Index - Circular

Reverse Charge Mechanism

1. Introduction

The concept of Reverse Charge Mechanism was introduced in erstwhile Service Tax laws. Generally, tax is payable by the person who provides services but under Reverse Charge Mechanism the liability to pay tax has shifted to recipient of services. The concept of Reverse Charge Mechanism is incorporated under GST, but in GST regime Government has notified not only supply of certain services but also supply of certain goods under RCM. The objective of Reverse Charge Mechanism is to widen the scope of levy of tax on unorganized sectors and give exemption to specific class of supplier of goods/services and import of services.

Therefore, under Reverse Charge Mechanism the liability to pay tax is fixed on the recipient of supply of goods or services instead of the supplier or provider in respect of certain categories of goods or services or both under Section 9(3) or Section 9(4) of the CGST Act, 2017 and under sub-section (3) or sub-section (4) of Section 5 of the IGST Act, 2017.

2. Statutory provision of reverse mechanism

Section 2(98) of the CGST Act, 2017 has defined the term "Reverse Charge" and the same is reproduced as follows:

"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 the Integrated Goods and Services Tax Act.

The plain reading of the cited definition of reverse charge under GST laws, it is clearly stated that reverse charge is not only confined to services rather the scope of reverse charge is extended to goods also. For more detailed provisions of reverse charge as provided under section and sub-section of the CGST Act, 2017 and IGST Act, 2017 is reproduced in the following paras as under:

Section 9(3) of the CGST Act, 2017 and Section 5(3) of the IGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows:

"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 and 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."

Reverse Charge Mechanism in respect of Un-Registered Person:

Section 9(4) of the CGST Act, 2017 and Section 5(4) of the IGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows:

"The central tax/integrated tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and 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."

The cited provision has been deferred till 30th September, 2019 vide Notification No. 22/2018-Central Tax (Rate) and No. 23/2018-Integrated Tax, dated 6-8-2018 and have been rescinded vide Notification No. 1/2019-Central Tax (Rate) dated 29.1.2019 [said section 9(4) and 5(4) have been forced w.e.f.1.2.2019].But the list of Goods or services not yet declared by the Government for implementation of the provision.

The above cited provisions of CGST Act, 2017 and IGST Act, 2017 says that there are two types of reverse charge scenarios provided in law. First situation is dependent on the nature of supply and/or nature of supplier. This is covered by Section 9(3) of the CGST/SGST/UTGST Act and Section 5(3) of the IGST Act.

Second situation is covered by Section 9(4) of the CGST/SGST/UTGST Act and Section 5(4) of the IGST Act where a taxable supply by any unregistered person to a registered person is covered. Accordingly, whenever a registered person procures supplies from an unregistered supplier, he needs to pay GST on reverse charge basis. However, supplies where the aggregate value of such supplies of goods or services or both received by a registered person from any or all the unregistered suppliers is less than five thousand rupees in a day are exempted vide Notification No. 8/2017-C.T. (Rate), dated 28-6-2017.

3. Reverse Charge Procedures and Compliances

♦ As per Section 31(3)(f) of CGST Act, a registered person who is liable to pay GST under reverse charge shall issue an invoice in respect of goods or services received by him on the date of receipt of goods or services from the supplier who is not registered under the Act.

♦ Also, as per Section 31(3)(g) of CGST Act, when payment is made by recipient of supply to supplier in respect of supplies where tax is payable under reverse charge, payment voucher is required to be issued.

♦ On reading of Section 49(4) of CGST Act read with section 2(82) of CGST Act, it can be concluded that, GST under reverse charge should be paid by cash i.e. through Electronic Cash Ledger only. The GST under reverse charge cannot be paid by utilizing input tax credit from Electronic Credit Ledger.

♦ However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.

♦ Maintenance of accounts by registered persons: Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge.

♦ Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in column 4B of GSTR-1.

♦ Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge basis.

Considering the inconvenience that may be caused to the stakeholders in the procedure under Section 9(4) of the CGST Act, 2017, the Central Government, therefore, issued a Notification vide No. 8/2017-C.T. (Rate), dated 28-6-2017 has given exemption to intra-State supplies of goods or services or both to the tune of ₹ 5,000/- in a day from the purview of Section 9(4) which came into effect from 1-7-2017. If the value of the supply is more than ₹ 5,000/- per day then reverse charge is applicable under Section 9(4) and vide Notification No. 38/2017-C.T. (Rate), dated 13-10-2017 the threshold limit of ₹ 5,000/- for exemption per day kept abeyance until 31-3-2018 and also with subsequent notifications the time-line has been extended up to 30-9-2019 vide Notification No. 22/2018-C.T. (Rate), dated 6-8-2018 and the same has been rescinded.

