All about Reverse Charge Mechanism (RCM) under GST

All about Reverse Charge Mechanism (RCM) under GST

Introduction:

In a recent meeting of the 50th GST Council held on July 11th, 2023, several decisions were made regarding the reverse charge mechanism under GST. These decisions, once notified by the CBIC, will come into effect. One such decision was that the supply of raw cotton by agriculturists to cooperatives, including kala cotton, will be taxable under the reverse charge mechanism. Additionally, it was decided that services supplied by a director of a company to the company in their personal or private capacity will not be taxable under RCM.

The reverse charge mechanism is a process where the recipient of goods or services is responsible for paying Goods and Services Tax (GST) instead of the supplier. The purpose of implementing the reverse charge mechanism is to broaden the scope of levying tax on various unorganized sectors, exempt specific classes of suppliers, and tax the import of services from suppliers based outside of India.

Not all business entities are subject to the reverse charge mechanism. You can use the GST search tool to find out the business constitution of any GST number.

Let's explore when the reverse charge mechanism is applicable:

A. Supply of certain goods and services specified by the CBIC

The CBIC has the power to issue a list of goods and services on which reverse charge is applicable, according to Section 9(3) of CGST Acts. You can access the list of goods and services on which reverse charge is applicable on the CBIC website.

B. Supply from an unregistered dealer to a registered dealer

According to Section 9(4) of the CGST Act, if a vendor who is not registered under GST supplies goods to a person registered under GST, reverse charge will apply. This means that the recipient of the goods will have to pay the GST directly instead of the supplier. Intra-state purchases require the payment of CGST and SGST under the reverse charge mechanism, while inter-state purchases require the payment of IGST. The government periodically notifies the list of goods or services on which this provision applies.

In the real estate sector, the government has mandated that promoters should buy inward supplies to the extent of 80% from registered suppliers only. If the purchases from registered dealers fall short of 80%, the promoter must pay GST at 18% on the reverse charge for the extent of the shortfall. However, if the promoter purchases cement from an unregistered supplier, they must pay tax at 28%. This calculation is independent of the 80% calculation. Promoters are also liable to pay GST on a reverse charge basis for Transfer of Development Rights (TDR) or floor space index (FSI) supplied on or after April 1st, 2019. Even if a landowner is not regularly engaged in land-related activities, the transfer of development rights to the promoter is considered a supply of service under Section 7 of the CGST Act and is liable to GST. In the case of outward supply of TDR by one developer to another, GST at 18% applies on reverse charge.

C. Supply of services through an e-commerce operator

According to Section 9(5) of the CGST Act, if a service provider uses an e-commerce operator to provide specified services, reverse charge will apply to the e-commerce operator, and they will be liable to pay GST. This section covers services such as transportation services to passengers by radio-taxi, motor cab, maxi cab, and motorcycle, accommodation services in hotels, inns, guest houses, clubs, campsites, or other commercial places meant for residential or lodging purposes, and housekeeping services like plumbing and carpentering. If the e-commerce operator does not have a physical presence in the taxable territory, a person representing the operator will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.

Time of Supply Under RCM

The time of supply for goods under reverse charge is determined by the earliest of the following dates: the date of receipt of goods, the date of payment, or the date immediately after 30 days from the date of issue of an invoice by the supplier. If it is not possible to determine the time of supply, it will be the date of entry in the recipient's books of account.

For services, the time of supply under reverse charge is the earliest of the following dates: the date of payment or the date immediately after 60 days from the date of issue of the invoice by the supplier. If the time of supply cannot be determined, it will be the date of entry in the recipient's books of account.

Registration Rules Under RCM

According to Section 24 of the CGST Act, a person liable to pay GST under the reverse charge mechanism must register under GST, regardless of the threshold limits of Rs. 20 lakh or Rs. 40 lakh.

Who Should Pay GST Under RCM?

The recipient of goods or services is responsible for paying GST under the reverse charge mechanism. The supplier must mention in the tax invoice whether tax is payable under RCM.

There are a few factors to consider when making GST payments under RCM. The recipient can claim Input Tax Credit (ITC) on the tax amount paid under RCM only if the goods or services are used for business purposes. Composition dealers must pay tax at normal rates and cannot claim any input tax credit. GST compensation cess can apply to the tax payable or paid under RCM.

Input Tax Credit (ITC) Under RCM

A supplier cannot claim the GST paid under RCM as Input Tax Credit (ITC). The recipient can avail of ITC on the GST amount paid under RCM for goods or services used for business purposes. However, the recipient cannot use the ITC to pay output GST on goods or services under reverse charge. The payment must be made in cash.

Self-Invoicing

Self-invoicing is required when purchasing goods or services from an unregistered supplier under reverse charge. Since the supplier cannot issue a GST-compliant invoice, the recipient becomes liable to pay taxes on their behalf. Section 31(3)(g) also states that the recipient must issue a payment voucher at the time of making payment to the supplier when liable to pay tax under RCM.

