What is Reverse Charge Mechanism (RCM) in GST?

Generally, the supplier of goods or services is liable to pay GST. However, notified goods and services on which GST is paid by the recipient directly to the government which is called reverse charge mechanism (RCM). Under the principle of indirect tax, the burden of tax has to be passed on to the recipient. GST is indirect tax and this principle holds good for GST. Under normal circumstances the liability to deposit GST is on supplier but in RCM the liability to deposit GST to government shifts from supplier to recipient.

When is Reverse Charge Applicable?

In law two types of reverse charge scenarios have been provided:

Supply of specified goods or services section 9 (3)

Notified Goods

As per the notification of CGST Act, following goods has notified wherein whole of the tax shall be paid on reverse charge basis by the recipient of supply:

Nature of supply of goods	Supplier	Recipient
1)      Cashew nuts not shelled or peeled, Bidi wrapper leaves (Tendu), Tobacco leaves, Raw cotton	Agriculturist	Any registered person
2)      Oils other than those of citrus fruits: ·         Of peppermint (Mentha piperita) ·         Of other mints: –          Spear mint oil –          Water mint oil –          Horse mint oil –          Berga mint oil –          Mentha Orvenis	Any unregistered person	Any registered person
3)      Silk yarn made from raw silk or silk worm cocoons.	Manufacturers of silk yarn	Any registered person
4)      Supply of lottery	State government, Union territory or any local authority	Lottery distributor or Selling agent
5)      Used vehicles, seized and confiscated goods, old and used goods, waste and scrap	Central or state government (excluding Ministry of Railways) UT or local authority	Any registered person
6)      Priority sector Lending Certificate	Any registered person	Any registered person
7)      Metal Scrap	Any Unregistered person	Any registered person

Notified Services

As per the notification of CGST Act, following services has notified wherein whole of the tax shall be paid on reverse charge basis by the recipient of supply:

Nature of supply of goods	Supplier	Recipient
1)      Supply of transportation of goods by road services by a Goods Transport Agency (GTA), if not opted for forward charge mechanism (FCM), supplied.	Goods Transport Agency (GTA)	To any registered person under GST, any Factory, Co-operative society, body corporate, partnership firm or AOP and to any casual taxable person.
2)      Legal services provided by advocate, senior advocate, firm of advocate or arbitral tribunal.	An individual advocate including a senior advocate or firm of advocates.	To any business located in taxable territory.
3)      Sponsorship services provided by any person.	Any person	Any business entity located in taxable territory.
4)      Any services provided by central or state government or union territory or local authority	Central government, State government, Union territory or local authority	Any business entity located in taxable territory.
5)      Services of renting of immovable property by central or state government or union territory or local authority (except Ministry of railways)	Central government, State government, Union territory or local authority	Any registered person.
6)      Services of transfer of development rights (TDR), floor space index (FSI), Long term lease (>= 30 years) for construction by any person.	Any person	To any promoter
7)      Services supplied by a director.	Director	To any company and body corporate located in taxable territory.
8)      Services supplied by an Insurance agent	Insurance agent	To any insurance business located in taxable territory.
9)      Services supplied by a recovery agent	A recovery agent	To banking company or financial institution or NBFC located in taxable territory.
10)  Services by individual Direct Selling Agent (DSA)	DSA	To any banking company or NBFC located in taxable territory.
11)  Services by business facilitator,	Business Facilitator	To any banking company located in taxable territory.
12)  Services by Agent of business correspondent.	Agent of Business Correspondent	To business correspondent located in taxable territory
13)  Services by RBI Overseeing Committee members	RBI Overseeing Committee members	To Reserve Bank of India
14)  Services of lending of securities	Lender	To security borrower
15)  Security services (By way of supply of security personnel) by person other than body corporate.	Other than Body corporate	To any registered person located in taxable territory.
16)  Services provided by way of renting of any motor vehicle (designed to carry passenger) where the cost of fuel is included in the consideration.	Any person other than body corporate	Any body corporate located in the taxable territory.

Supply of specified goods or services made by unregistered supplier to registered recipient under section 9(4)

When a registered person receives specified goods or services from an unregistered supplier section 9(4) applies. Under this the registered person is liable to pay GST instead of the supplier.

The government may, on the recommendation of council, by notification specify a class of registered person who shall, in respect of supply of specified categories of goods or services r both received from an unregistered supplier pay tax on reverse charge basis.

Value of supply under Reverse Charge Mechanism (RCM)

As per section 15 of CGST Act, the value of supply is the transaction value. In case where the goods/services are supplied from unregistered supplier to the registered recipient, the value is the price paid or payable for the goods/services.

In case of import of services by a registered person in India from a related person located outside India, the tax is required to be paid by the registered person in India under Reverse Charge Mechanism. The value of supply is the transaction value or the price paid or payable for the services. If it is not possible to determine the value, it is calculated on the open market value.

In this case the registered person in India is required to issue self-invoice under section 31(3)(f) and pay tax on RCM basis.

Time of supply under Reverse Charge Mechanism

As per section 13(3) the time of supply of services on which GST is payable on reverse charge basis will be earlier of following:

• Date of payment, or
• 61^st day from the date of issue of invoice by the supplier.

Date of payment refers to the date on which payment is recorded in the books of account or the date on which payment is debited from from recipient’s bank account whichever is earlier.

Input tax credit (ITC) in Reverse Charge Mechanism

ITC on tax paid can be claimed if following conditions are met:

• As per section 16 of CGST Act, 2017 recipient is eligible to claim ITC.
• Tax paid under RCM is reflected in the recipients GSTR-2B.
• Recipient has filed their GSTR-3B and paid the tax liability under RCM.
• The goods or services are used or intended to be used the course or furtherance of business.

Documents required:

As per section 16(2) (a) invoice issued by the recipient receiving goods and/or services from unregistered supplier should be in possession for claiming input tax credit in case of tax paid under RCM.