 

Frequently Asked Questions (FAQ)
 
Q: Does aggregate turnover include the value of inward supplies received on which RCM is payable?
 No, as per section 2(6) of CGST Act, 2017, Aggregate turnover does not include the value of inward supplies on which tax is payable on a reverse charge basis.
 
Q: In case the supplier has paid GST which, was payable by the recipient on the reverse charge, is the recipient discharged from the liability to pay tax on the reverse charge?
No, even if the supplier has paid tax on the supplies on which tax is payable under RCM must be paid by the recipient.
 
Q: Is the condition to pay the supplier within 180 days applicable to supplies covered by reverse charge?
No, the second proviso to Section 16(2) of the act days does not apply to supplies on which tax is payable on a reverse charge basis.

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