The Central Board of Indirect Taxes & Customs ("CBIC") has notified that Exemption from tax under 'Reverse Charge Mechanism (RCM)' under GST stands rescinded w.e.f. February 1, 2019 in respect of Intra-State Purchases of Goods and Services from Unregistered Dealers (of value upto ₹ 5,000 per day), in view of bringing into effect, the amendments (regarding RCM on supplies by unregistered persons) in the Amended CGST/IGST/UTGST Acts, 2018. Consequently Notification No. 8/2017- Union Territory Tax (Rate), dated the 28th June, 2017, Notification No. 8/2017-Central Tax (Rate), dated the 28th June, 2017, and Notification No. 32/2017-Integrated Tax (Rate), dated the 13th October, 2017, have been rescinded vide Notifications No. 1/2019-Central Tax (Rate), No. 1/2019-Integrated Tax (Rate) and No. 1/2019-Union Territory Tax (Rate) all dated 29-1-2019.

4. Input Tax Credit under RCM

A supplier cannot take Input Tax Credit of GST paid on goods or services used to make supplies on which the recipient is liable to pay tax under reverse charge.

The recipient can avail Input Tax Credit of GST amount that is paid under reverse charge on receipt of goods or services by him.

GST paid on goods or services under reverse charge mechanism is available as ITC to the registered person provided that such goods or services are used or will be used for business or furtherance of business.

The ITC is availed by recipient cannot be used towards payment of output tax on goods or services, the payment of tax under reverse charge only on cash.

5. Time of Supply for Reverse Charge Mechanism

Time of supply for supplies under reverse charge is different from the supplies which are under forward charge.

The same can be summarised as follows:

Section 12(3) of CGST Act - Time of Supply in case of Goods under RCM	Section 13(3) of CGST Act - Time of Supply in case of Services under RCM
Earliest of following:	Earliest of following:
♦ Date of receipt of goods; or	♦ Date of payment as per books of account or date of debit in bank account, whichever is earlier; or
♦ Date of payment as per books of account or date of debit in bank account, whichever is earlier; or	♦ 60 days from the date of issue of invoice or similar other document.
♦ 30 days from the date of issue of invoice or similar other document	Special Provision for Associated Enterprises Outside India:
	Further, in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.

Also, where it is not possible to determine time of supply using above methods, the time of supply would be the date of entry in the books of account of the recipient.

6. Real Estate Sector under RCM:

On the recommendations of the GST Council in its 33rd Meeting and decision has taken in its 34th meeting. In case of a project developer or construction of apartment by the developer, 80% of inputs and input services [other than capital goods, TDR/JDA, FSI, long-term lease (premium) shall be purchased from registered persons. On shortfall of purchases from 80% tax shall be paid by the builder @18% on RCM basis. However, Tax on cement purchased from unregistered person shall be paid @28% under RCM, and on capital goods under RCM at applicable rates in terms of Section 9(4) the CGST Act, 2017, in terms of C.B.I & C., Notification No. 7/2019-C.T. (Rate), dated 29th March, 2019.

Key features of RCM on Real Estate Sector are as under :

a. The tax on transfer of Development rights and FSI to a Land owner has to be paid at the time of completion of project for unsold portion of units allotted in consideration of rights to land owner if he is registered person or discharged by way of RCM if land owner is unregistered person.

b. 80% Inputs and Input services (other than services by grant of development rights, long term lease premium, FSI, Electricity, High Speed Diesel, Motor Spirit and natural gas) shall be received from registered Persons till the date of completion certificate or first occupation whichever is earlier.

c. If Input goods and services from registered persons falls short then at the end of financial year promoter has to pay RCM @ 18% by 30th June of the next financial year for the financial year.

d. However, tax on purchase of cement unregistered person shall be paid monthly at the rate of 28%. The tax on purchase of capital goods from unregistered persons shall be payable as per the rates prescribed in the schedule for the item purchased.

e. 80% limit has to be calculated financial year wise. Any excess in Financial year cannot be adjusted against shortfall of next year.

f. Promoter has to maintain project wise account of inward supplies and calculate RCM accordingly.

g. GST to be paid by promoter under RCM on the value attributable to the residential apartments remaining unbooked as on the date of issuance of completion certificate. The formula is as under:

GST payable on TDR or FSI × Unbooked carpet area of residential apartment/Total carpet area of the residential apartments in the project

h. RCM liability is to be offered in Form GST DRC -03 by payment of tax in cash and Input Tax credit has to be shown as ineligible credit in FORM 3B.

