Article on Reverse Charge Mechanism –Everything you need to know

Reverse Charge Mechanism - Everything you need to know

The person who supplies the goods or services or both i.e., the supplier, is generally required to pay tax to the Government. This is called payment of tax under forward charge mechanism. However, under the GST law there is a concept of Reverse Charge also, where the recipient is required to pay tax to the government instead of supplier. In this article we are about to discuss the concept of RCM in detail, the time of supply in case of RCM, registration & invoicing requirements, eligibility of input tax credit in respect of tax paid under RCM.

Before going into detailed discussion it is necessary to understand the provisions of section 9(3), 9(4) & 9(5) and corresponding section 5(3), 5(4) & 5(5) of IGST Act 2017. As the provisions of RCM are governed by these sections.

Section 9(3) of CGST Act 2017 gives the power to the Government to notify the goods or services or both, on which the tax is to be paid on reverse charge basis by the recipient of such goods or services or both. While section 9(4) of CGST Act 2017 gives the power to the Government to notify the class of registered person who shall be liable to pay tax under RCM, in respect of the goods or service procured from unregistered person. On other hand section 9(5) of CGST Act 2017 gives the power to the Government to notify the services on which tax is to be paid by the E-commerce Operator (ECO).

Thus in the exercise of the power conferred by section 9(3) of CGST Act 2017 the central government on the recommendations of the council had issued a Notification No. 13/2017 CT(R) wherein the list of the services are specified on which RCM would be applicable subject to the conditions mentioned therein. For example the services provided by GTA, services provided by advocates or firm of advocates , Services supplied by an arbitral tribunal, Renting services, Security services etc. are covered in the said Notification on which RCM is applicable subject to the conditions specified.

Similarly, a Notification No. 04/2017-CT (R) has been issued by to notify the goods on which RCM is applicable. In the said notification goods like Cashew nuts, Tobacco leaves, Raw cotton, Silk Yarn, Metal scrap etc. are notified on which tax is payable under RCM subject to the conditions specified therein.

Further, in the exercise of the power conferred by section 9(4) of CGST Act 2017 the central government on the recommendations of the council had issued a Notification No. 07/2019 CT(R) wherein the Promoters (being a recipient of goods or services) are notified to pay the tax under RCM in respect of procurement of goods or services relating to the construction of the project from an un registered person.

Similarly, in the exercise of the power conferred by section 9(5) of CGST Act 2017 the central government on the recommendations of the council had issued a Notification No. 17/2017 CT(R) wherein the services are notified on which the E-commerce Operator (ECO) would be liable to pay the tax under reverse charge. In the said notification the following four services are notified on which the liability to pay tax has been shifted to the ECO subject to the conditions mentioned therein:

(i) The services by way of transportation of passengers by a radio-taxi, motorcab, maxicab, motor cycle, or any other motor vehicle.

(ii) Services by way of providing accommodation in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes.

(iii) Services by way of house-keeping, such as plumbing, carpentering etc.

(iv) Supply of restaurant service other than the services supplied by restaurant, eating joints etc.

Till now we have discussed about the sections which gives the power to the Government to issue a notifications related to reverse charge and also get a knowledge about the RCM Notifications issued in this respect. Now we proceeds to discuss some other important aspects relating to the reverse charge;

Registration requirements:

Section 24 of CGST Act 2017 contains the categories of persons who are required to obtain compulsory registration irrespective of the threshold limits given under section 22. The persons who are liable to pay GST under the reverse charge mechanism are also specified under section 24 of CGST Act 2017. Hence if the person who is otherwise not registered under GST due to the threshold limit but if said person receives any supply of goods or services on which RCM is applicable, in such situation he shall compulsory liable to obtain registration under GST even if the turnover of said person is below the threshold limits given under section 22.

For example Mr. A is a trader in Haryana and not registered under GST since his turnover is below Rs. 20 Lakhs. But Mr. A has obtained the services of advocate for the settlement of any pending case. For providing such services the advocate had raised a bill for his consultancy charges. Now since the services of advocates are covered under RCM as per Notification No. 13/2017 CT(R) hence Mr. A would be liable to pay tax under reverse charge. In such situation Mr. A has to obtain compulsory registration by virtue of section 24 irrespective of the fact that his turnover is below the threshold limit.

