Introduction:

In the 50th GST Council meeting on July 11, 2023, key decisions were taken regarding the reverse charge mechanism (RCM) under GST. Once the CBIC notifies these decisions, they will be implemented. Among them, it was decided that the supply of raw cotton by agriculturists to cooperatives, like kala cotton, will be taxable under RCM. It was also determined that services provided by a company director in a personal capacity are not taxable under RCM.

RCM transfers the responsibility of paying GST from the supplier to the recipient. This mechanism aims to widen the tax base among unorganized sectors, exempt specific suppliers, and levy taxes on imported services.

Only select business entities fall under RCM. Use the GST search tool to verify the constitution of any GST number.

Understanding When RCM Applies:

A. Supply of Specific Goods and Services by CBIC

Under Section 9(3) of CGST Acts, the CBIC specifies goods and services under RCM. The complete list is accessible on the CBIC website.

B. Transactions from Unregistered to Registered Dealers

Per Section 9(4) of the CGST Act, when unregistered vendors supply goods to GST-registered persons, the RCM applies, requiring the recipient to pay GST. While intra-state purchases mandate CGST and SGST payments, inter-state purchases require IGST. Periodic government notifications detail applicable goods or services under this provision.

In real estate, promoters must source at least 80% of inward supplies from registered dealers. Otherwise, they pay 18% GST on the shortfall under RCM. Cement purchases from unregistered suppliers are taxed at 28%, independent of the 80% rule. Since April 1, 2019, promoters are taxed on Transfer of Development Rights (TDR) or Floor Space Index (FSI) via RCM. TDR is seen as a service supply under Section 7, obligating GST payments. "Outward TDR supply" between developers attracts an 18% GST through RCM.

C. Services through E-Commerce Operators

As per Section 9(5) of CGST, services provided via e-commerce operators fall under RCM, compelling operators to pay GST. This includes passenger transport via radio taxi, motor cab, maxi cab, motorcycle, accommodation services, and housekeeping (e.g., plumbing, carpentering). Without physical tax territory presence, the operator appoints a representative for GST payment obligations.

Time of Supply Under RCM:

Goods under RCM have their supply time determined by the earliest of these: receipt date, payment date, or 30 days post-invoice issue. If indeterminable, it defaults to the entry date in the recipient's accounts. For services, it's the earliest of the payment date or 60 days post-invoice. If indetermination occurs, it defaults to the recipient's account entry date.

Registration Rules Under RCM:

Section 24 of CGST Act mandates GST registration for individuals accountable for RCM payments, irrespective of the Rs. 20 lakh or Rs. 40 lakh threshold.

Who Pays GST Under RCM?

The goods or services recipient bears GST liability under RCM, with supplier invoices indicating RCM applicability. Considerations include Input Tax Credit (ITC) eligibility solely for business-use goods/services, composition dealers paying standard tax without ITC eligibility, and potential applicability of GST compensation cess under RCM.

Input Tax Credit (ITC) Under RCM:

Suppliers can't claim ITC on RCM-paid GST, but recipients can, provided the goods/services serve business purposes. They cannot, however, use ITC to offset output GST under RCM—such payments require cash settlements.

Self-Invoicing:

For goods/services from unregistered suppliers, recipients must self-invoice under RCM, becoming liable for tax payments on behalf of unregistered suppliers. Section 31(3)(g) dictates recipients also issue a payment voucher during supplier payments involving RCM tax liabilities.