7. Reverse charge on specified goods

Notified Supplies of certain Goods under Reverse Charge Mechanism (Relevant Extracts of Notifications): Notification Nos. 4/2017-C.T. (Rate) and 4/2017-I.T. (Rate) both dated 28-6-2017 as amended

Sr. No.	Tariff Item, Subheading, Or Chapter	Description of goods	Supplier of goods	Recipient of goods
1	0801	Cashew nuts (not shelled or peeled), bidi wrapper leaves (tendu), tobacco leaves and raw cotton	Agriculturist	Any registered person
2	1404 90 10	Bidi Wrapper Leaves (tendu)	Agriculturist	Any registered person
3	2401	Tobacco Leaves	Agriculturist	Any registered person
4	5004 to 5006	Silk yarn	Any person who manufactures silk yarn from raw silk or silk worm cocoons	Any registered person
4A	5201 Effective from 15.11.2017	Raw Cotton	Agriculturist	Any registered person
5	-	Lottery	State Government, Union Territory or local authority	Lottery distributor or selling agent
6	Any Chapter (Effective from 13.10.2017)	Used vehicles, seized and confiscated goods, old and used goods, waste and scrap	Central Government, State Government, Union territory or a local authority	Any registered person
7	Any Chapter (Effective from 28.5.2018)	Priority Sector Lending Certificate	Registered person	Recipient who is registered person

8. Reverse charge on specified Services

Notified Supplies of certain Services under Reverse Charge Mechanism (Relevant Extracts of Notifications)

Notification Nos. 13/2017-C.T. (Rate) and 10/2017-I.T. (Rate) both dated 28-6-2017

