Reverse Charge Mechanism under GST

Reverse Charge Mechanism Under GST Regime

Under the GST laws, usually the supplier of goods or services pays the tax on supply. But under the Reverse Charge Mechanism (hereinafter: ‘RCM’), the receiver of the goods is liable to pay the taxes.

How is RCM different from the Normal GST Regime?

As stated above, Reverse Charge is a mechanism under which the recipient of the goods or services is liable to pay the taxes instead of the provider of the goods or services. On the other hand, under the Normal GST Regime, the supplier collects tax from the buyer and deposits the same with the Government, after adjusting the output tax liability with the Input Tax Credit available.

Also Read: Quarterly Return Monthly Payment Scheme Under GST

Types of RCM

Under the GST laws, there are two types of Reverse Charge Mechanism, which are as follows:

  1. Section 9(3) of CGST Act : Supply of specified goods / services.
  2. Section 9(4) of CGST Act : Supply of specified goods / services made by unregistered persons to the specified registered persons.

RCM under Section 9(3): Supply of Specified Goods

As per Notification No.4/2017, dated 28/06/2017, amended from time to time, supply of following Goods is covered under RCM:

S.No.

Supply of Goods

Supplier of Goods

Recipient of Supply

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

4A.

Raw cotton

Agriculturist

Any registered person

5.

Supply of lottery

State Government, Union Territory or any local authority

Lottery distributor or selling agent

6.

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

7.

Priority Sector Lending Certificate

Any registered person

Any registered person

RCM under Section 9(3): Supply of Specified Services

1.GTA (Goods Transport Agency)
Meaning:
As per Section 2(ze) of GST Act, goods transport agency” means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called.

Supplier of Service: Goods Transport Agency (GTA), who has not opt to pay GST @ 12%.

Recipient of Service:
– Factory registered under Factories Act, 1948
– Society registered under Societies Registration Act, 1860 or any other law
– Co – operative Society established under any law
– Any person registered  under CGST/ SGST/ IGST/ UTGST Act
– Body Corporate
– Partnership firm including Association of persons
– Any casual taxable person located in taxable territory  

Also Read: GST Invoices: B2B, B2CL And B2CS

However, RCM shall not apply to the services provided by GTA by way of transport of goods by way of carriage of goods by road to :
– Department or Establishment of the Central or State Govt. or Union territory
– Local Authority
– 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 and not for making a taxable supply of goods or services.

2. Legal Services
Meaning: ‘Legal service’ means any service provided in relation to advice, consultancy or assistance in any manner and includes representational services before any Court, Tribunal or Authority.

Supplier of Service: An individual advocate including a senior advocate or firm of advocates.

Recipient of Service: Any business entity located in taxable territory.
Note:
Business entity means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession

3. Arbitral Tribunal Services
Meaning:
 Arbitral Tribunal means a sole arbitrator or a panel of arbitrators

Supplier of Service: An Arbitral Tribunal          

Recipient of Service: Business Entity  

4. Sponsorship Services
Meaning:
Sponsoring something or someone basically means endorsing any person, event, activity or organization financially or through the provision of products or services. The individual or group that provides such support is known as a sponsor.

Supplier of Service: Any Person.

Recipient of Service: Any body corporate or partnership firm located in the taxable territory.

Also Read: GST Registration on the basis of State and Turnover

5. Government Services
Meaning:
As per Section 3(23) of the General Clauses Act, 1897 the ‘Government’ includes both the Central Government and any State Government. As per clause (8) of section 3 of the said Act, the ‘Central Government’, in relation to anything done or to be done after the commencement of the Constitution, means the President.

Supplier of Service: Central Government, State government, Local authority, Union Territory.

Recipient of Service: Any person whose turnover exceeds Rs. 40 lakhs (Rs.20 lakhs for Special Category States).

The following services by Government are not covered under the ambit of RCM:

1. Renting of immovable property and
2. Services specified below –
– 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
– The services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport
– Transport of goods or passengers

Also Read: GST Rates applicable on modes of travelling 

5A. Services By The Government
Supplier Of Service: Central Government, State Government, Local Authority, Union Territory.

Recipient of Service: Any person registered under the Central Goods and Services Tax Act, 2017.     

5B. Services Of Transfer Of Development Rights
Meaning:
Development Rights is a contract between the landlord and Real Estate Developer to build a new project on the land of the owner.