Introduction:

In a recent meeting of the 50th GST Council held on July 11th, 2023, several decisions were made regarding the reverse charge mechanism under GST. These decisions, once notified by the CBIC, will come into effect. One such decision was that the supply of raw cotton by agriculturists to cooperatives, including kala cotton, will be taxable under the reverse charge mechanism. Additionally, it was decided that services supplied by a director of a company to the company in their personal or private capacity will not be taxable under RCM.

The reverse charge mechanism is a process where the recipient of goods or services is responsible for paying Goods and Services Tax (GST) instead of the supplier. The purpose of implementing the reverse charge mechanism is to broaden the scope of levying tax on various unorganized sectors, exempt specific classes of suppliers, and tax the import of services from suppliers based outside of India.

Not all business entities are subject to the reverse charge mechanism. You can use the GST search tool to find out the business constitution of any GST number.

Let's explore when the reverse charge mechanism is applicable:

A. Supply of certain goods and services specified by the CBIC

The CBIC has the power to issue a list of goods and services on which reverse charge is applicable, according to Section 9(3) of CGST Acts. You can access the list of goods and services on which reverse charge is applicable on the CBIC website.

B. Supply from an unregistered dealer to a registered dealer

According to Section 9(4) of the CGST Act, if a vendor who is not registered under GST supplies goods to a person registered under GST, reverse charge will apply. This means that the recipient of the goods will have to pay the GST directly instead of the supplier. Intra-state purchases require the payment of CGST and SGST under the reverse charge mechanism, while inter-state purchases require the payment of IGST. The government periodically notifies the list of goods or services on which this provision applies.

In the real estate sector, the government has mandated that promoters should buy inward supplies to the extent of 80% from registered suppliers only. If the purchases from registered dealers fall short of 80%, the promoter must pay GST at 18% on the reverse charge for the extent of the shortfall. However, if the promoter purchases cement from an unregistered supplier, they must pay tax at 28%. This calculation is independent of the 80% calculation. Promoters are also liable to pay GST on a reverse charge basis for Transfer of Development Rights (TDR) or floor space index (FSI) supplied on or after April 1st, 2019. Even if a landowner is not regularly engaged in land-related activities, the transfer of development rights to the promoter is considered a supply of service under Section 7 of the CGST Act and is liable to GST. In the case of outward supply of TDR by one developer to another, GST at 18% applies on reverse charge.

C. Supply of services through an e-commerce operator

According to Section 9(5) of the CGST Act, if a service provider uses an e-commerce operator to provide specified services, reverse charge will apply to the e-commerce operator, and they will be liable to pay GST. This section covers services such as transportation services to passengers by radio-taxi, motor cab, maxi cab, and motorcycle, accommodation services in hotels, inns, guest houses, clubs, campsites, or other commercial places meant for residential or lodging purposes, and housekeeping services like plumbing and carpentering. If the e-commerce operator does not have a physical presence in the taxable territory, a person representing the operator will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.

Time of Supply Under RCM

The time of supply for goods under reverse charge is determined by the earliest of the following dates: the date of receipt of goods, the date of payment, or the date immediately after 30 days from the date of issue of an invoice by the supplier. If it is not possible to determine the time of supply, it will be the date of entry in the recipient's books of account.

For services, the time of supply under reverse charge is the earliest of the following dates: the date of payment or the date immediately after 60 days from the date of issue of the invoice by the supplier. If the time of supply cannot be determined, it will be the date of entry in the recipient's books of account.

Registration Rules Under RCM

According to Section 24 of the CGST Act, a person liable to pay GST under the reverse charge mechanism must register under GST, regardless of the threshold limits of Rs. 20 lakh or Rs. 40 lakh.

Who Should Pay GST Under RCM?

The recipient of goods or services is responsible for paying GST under the reverse charge mechanism. The supplier must mention in the tax invoice whether tax is payable under RCM.

There are a few factors to consider when making GST payments under RCM. The recipient can claim Input Tax Credit (ITC) on the tax amount paid under RCM only if the goods or services are used for business purposes. Composition dealers must pay tax at normal rates and cannot claim any input tax credit. GST compensation cess can apply to the tax payable or paid under RCM.

Input Tax Credit (ITC) Under RCM

A supplier cannot claim the GST paid under RCM as Input Tax Credit (ITC). The recipient can avail of ITC on the GST amount paid under RCM for goods or services used for business purposes. However, the recipient cannot use the ITC to pay output GST on goods or services under reverse charge. The payment must be made in cash.

Self-Invoicing

Self-invoicing is required when purchasing goods or services from an unregistered supplier under reverse charge. Since the supplier cannot issue a GST-compliant invoice, the recipient becomes liable to pay taxes on their behalf. Section 31(3)(g) also states that the recipient must issue a payment voucher at the time of making payment to the supplier when liable to pay tax under RCM.

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