Sr. No.	Category of Supply of Services		Supplier of service	Recipient of Service	Relevant Notification
1	Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road to-		Goods Transport Agency (GTA) who has not paid integrated tax @ 12%/Central Tax @ 6%		13/2017 (CTR) dated 28/06/2017
	(a)	any factory registered under or governed by the Factories Act, 1948 (63 of 1948); or		(a) Any factory registered under or governed by the Factories Act, 1948 (63 of 1948); or
	(b)	any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or		(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or
	(c)	any co-operative society established by or under any law; or		(c) any co-operative society established by or under any law; or
	(d)	any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or		(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or
	(e)	any body corporate established, by or under any law; or		(e) any body corporate established, by or under any law; or
	(f)	any partnership firm whether registered or not under any law including association of persons; or		(f) any partnership firm whether registered or not under any law including association of persons; or
	(g)	any casual taxable person located in the taxable territory.		(g) any casual taxable person; located in the taxable territory.
	Provided that nothing contained in this entry shall apply to services provided by a goods transport agency, by way of transport of goods in a goods carriage by road, to, -
	(a)	a Department or Establishment of the Central Government or State Government or Union territory; or
	(b)	local authority; or
	(c)	Governmental agencies,
	which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 and not for making a taxable supply of goods or services.
2	Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly. Explanation: "Legal service" means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.		An individual advocate including a senior advocate or firm of advocates.	Any business entity located in the taxable territory.	13/2017 (CTR) dated 28/06/2017
3	Services supplied by an arbitral tribunal to a business entity.		An arbitral tribunal.	Any business entity located in the taxable territory.	13/2017 (CTR) dated 28/06/2017
4	Services provided by way of sponsorship to any body corporate or partnership firm.		Any person	Any body corporate or partnership firm located in the taxable territory.	13/2017 (CTR) dated 28/06/2017
5	Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, -		Central Government, State Government, Union territory or local authority	Any business entity located in the taxable territory.	13/2017 (CTR) dated 28/06/2017
	(1) renting of immovable property, and
	(2) services specified below-
	(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority;
	(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
	(iii) transport of goods or passengers.
5A	Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017 (12 of 2017).		Central Government, State Government, Union territory or local authority	Any person registered under the Central Goods and Services Tax Act, 2017 read with clause (v) of section 20 of Integrated Goods and Services Tax Act, 2017.	13/2017 (CTR) dated 28/06/2017
5B	Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter.		Any person	Promoter	Inserted via notification no. 4/2019 dated 29/03/2019
5C	Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount (called as premium, salami, cost, price, development charges or by any other name) and/or periodic rent for construction of a project by a promoter.		Any person	Promoter	Inserted via notification no. 4/2019 dated 29/03/2019
6	Services supplied by a director of a company or a body corporate to the said company or the body corporate.		A director of a company or a body corporate	The company or a body corporate located in the taxable territory	13/2017 (CTR) dated 28/06/2017
7	Services supplied by an insurance agent to any person carrying on insurance business.		An insurance agent	Any person carrying on insurance business, located in the taxable territory	13/2017 (CTR) dated 28/06/2017
8	Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company.		A recovery agent	A banking company or a financial institution or a non-banking financial company, located in the taxable territory.	13/2017 (CTR) dated 28/06/2017
9	Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like.		Author or music composer, photographer, artist, or the like	Publisher, music company, producer or the like, located in the taxable territory.	13/2017 (CTR) dated 28/06/2017
9A	Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher. (Sl. Nos. 9 & 9A changes carried vide Notification No.22/2019-C.T (Rate) dated 30.09.2019 with effect from 1st October, 2019 Author Publisher located in the taxable territory		Author	Publisher located in the taxable territory:- Provided that nothing contained in this entry shall apply where:- (i) the author has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017), and filed a declaration, in form at annexure I, within the time limit prescribed therein, with the jurisdictional CGST or SGST commissioner, as the case may be, that he exercises the option to pay central tax on the service specified in column (2), under forward charge in accordance with Section 9 (1) of the Central Goods and Service Tax Act, 2017 under forward charge, and to comply with all the provisions of Central Goods and Service Tax Act, 2017 (12 of 2017) as they apply to a person liable for paying the tax in relation to the supply of any goods or services or both and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option; (ii) the author makes a declaration, as prescribed in Annexure II on the invoice issued by him in Form GST Inv-I to the publisher. "	Notification No.22/2019- Central Tax (Rate)
10	Supply of services by the members of Overseeing Committee to Reserve Bank of India		Members of Overseeing Committee constituted by the Reserve Bank of India	Reserve Bank of India.	33/2017(CTR) Dt. 13.10.2017
11	Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs)		Individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm.	A banking company or a non-banking financial company, located in the taxable territory.	15/2018 (CTR)Dt. 26.07.2018
12.	Services provided by business facilitator (BF) to a banking company		Business facilitator (BF)	A banking company, located in the taxable territory	29/2018(CTR) Dt 31.12.2019
13.	Services provided by an agent of business correspondent (BC) to business correspondent (BC)		An agent of business correspondent (BC)	A business correspondent, located in the taxable territory.	29/2018(CTR) Dt 31.12.2019
14.	Security services (services provided by way of supply of security personnel) provided to a registered person: Provided that nothing contained in this entry shall apply to, - (i) (a) a Department or Establishment of the Central Government or State Government or Union territory; or (b) local authority; or (c) Governmental agencies; which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services; or (ii) a registered person paying tax under section 10 of the said Act.		Any person other than a body corporate	A registered person, located in the tax	29/2018(CTR) Dt 31.12.2019
15	Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate.		Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6% to the service recipient.	Any body Corporate located in the taxable territory	9/2019-Central Tax (Rate), dated 31.12.2019.
16	Services of lending securities of Securities under Lending scheme, 1997 (Scheme). Securities and Exchange Board of India (SEBI), as amended.		Lender i.e. a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the scheme of SEBI.	Borrower i.e. a person who borrows the securities under the Scheme through an approved intermediary of SEBI	22/2019-C.T. (Rate) dated 30.09.2019

9. Additional Services on which tax is payable by recipient under IGST Act, 2017 on Reverse charge basis under GST

In addition to above cited services, the following two additional services has been notified by the Central Government vide Notification No. 10/2017-Integrated Tax (Rate) dated 28-06-2017 wherein whole of the tax shall be payable by the recipient on services under Section 5(3) of IGST Act, 2017 on Reverse charge basis.

Sr. No.	Category of Supply of Services	Supplier of service	Recipient of Service	Relevant Notification
1	Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient.	Any person located in a non-taxable territory	Any person located in the taxable territory other than non-taxable online recipient.	Entry No. 1 of Notification No. 10/2017- Integrated Tax (Rate) dated 28 June 2017.
2	Services supplied by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.	A person located in non-taxable territory	Importer, as defined in clause (26) of section 2 of the Customs Act, 1962 (52 of 1962), located in the taxable territory.	Entry No. 10 of Notification No. 10/2017- Integrated Tax (Rate) dated 28 June 2017

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