Reverse Charge Mechanism (RCM) under GST

 

Source: Excerpts from "Handbook on Reverse Charge under GST(download link)" by The Institute of Chartered Accountants of India

1. Introduction to Reverse Charge Mechanism (RCM)

The Handbook provides a comprehensive overview of the Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) in India. RCM is a mechanism where the recipient of goods or services is liable to pay the GST, instead of the supplier. The document outlines two primary categories of RCM provisions:

• Specified categories of goods and/or services [Section 9(3) of CGST / 5(3) of IGST]: The government, based on the GST Council's recommendations, notifies specific goods or services where RCM applies.
• "The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both..."
• Specified categories of taxable goods and/or services procured by a registered person from an unregistered person [Section 9(4) of CGST / 5(4) of IGST]: This provision makes registered recipients liable to pay GST on supplies from unregistered suppliers for certain notified goods or services.

The Handbook emphasizes that under RCM, "all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both."

2. Key Definitions

• Recipient: Defined under Section 2(93) of the CGST Act, the recipient is generally the person liable to pay the consideration. In cases where no consideration is payable for goods, it's the person to whom the goods are delivered. For services with no consideration, it's the actual receiver of the services.
• "recipient" of supply of goods or services or both, means- (a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration; (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available..."
• Consideration: Section 2(31) defines consideration broadly to include "any payment made or to be made, whether in money or otherwise..." but excludes subsidies from the Central or State Government.

3. Time of Supply under RCM

The time of supply for goods under RCM is the earliest of:

• The date of receipt of goods.
• The date of payment.
• 31st day from the date of issue of the invoice by the supplier.
• If not determinable, the date of entry in the books of account of the recipient.

For services under RCM, the time of supply is the earliest of:

• The date of payment.
• 61st day from the date of issue of the invoice by the supplier.
• If not determinable, the date of entry in the books of account of the recipient.
• A specific provision exists for associated enterprises where the supplier is outside India, making the time of supply the date of entry in the recipient's books of account.

4. Tax Invoice Requirements under RCM

A tax invoice issued under RCM must contain standard particulars, including the supplier's and recipient's details. Notably, if the recipient is unregistered and the taxable supply value is ₹50,000 or more, or if requested by the recipient for a lower value, the invoice must include their name, address, and delivery address with the state name and code. Special provisions apply to online money gaming, e-commerce operators, and OIDAR services to unregistered recipients, requiring the state of the recipient to be mentioned.

5. E-invoicing Applicability

The Handbook mentions that certain registered persons, exceeding a specified aggregate turnover (currently ₹5 crores w.e.f. 01-08-2023), are required to prepare e-invoices for supplies to registered persons or for exports.

6. Recording RCM Transactions and Payment

The recipient liable under RCM needs to:

• Self-invoice for the goods or services received.
• Make payment of the GST liability.
• Issue a payment voucher under Section 31(3)(g) at the time of making payment to the supplier.
• Record RCM liability and input tax credit in their books of account using specific output and input tax ledgers for RCM.

7. Input Tax Credit (ITC) under RCM

The recipient who pays tax under RCM is generally eligible to avail the input tax credit of the GST paid, subject to the general conditions for availing ITC under Sections 16 and 17 of the CGST Act and related rules. Key points regarding ITC under RCM:

• Credit can be availed on payment of tax under RCM.
• The goods or services must be used or intended to be used in the course or furtherance of business.
• The recipient must possess a valid tax invoice.
• Payment to the supplier must be made within 180 days to avoid reversal of credit (Rule 37). However, this rule has specific exceptions related to RCM.
• ITC cannot be claimed if depreciation has been claimed on the tax component of capital goods under the Income Tax Act.
• Special rules apply for apportionment of credit where goods or services are used partly for business and partly for other purposes, or for making taxable and exempt supplies. Importantly, "Supplies on which the recipient is liable to pay tax on reverse charge basis" are excluded from the definition of exempt supplies for the purpose of ITC reversal under Section 17(2).
• Banks and financial institutions have a specific option to avail only 50% of eligible ITC.
• Section 17(5) lists blocked credits where ITC cannot be availed even if other conditions are met.

8. Input Service Distributor (ISD) and RCM Credit

An ISD is an office of the supplier that receives invoices for input services (including those under RCM) for or on behalf of distinct persons (entities with the same PAN but different GST registrations). The ISD is responsible for distributing the input tax credit in the manner prescribed under Section 20. If an office receives services liable under RCM for distinct persons, it may need separate registration as an ISD.