The another important point that need to understand here is that if the person is exclusively engaged in the supply of goods or services which is covered under reverse charge, in such situation such person would be exempted from the requirement to obtain registration even if his turnover cross the threshold limit. To provide such exemption from registration a Notification No. 5/2017 - Central Tax has been issued stating that the persons who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both under sub-section (3) of section 9 of the said Act as the category of persons exempted from obtaining registration under the aforesaid Act.

Provided that nothing contained in this notification shall apply to any person engaged in the supply of metal scrap, falling under Chapters 72 to 81 in the first schedule to the Customs Tariff Act, 1975.

Thus from the above it is clear that there is no need to obtain registration if the person is only providing those goods or services on which the recipient is required to pay tax under RCM subject to the one exception that is the supplier of metal scrap.

Time of supply in case of RCM:

1. Time of supply in case of goods:
Sub section 3 of section 12 of CGST Act 2017 is relevant in this regard which states that in case of supplies in respect of which tax is paid or liable to be paid on RCM basis, the time of supply shall be the earliest of the following dates, namely:

(a) the date of the receipt of goods; or

(b) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(c) 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:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.

2. Time of supply in case of services:
To determine the time of supply in case of services which are covered under RCM we have to move to the sub section 3 of section 13 of CGST Act 2017. As per section 13(3), in case of supplies in respect of which tax is paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely:

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier, in cases where invoice is required to be issued by the supplier; or

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), or clause (c) the time of supply shall be the date of entry in the books of account of the recipient of supply.

Concept of self invoicing in case of RCM:

In case the tax is deposited under RCM the recipient has to issue a self invoice for the same. Section 31(3)(f) of CGST Act 2017 states that a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both. Thus it is clear that when the supplier is unregistered and goods or services are covered under RCM, in such situation the recipient has to issue a self invoice for the same.

Time limit to issue self invoice:

Earlier there was no specific time limit prescribed under GST law to issue a self invoice in case of RCM. However vide Notification No. 20/2024-Central Tax a new rule has been inserted with effect from 01.11.2024 i.e., Rule 47A of CGST Rules 2017. Rule 47A states that where an invoice is required to be issued under section 31(3)(f) by a registered person, who is liable to pay tax under sub-section (3) or sub-section (4) of section 9, he shall issue the said invoice within a period of thirty days from the date of receipt of the said supply of goods or services, or both, as the case may be.

Thus, it is now clear that in case of RCM the registered person (Recipient) has to issue a self invoice within 30 days from the date of receipt of goods or services from an unregistered person

Input Tax Credit (ITC) of tax deposited under RCM

The CBIC, vide circular no. 211/5/2024-GST, dated 26^th June 2024, it is clarified that in cases of supplies received from unregistered suppliers, where tax has to be paid by the recipient under reverse charge mechanism (RCM) and where invoice is to be issued by the recipient of the supplies in accordance with section 31(3)(f) of CGST Act, the relevant financial year for calculation of time limit for availment of input tax credit under the provisions of section 16(4) of CGST Act will be the financial year in which the invoice has been issued by the recipient under section 31(3)(f) of CGST Act, subject to payment of tax on the said supply by the recipient and fulfilment of other conditions and restrictions of section 16 and 17 of CGST Act.

In case, the recipient issues the invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax. Further, in cases of such delayed issuance of invoice by the recipient, he may also be liable to penal action under the provisions of Section 122 of CGST Act.

After discussing the concept of reverse charge from each & every aspects we can reach the following conclusion;

Conclusion: To ensure that whether any service is covered under RCM we have to refer Notification No.13/2017 CT(R). Similarly to ensure that any supply of goods is covered under RCM we have to refer Notification No. 04/2017. The RCM would not be applicable on goods purchased from unregistered person except the goods which are specified in the Notification No. 04/2017 CT(R) & Notification No. 07/2019 CT(R). The E-commerce operator is required to pay RCM only in respect of services specified in Notification No. 17/2017 CT(R). The persons who are liable to pay GST under RCM are compulsory required to obtain registration. Further, there is no need to obtain registration if the person is only providing those goods or services on which the recipient is required to pay tax under RCM. Also in case the tax is deposited under RCM the recipient has to issue a self invoice for the same with in 30 days from the date of receipt of goods or services.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.