The supplier of goods or services pays the tax on supply. Under the reverse charge mechanism, the recipient of goods or services becomes liable to pay the tax, i.e., the chargeability gets reversed.
The objective of shifting the burden of GST payments to the recipient is to widen the scope of levy of tax on various unorganized sectors, to exempt specific classes of suppliers, and to tax the import of services (since the supplier is based outside India).
What is reverse charge?
Typically, taxes are collected by business owners on behalf of the customers, which is then paid to the government. Reverse charge is when the buyer pays the tax directly to the government.
The responsibility of reverse charge can either rest completely on the buyer or in certain special cases, it can be partially/jointly borne both by the buyer and the seller.
When is Reverse Charge Applicable?
Section 9(3), 9(4) and 9(5) of Central GST and State GST Acts govern the reverse charge scenarios for intrastate transactions. Also, sections 5(3), 5(4) and 5(5) of the Integrated GST Act govern the reverse charge scenarios for inter-state transactions. Let’s have a detailed discussion regarding these scenarios:
A. Supply of certain goods and services specified by the CBIC
As per the powers conferred in section 9(3) of CGST Acts, the CBIC has issued a list of goods and services on which reverse charge is applicable.
B. Supply from an unregistered dealer to a registered dealer
Section 9(4) of the CGST Act states that if a vendor is not registered under GST supplies goods to a person registered under GST, then reverse charge would apply. This means that the GST will have to be paid directly by the receiver instead of the supplier. The registered buyer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.
In intra-state purchases, CGST and SGST have to be paid under reverse charge mechanism (RCM) by the purchaser. Also, in the case of inter-state purchases, the buyer has to pay the IGST. The government notifies the list of goods or services on which this provision gets attracted from time to time.
In the real estate sector, the government notified that the promoter should buy inward supplies to the extent of 80% from registered suppliers only. Suppose the purchases from registered dealers shortfall 80%, then the promoter should GST at 18% on the reverse charge to the extent short of 80% of inward supplies. However, if the promoter purchases cement from an unregistered supplier, he must pay tax at 28%. This calculation is to be done irrespective of the 80% calculation.
The promoter is liable to pay GST on reverse charge basis on TDR or floor space index (FSI) supplied on or after 1st April 2019. Even if a landowner is not engaged in a regular business of land-related activities, transfer of development rights by such an individual to the promoter is liable to GST as it is considered as supply of service under section 7 of CGST Act. Also, in case of outward supply of TDR by one developer to another, GST is applicable at 18% on reverse charge.
C. Supply of services through an e-commerce operator
All types of businesses can use e-commerce operators as an aggregator to sell products or provide services. Section 9(5) of the CGST Act states that if a service provider uses an e-commerce operator to provide specified services, the reverse charge will apply to the e-commerce operator and he will be liable to pay GST. This section covers the services such as:
- Transportation services to passengers by a radio-taxi, motor cab, maxi cab and motorcycle. For example – Ola, Uber.
- Providing accommodation services in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes, except where the person supplying such service through electronic commerce operator is liable for registration due to turnover exceeding the threshold limit. For example – Oyo and MakeMyTrip.
- Housekeeping services, such as plumbing and carpentering, except where the person supplying such services through electronic commerce operators are liable for registration due to turnover beyond the threshold limit. For example, Urban Company provides the services of plumbers, electricians, teachers, beauticians etc. In this case, Urban Company is liable to pay GST and collect it from the customers instead of the registered service providers.
When is Reverse Charge under GST Applicable
| Supply from Unregistered or Registered Dealers – | Reverse Charge will occur if a seller who is not registered for GST supplied products to an individual who is registered for GST. This ensures that the GST would have to be billed directly to the government by the recipient rather than the seller. The licensed dealer who is required to pay GST under reverse charge must self-invoice for sales made. The customer would pay IGST on interstate sales. The customer must pay CGST and SGST on intra-state purchases under RCM. |
| Services through eCommerce Operators – | Where an e-commerce operator provides facilities, the e-commerce operator would be subject to a reverse charge. He would be required to pay GST. For eg, UrbanClap offers the services of plumbers, electricians, teachers, beauticians, and other professionals. Instead of licensed service providers, UrbanClap is required to pay GST and receive it from consumers. If the e-commerce operator does not have a physical presence in the taxable jurisdiction, a person representing such an e-commerce operator for any reason must pay tax. If there is no official, the operator will nominate one who will be responsible for GST. |
| CBEC-specified supply of such goods and services – | The CBEC has published a list of products and services that are subject to a reverse payment. |
Who Needs to GST in Reverse Charge Mechanism
According to GST rules, the person supplying the goods must indicate on the tax invoice whether or not tax is payable under the RCM. When making GST payments under RCM, keep the following points in mind:
- The ITC on the tax amount paid under RCM can be claimed by the recipient of goods or services only if such goods or services are utilised for business or furthering of business.
- When discharging duty under RCM, a composition dealer shall pay tax at the regular rates, not the composition rates. They are also ineligible to claim any input tax credit for taxes paid.
- The GST compensation cess can be applied to the RCM tax payable or paid.
Goods supplied under the Reverse Charge Mechanism
| S.No. | Description of supply of goods | Supplier | Recipient |
| 1 | Bidi wrapper | Agriculturist | Any Registered Person |
| 2 | Cashew Nuts | Agriculturist | Any Registered Person |
| 3 | Tobacco Leaves | Agriculturist | Any Registered Person |
| 4 | Supply of Lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent |
| 5 | Silk Yarn | A person who manufactures silk yarn. | Any Registered Person |
| 6 | Priority Sector Lending Certificate | Any Registered Person | Any Registered Person |
| 7 | Raw Cotton | Agriculturist | Any Registered Person |
| 8 | Used vehicles, seized & Confiscated goods | Central Govt or State Govt. Union Territory or the local Authority | Any Registered Person |
RCM GST List For Services
| SL. NO | Provider | Recipient |
| 1 | Director of a company or a body corporate | Company or the body corporate |
| 2 | Recovery Agent | Banking Company, NBFC or financial institutions |
| 3 | Goods transport agency | Casual Taxable person, body corporate, partnership firm, any society, factory, and persons registered under CGST, SGST, IGST Act |
| 4 | An insurance agent | Persons carrying on insurance business |
| 5 | Individual advocate or firm of advocates | Any business entity |
FAQs
Q1. Is Input Tax Credit (ITC) allowed under reverse charge?
Tax paid on a reverse charge basis will be available for ITC if such goods or services are used, or will be used, for business. The recipient, i.e., who pays reverse tax, can avail it as ITC.
Q2. When can one claim ITC of tax paid under RCM?
The person who paid tax under RCM in a month can claim it as ITC in the subsequent month.
Q3. Requirements under the reverse charge mechanism?
- The recipient of goods/services must be registered under GST.
- Every registered business owner should maintain accurate records of supplies that would incur reverse charge.
- Wherever reverse charge applies, the supplier must clearly mention on the invoice that the tax payable for that specific transaction is through reverse charge. Similarly, the same should be mentioned on receipt vouchers and refunds vouchers.
- Advance paid on supplies that incur reverse charge is taxable under GST. The taxpayer making advance payment should pay tax on reverse charge basis.
Q4. What if an Input Service Distributor (ISD) receives supplies liable to reverse charge?
An ISD cannot make purchases liable to reverse charge. If the ISD wants to procure such supplies and take the reverse charge paid as ITC, the ISD should register as a regular taxpayer.