9. Goods Notified under RCM [Section 9(3)/5(3)]

Chapter 2 of the Handbook details specific goods notified under RCM:

• Cashew nuts (not shelled or peeled), Bidi wrapper leaves (tendu), Tobacco leaves: Supplied by an agriculturist to any registered person. "Agriculturist" and "family" are defined in the Act to clarify the supplier category.
• Essential oils other than Citrus Fruits: Supplied by any unregistered person to any registered person (specific list of oils provided, with amendments effective from 01-01-2023 and prior periods noted).
• Silk Yarn: Supply by any person to a registered person.
• Actionable claims, other than specified actionable claims: This entry was amended and now excludes lottery, betting, and gambling. The Handbook discusses the complexities of applying HSN codes to actionable claims and suggests HSN 4907-00-90 for 'documents of title'.
• Used vehicles, seized and confiscated goods, old and used goods, waste and scrap: Supplied by the Central Government (excluding Ministry of Railways), State Government, Union territory, or a local authority to any registered person. Clarifications from Circular No. 76/50/2018-GST are included, stating that such supplies to unregistered persons are also taxable under forward charge, and the supplying government entity needs to register. Supplies by the Ministry of Railways are under forward charge w.e.f. 20-10-2023.
• Priority Sector Lending Certificate: Supplied by any registered person to any registered person.
• Metal Scrap: Supplied by any unregistered person to any registered person (effective from 10-10-2024). This change aims to track untapped transactions.

10. Services Notified under RCM [Section 9(3)/5(3)]

Chapter 3 covers services notified under RCM:

• Supply of Services by Goods Transport Agency (GTA): Taxable when supplied to specific registered recipients (factories, societies, government establishments registered only for TDS). Exemptions exist when GTA services are provided to government departments registered solely for TDS and for specific categories under Notification No. 12/2017. The definition of GTA services includes intermediary and ancillary services like loading/unloading, if included in the GTA's invoice as part of a composite supply. GTAs have an option to pay tax under forward charge, which needs to be exercised annually through a specific form before the start of the financial year (with revised timelines). RCM is treated as exempt supply for GTA for common credit reversal. An illustration shows the accounting entries for RCM on GTA services.
• Supply of Advocate Services: Services provided by an individual advocate (including senior advocate) or a firm of advocates are under RCM when the recipient is a business entity located in the taxable territory. Exemptions apply to services provided to non-business entities or business entities with turnover below a certain threshold (threshold limit amendment noted). An example illustrates ITC claim on RCM paid for advocate services.
• Supply of Services of Arbitral Tribunal: Services supplied by an arbitral tribunal to a business entity located in the taxable territory are under RCM. Arbitral tribunals are distinguished from Courts or Tribunals established by law.
• Supply of Sponsorship Services: Services relating to sponsorship supplied to any body corporate or partnership firm located in the taxable territory are under RCM. Exemptions exist for sponsorship of specified sporting events by the National Sports Federations, etc.
• Supply of Services by Central Government, State Government, Union territory or local authority to Business Entity: Generally under RCM, excluding renting of immovable property and specific services like postal services (limited post 07/2022), services related to aircraft/vessels, and transport of goods/passengers. "Government" and "local authority" are defined. The Handbook discusses whether payments to the government are fees, penalties, or consideration, noting that consideration paid can be subject to exemptions. It also touches upon the taxability of sovereign functions involving natural resources and the debate on statutory payments as taxes or consideration.
• Supply of Services of Renting of Immovable Property:By Central/State Govt./UT/local authority to a GST-registered person is under RCM.
• Renting of residential dwelling to a registered person is under RCM. Clarifications regarding renting by a proprietor in their personal capacity for own residence (exempt w.e.f. 01-01-2023 with conditions) are provided. Conditions for RCM applicability (residential dwelling, any supplier, registered recipient, commercial purpose) are listed. Ambiguity regarding PGs and serviced apartments is mentioned.
• Renting of any immovable property (other than residential dwelling) by an unregistered person to a registered person (other than those under composition levy) is under RCM (effective date needs verification based on the provided corrigendum and notification date of 2025).
• Supply of Transfer of Development Rights/Floor Space Index/Long Term Lease: Services supplied by any person for transfer of development rights or FSI for construction by a promoter, and long-term lease of land (30 years or more) by any person against upfront payment to a promoter are under RCM. Definitions of "promoter," "project," "residential apartment," "commencement certificate," etc., are provided as per relevant notifications (effective 01-04-2019). The taxability post 01-04-2019 is described, with an illustration of GST payment on unsold flats after occupancy certificate.
• Supply of Services by Director: Services supplied by a director of a company or body corporate to the said entity are under RCM. The Handbook clarifies the distinction between a director acting as an employee ("contract of service") and in other capacities ("contract for service"). Services supplied by a director in their personal capacity (e.g., renting property) to the company are not under RCM (clarified via Circular No. 201/13/2023-GST).
• Supply of Services for Insurance Business: Services supplied by an insurance agent to an insurance company are under RCM.
• Supply of Services by Recovery Agent: Services supplied by a recovery agent to a banking company, financial institution, or NBFC are under RCM. Definitions of banking company and NBFC are provided based on relevant Acts.
• Supply of Services by Music Composer, Photographer, Artist and Author: Services by way of transfer or permitting the use of copyright related to original works are under RCM when supplied to music companies, producers (from music composer, photographer, artist), or publishers, music companies, producers (from author) located in the taxable territory. A form for authors to opt for forward charge is included. The RCM was implemented to address ITC chain issues.
• Supply of Services by members of Overseeing Committee to Reserve Bank of India: This is under RCM.
• Supply of Services by Individual Direct Selling Agents (DSAs): Services supplied by individual DSAs (non-corporate, non-partnership, non-LLP) to banks or NBFCs are under RCM. DSAs are generally involved in bringing direct business and guiding loan applicants.
• Supply of Services by Business Correspondent (BC)/ Business Facilitator (BF): Services provided by a BF to a banking company and by an agent of a BC to a BC are under RCM (effective 01-01-2019). Clarification from CBIC Circular No. 86/05/2019-GST aligns with RBI guidelines on BCs. An illustration details the GST framework for BCs, including exemptions for rural areas and RCM applicability in urban areas.
• Supply of Security Services: Services supplied by any person to a registered person are under RCM; however, this is overridden by Notification No. 13/2017 which makes the supplier liable under forward charge.
• Supply of Renting of Passenger Motor Vehicle: Effective 01-01-2020, renting of passenger motor vehicles where the fuel cost is included, supplied by any person other than a body corporate to a body corporate, is under RCM, provided the supplier does not issue an invoice charging tax at 6%. Circular No. 177/09/2022-TRU clarifies that RCM applies when the vehicle is hired for a period and at the disposal of the body corporate (Heading 9966), not for specific passenger transport services (Heading 9964). The recipient's ITC eligibility is also noted (generally blocked for employee transportation).
• Supply of Lending of Securities: Services of lending of securities under SEBI's scheme are under RCM w.e.f. 01-10-2019, with the borrower liable to pay IGST under RCM. Prior to this, it was under forward charge. Securities themselves are not considered goods or services under GST.

