All about reverse charge mechanism (RCM) under GST

1. What is the Reverse Charge Mechanism (RCM) under GST?

For understanding reverse charge mechanism (RCM) we need to refer to its definition provided under Section 2(98) of the CGST Act, 2017, according to which ‘reverse charge’ means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of IGST Act, 2017.

It is pertinent to mention here generally it is the responsibility of the supplier to pay GST to the Government (though collect’s the same from customer) which is apparent from section 9(1) of CGST Act / section 5(1) of IGST Act, 2017 wherein the taxable person viz supplier is liable to pay tax.

However such liability for payment of tax is shifted onto the recipient where Government believes it would be administratively efficient and will ensure recovery of taxes. Such payment by the recipient is referred to as payment under reverse charge mechanism.

The coverage under reverse charge does not put additional financial burden on the recipient of supply as in such cases the supplier will not charge any GST in its invoice from the recipient and the due GST will be directly be paid by the recipient to the Govt. Thus instead of paying tax to the supplier the recipient is paying same to the Government directly.

In accordance to the powers conferred under section 9(3) of CGST Act, 2017 and under section 5(3) of IGST Act, 2017, Notification No. 13/2017-Central Tax (Rate) dated 28-6-2017 and Notification No. 10/2017-Integrated Tax (Rate) dated 28-6-2017 (RCM Notifications) have been issued by Govt, notifying the situations wherein certain supply of services would be under ambit of reverse charge mechanism.

2. Services notified under Section 9(3) and covered under Reverse Charge Mechanism under GST:

The supply of services under reverse charge mechanism (RCM) has been notified vide Notification No. 13/2017-Central Tax (Rate) dated 28-6-2017 (as amended) under Section 9(3) of the CGST Act, 2017.

The list of notified services that are under reverse charge is given below along with date from which reverse charge provisions are applicable on such services. These services are also notified for reverse charge under other GST Acts(s).

It may be noted here that the tax is to be paid under reverse charge mechanism on all the above 20 services in case the supply is made by specified persons to specified persons as prescribed under RCM Notifications.

The tax will be paid under CGST Act as well as SGST Act viz CGST + SGST in case such supplies are intra-State supplies as defined under Section 8 of the IGST Act,2017. However IGST will be required to paid under reverse charge where such supplies of services are inter-State as defined under Section 7 of the IGST Act, 2017.

However in regard to inter-State supplies, apart from above 20 services the following two additional services has been notified by the Central Government vide Notification No. 10/2017-Integrated Tax (Rate) dated 28-6-2017 wherein whole of the tax viz IGST shall be payable by the recipient on services under Section 5(3) of IGST Act,2017 on Reverse charge basis.

3. Goods notified under Section 9(3) and covered under Reverse Charge Mechanism under GST

The supply of goods which are under ambit of reverse charge mechanism (RCM) has been notified vide Notification No. 4/2017-Central Tax (Rate) dated 28-6-2017 (as amended) under Section 9(3) of the CGST Act, 2017.

The list of goods that is under reverse charge as notified by the Central Government is given below along with date from which reverse charge provisions are applicable. These goods are also notified for reverse charge under other GST Acts(s).

4. Goods / Services notified under Section 9(4) and covered under reverse charge mechanism

In exercise of the powers conferred by Section 9(4) of the CGST Act, 2017, the Central Government has issued Notification No. 07/2019- Central Tax (Rate) dated 29-03-2019 wherein GST will be required to be paid w.e.f. 1st April, 2019, by the promoter (builder) on procurement of goods or services from unregistered suppliers.

Under the aforesaid Notification, the promoter shall be liable to pay GST under reverse charge mechanism (RCM) on three kinds of supplies from unregistered suppliers. The supplies are briefly discussed as under:

a. RCM on Input and input Service for Construction of Project:

If ‘Promoter’ purchases input goods and services used for construction of project from the unregistered person, then he is liable to pay GST under reverse charge mechanism (RCM) on such supplies under Section 9(4) of CGST Act, 2017, if such purchase is less than 80% of total value of inputs and input services.

Notification No. 07/2019- Central Tax (Rate) dated 29.03.2019 prescribes that RCM is to be paid on following supplies from unregistered suppliers:

“Supply of such goods and services or both [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended”

The term used in the notification “shortfall from the minimum value of goods or services or both required to be purchased by a promoter” means, minimum 80% of the total value of input and input services or both are required to be procured by a promoter from a registered person and balance 20% can be procured from an unregistered person. In case this condition is not fulfilled promoter will have has to be pay RCM on the shortfall from 80% threshold.

Minimum value for the purpose is prescribed as 80% of the value of input & Input Services. However, value of input Services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI) are excluded for calculating 80% procurement limit.