Supplier of service: Any person providing service by way of transfer of development rights        

Recipient of Service: Developer / Promoter

5C  Long Term Lease Of Land
Meaning:
Long Term Lease Has A Tenure Of 30 Years Or More

Supplier of service: Any person providing service against consideration in the form of upfront amount (called as premium, salami, cost, price, development charges or by any other name) and/or periodic rent for construction of a project     

Recipient of Service: Promoter 

6.  Services By The Director Or Body Corporate
Meaning: As per the GST laws, GST is applicable under the Reverse Charge Mechanism basis on the services provided by the directors of company or body corporate. However, such director must not be a whole time employee of the Company.

Supplier of Service: A director of a company or a body corporate. 

Recipient of Service: A company or a body corporate located in the taxable territory.   

7. Insurance Agent Services
Supplier Of Service:
 An Insurance Agent

Recipient of Service: Any person carrying on insurance business, located in the taxable territory.

8. Recovery Agent Services
Meaning: 
Recovery Agents Are The Ones That Pursue Customers And Businesses That Owe Payments To Banks. Most Of These Recovery Agencies Act As Agents In Collecting The Dues Of Customers For A Fee Or A Percentage Of The Total Money Owed.

Supplier of Service: A recovery agent.

Recipient of Service: A banking company or a financial institution or a non-banking financial company, located in the taxable territory.

9. Copyright Services
Supplier of Service:
 Music composer, photographer, artist, or the like providing services by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of Section 13 of the Copyright Act, 1957 relating to original dramatic, musical or artistic works

Recipient of Service: The Music company, producer or the like, located in the taxable territory.           

9A. Services Of Author
Supplier of Service:
 Author providing services by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of subsection (1) of section 13 of the Copyright Act, 1957 relating to original literary works

Recipient of Service: Publisher located in the taxable territory.

Provided that nothing contained in this entry shall apply where:-
– the author has taken GST registration and filed a declaration, in form at annexure I, that he will pay GST under forward charge.
– the author makes a declaration, as prescribed in Annexure II on the invoice issued by him in Form GST Inv-I to the publisher.

10. Reserve Bank Services
Supplier Of Service: Members Of Overseeing Committee Constituted By The Reserve Bank Of India.

Recipient of Service: Reserve Bank of India.                        

11. Services By Direct Selling Agents
Meaning: 
A Direct Selling Agent Or DSA is a person who works as a referral agent for a bank or NBFC.

Supplier of Service: Individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm.

Recipient of Service: A banking company or a non-banking financial company, located in the taxable territory.

12. Services By Business Facilitator
Meaning: 
A Business Facilitator is the one who helps a group of people in a business to reach an outcome or decision for which everyone will take responsibility and be fully committed.

Supplier of Service: Business facilitator (BF).

Recipient of Service: A banking company, located in the taxable territory.

13. Services By Business Correspondent
Meaning: 
Business Correspondents are retail agents engaged by banks for providing banking services at locations other than a Bank Branch/ATM

Supplier of Service: An agent of business correspondent (BC)

Recipient of Service: A business correspondent, located in the taxable territory.

14. Security Services :
Meaning: 
Security Service means service rendered by any person towards the security of any property (whether movable or immovable) or security of any person in any manner.

Supplier of Service: Any person other than a body corporate.

Recipient of Service: A registered person, located in the taxable territory.
Provided that nothing contained in the entry shall apply to,-

(a) a Department or Establishment of the Central Government or State Government or Union territory; or (b) local authority; or (c) Government agencies;

which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 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 of the said Act.

15. Service Of Renting Of Motor Vehicle  
Supplier of Service: Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging GST at the rate of 12 per cent  to the service recipient.
Recipient of Service: Any body corporate located in the taxable
territory.

16. Lending Securities Services
Meaning:
 Services of lending securities of Securities under Lending scheme, 1997 (Scheme). Securities and Exchange Board of India (SEBI) as amended.

Supplier of Service: Lender i.e. a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the scheme of SEBI.

Recipient of Service: Borrower i.e. a person who borrows the securities under the Scheme through an approved intermediary of SEBI.

RCM Under Section 9(4) of CGST Act

As per Section 9(4) of CGST Act, if a registered person purchases goods / services from an unregistered dealer (URD), then the registered taxpayer is liable to pay GST on reverse charge basis (only for certain goods/services & registered persons). This provision will apply if the below conditions are met:

– There should be a supply of goods or services
– The supply should be in respect of taxable goods/services
– Supply must be by an unregistered person.
– Supply must be to a registered person
– Supply must be an intra-state supply as compulsory registration is required for inter-state sales

Note:
Till 1st February, 2019, purchases of upto Rs. 5,000 from Unregistered Suppliers did not attract GST.  In other words, there was a reverse charge on buying from unregistered dealers if you are dealing with unregistered suppliers and making payments above Rs. 5,000. This requirement has been cancelled from 1st Feb 2019 onwards. 

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