11. Import of Services under RCM [Section 5(3) of IGST Act]

Chapter 3 also covers services where the recipient in the taxable territory is liable to pay IGST under RCM when the supplier is located in a non-taxable territory:

• Any service supplied by a person in a non-taxable territory to a person in the taxable territory (other than a non-taxable online recipient).
• Ocean Freight in case of import of goods on CIF basis (Omitted w.e.f. 01.10.2023). Earlier, the importer was liable to pay IGST under RCM for transportation of goods by vessel from outside India up to the customs station in India. The Handbook details the omitted Entry 10-IGST and references the rate notification and valuation rules (deemed to be 10% of CIF value if actual value not available).

12. Goods and/or Services Notified under Section 9(4) of CGST Act / 5(4) of IGST Act

Chapter 4 discusses RCM on supplies from unregistered persons:

• Specified category of goods or services received by a specific class of registered person from unregistered suppliers. While the provision exists, the Handbook notes that notifications specifying such categories are currently not in force (as of the time of publication).
• Clarifications on Real Estate by CBIC: This section discusses a specific scenario related to the real estate sector where a promoter needs to procure at least 80% of goods and services (excluding land and electricity) from registered suppliers to avail concessional GST rates on residential apartments. If the procurement from registered suppliers falls below this threshold, the promoter needs to pay GST under RCM on the shortfall for certain inputs like cement. If the shortfall is not addressed by RCM on specific goods, tax at 18% is payable on the remaining shortfall. Illustrations are provided to explain this.

13. Forms

Chapter 5 includes examples of forms, such as the form for GTAs to opt for forward charge and the declaration by authors to opt for forward charge. It also references the reporting of RCM transactions in GST returns like GSTR-1, GSTR-3B, and GSTR-9. Specifically:

• Supplies to registered persons liable to RCM are reported in Table 5C of GSTR-9 (using details from Table 4B of GSTR-1).
• Inward supplies liable to reverse charge are detailed in Table 3.1 of GSTR-3B and Table 4A(3) of GSTR-3B for ITC availment.
• Table 5 of GSTR-9 includes details of outward supplies on which tax is to be paid by the recipient under RCM.
• Table 6 of GSTR-9 captures ITC availed, including that on inward supplies liable to reverse charge (paid and availed).

This briefing document summarizes the key themes and important ideas presented in the provided excerpts of the "Handbook on Reverse Charge under GST." For detailed understanding and specific applicability, reference to the complete Handbook and the relevant GST legislation is recommended.