GST Rate: The GST Rate is 18% even if the actual rate of GST in case of some of inputs or input services is lower than 18% – (Sr No. 452Q of Schedule III of Notification No. 08/2019-CT (R) dated 28-6-2017 as inserted w.e.f. 1-4-2019.)

b. RCM on Purchase of Cement:

Notification No. 07/2019- Central Tax (Rate) dated 29.03.2019 as amended vide Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019 prescribes GST will be payable under RCM on following supply from an unregistered suppliers

“Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975).

It may be noted here that RCM will be applicable on any amount of purchase of ‘Cement’ by the “promoter” from an unregistered supplier for the construction of project during the financial year, irrespective of the condition of 20%/80%, as in case of input goods and services at point 1 above. Thus no grace is allowed to promoter and in order to avoid RCM he need to purchase entire Cement from registered supplier.

On Cement purchases from unregistered supplier , the promoter will be required to pay GST @ 28% i.e. currently applicable rate on Cement.

c. RCM on Purchase of Capital goods:

Notification No. 07/2019- Central Tax (Rate) dated 29.03.2019 prescribes RCM will be applicable on following supply from an unregistered supplier:

“Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) supplied to a promoter for construction of a project on which tax is payable or paid at the rate prescribed for items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.”

Thus as per above Notification a “promoter” is liable to pay GST under RCM for purchase of any capital goods from any unregistered supplier.

5. Registration Requirement under Reverse Charge Mechanism:

As per Section 24(iii) of CGST Act 2017, a person required to pay tax under the reverse charge mechanism has to compulsorily get itself registered even if the turnover is below the threshold limit.

It may also be noted that such registration is required even if a person is engaged fully in exempt supplies, despite the fact that Sec 23(1) exempts such suppliers from obtaining GST registration.

For further details click here.

6. Time of Supply under Reverse Charge Mechanism:

Under GST, time of supply means a particular point in time when the taxable event i.e. supply is crystallized. The payment of GST and filing of GST returns is directly determined from the time of supply.

The provisions regarding determination to time of supply under RCM cases in regard to goods and services is mandated under Section 12(3) and 13(3) of the CGST Act, 2017 , respectively.

In the case of Goods: Time of supply in case of supply of goods subject to RCM is earliest of the following dates:-

• the date of the receipt of goods;
• the date of payment as entered in the books of account of the recipient;
• the date on which the payment is debited in his bank account
• the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier (31st day from date of invoice)

In the case of services: Time of supply in case supply of services subject to RCM is earliest of the following dates:-

• the date of payment; or
• the date immediately following after sixty days from the date of issue of the invoice by the supplier. (61st day from the date of invoice).

Example of time of supply of legal services subject to RCM:

While determining the time of supply of services covered under reverse charge mechanism (RCM) the date of supply is not relevant and thus the date of hearing in court is to be ignored. The time of supply is computed as under:

Case 1:

Time of supply will be date of payment i.e. 10-05-20XX or 61^st day from the date of invoice i.e. 07-06-20XX, whichever is earlier i.e. 10-05-20XX. Accordingly tax in this case would be required to be paid by 20^th/22^nd/24^th of June, 20XX with filing of GSTR-3B in case of normal assessees.

Case 2:

Time of supply will be date of payment i.e. 10-07-20XX or 61^st day from the date of invoice i.e. 07-06-20XX, whichever is earlier i.e. 07-06-20XX. Accordingly tax in this case would be required to be paid by 20^th/22^nd/24^th of June, 20XX with filing of GSTR-3B in case of normal assessees.

7. Payment of GST under Reverse Charge Mechanism:

As per section 49(4) of CGST Act’2017, ITC can be used for payment of output tax only. Therefore tax under reverse charge can be paid through cash only without availing the benefit of ITC. In case the supply subject to RCM is supplied by a registered supplier , he must mention in his invoice that tax is payable on reverse charge.

The recipient should determine the nature of supply i.e. supply in inter-State supply ( where location of supplier and place of supply are in same State / UT) or intra-State supply ( where location of supplier and place of supply are in different State / UT).

In case of intra-State supply he should pay CGST + SGST and where the supply is inter-State, IGST should be paid under reverse charge mechanism (RCM).

8. Input Tax Credit:

In case the supplies subject to RCM were obtained for business purposes / taxable supplies, input tax credit in respect of tax paid under reverse charge mechanism can be availed as per Section 16 of the CGST Act, 2017. However this is subject to provisions of Section 17(5) of the CGST Act, 2017 wherein certain blocked credit have been prescribed.

However it is important to note that in case supplied subject to RCM are obtained from unregistered suppliers a self invoice as mandated under Section 31(3)(f) of the CGST Act,2017 will have be raised by the recipient.

It may be noted here that as per Rule 36, input tax credit in such cases can only be availed on basis of self invoice, subject to payment of tax. For detailed discussion on issue of self invoice please Click here.

Further if the composite dealer receives any goods / services subject to reverse charge mechanism (RCM), such dealer needs to pay GST at normal rates and also will also not be able to avail input tax credit thereof.

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Frah Saeed

Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.