Reverse Charge Mechanism Under GST: Notified Categories

The Reverse Charge Mechanism (RCM) under GST shifts the responsibility of paying tax from the supplier to the recipient for specific goods and services. This ensures tax compliance, especially in sectors with unorganised suppliers or where tax collection at the supplier's end is challenging. Understanding RCM is crucial for businesses to avoid penalties and correctly claim Input Tax Credit (ITC).

What is the Reverse Charge Mechanism (RCM) in GST?

The Reverse Charge Mechanism (RCM) is a system where the recipient of goods or services, rather than the supplier, is liable to pay the Goods and Services Tax (GST) to the government. This mechanism is an exception to the general rule where the supplier collects tax from the buyer and remits it to the government. The primary objective of RCM is to broaden the tax base, prevent tax evasion, and ensure compliance in specific sectors.

Under RCM, the recipient must register under GST, even if their aggregate turnover is below the threshold limit for mandatory registration, if they receive supplies subject to RCM. The tax paid under RCM can generally be claimed as Input Tax Credit (ITC) by the recipient, subject to other ITC eligibility conditions.

Which goods and services are notified under Section 9(3) for RCM?

Section 9(3) of the Central Goods and Services Tax (CGST) Act, 2017, empowers the government to notify specific categories of goods and services where the recipient is liable to pay GST under RCM. These notifications are issued based on recommendations from the GST Council to address specific industry challenges or compliance issues.

Some of the key goods and services notified under Section 9(3) include:

Goods:
- Cashew nuts, not shelled or peeled
- Bidi wrapper leaves (tendu leaves)
- Tobacco leaves
- Silk yarn
- Raw cotton
- Supply of lottery
- Used vehicles, seized and unserviceable goods, waste and scrap by Central Government, State Government, Union Territory or a local authority to any registered person.
- Priority Sector Lending Certificates (PSLCs)
Services:
- Services supplied by a Goods Transport Agency (GTA)
- Services supplied by an individual advocate, a firm of advocates or a senior advocate
- Services supplied by an arbitral tribunal
- Services supplied by way of sponsorship
- Services supplied by the Central Government, State Government, Union Territory or local authority to a business entity
- Services supplied by a director of a company or a body corporate to the said company or the body corporate
- Services supplied by an insurance agent to any person carrying on insurance business
- Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company
- Services by way of transfer or permitting the use or enjoyment of a copyright relating to original literary, dramatic, musical or artistic works
- Services by way of transfer of development rights or Floor Space Index (FSI)
- Long-term lease of land (30 years or more) by a lessor to a lessee against consideration in the form of upfront amount called as premium, salami, cost, price, development charges or by whatever name called and also periodical annuity to the extent of 99 years.

How does RCM apply to Goods Transport Agency (GTA) and legal services?

RCM applies to services provided by a Goods Transport Agency (GTA) and legal services, making the recipient responsible for GST payment.

Goods Transport Agency (GTA)

For services supplied by a Goods Transport Agency (GTA) in respect of transportation of goods by road to certain specified recipients, RCM applies. The specified recipients include:

Any factory registered under or governed by the Factories Act, 1948
Any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force
Any co-operative society established by or under any law
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
Any body corporate established, by or under any law
Any partnership firm whether registered or not under any law including association of persons
Any casual taxable person

The GTA has an option to pay GST under forward charge at 12% with ITC or under RCM at 5% without ITC. If the GTA opts for forward charge, they must issue a declaration in Annexure V to the transporter and a declaration in Annexure VI to the recipient. If the GTA does not exercise this option, the recipient is liable to pay GST under RCM at 5%.

Legal Services

Services supplied by an individual advocate, a firm of advocates, or a senior advocate by way of legal services, directly or indirectly, to any business entity located in the taxable territory are subject to RCM. This means the business entity receiving the legal services is liable to pay GST. "Legal services" include 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.

What was Section 9(4) regarding unregistered suppliers, and how has it changed?

Section 9(4) of the CGST Act, 2017, initially mandated RCM for supplies received by a registered person from an unregistered supplier, but this provision has undergone significant changes.

Initially, Section 9(4) stated that if a registered person received supplies of taxable goods or services from an unregistered supplier, the registered recipient would be liable to pay GST under RCM. This provision was introduced to bring unregistered suppliers into the tax net indirectly. However, this led to significant compliance challenges for registered businesses, as they had to track and pay GST on numerous small purchases from unregistered vendors.

To alleviate this burden, the applicability of Section 9(4) was deferred and later amended. Currently, Section 9(4) applies only to specific categories of supplies notified by the government for certain registered persons. As of now, the government has notified only a few specific categories of supplies of goods and services by an unregistered supplier to a promoter for construction of a project, where the promoter is liable to pay tax under RCM. This means the general RCM on all supplies from unregistered persons has been removed.

What is the self-invoicing rule under RCM?

The self-invoicing rule under RCM requires the recipient to issue an invoice for the goods or services received from a supplier who is not liable to issue a tax invoice. This typically applies when the recipient is liable to pay tax under RCM.

When a registered person receives supplies where RCM applies, and the supplier is not registered under GST or is not required to issue a tax invoice (e.g., in cases where the supplier is exempt or below the threshold), the recipient must issue a "self-invoice." This invoice should contain all the details required for a regular tax invoice, including the GSTIN of the recipient, description of goods/services, value, and the amount of tax payable under RCM.

Additionally, the recipient must also issue a "payment voucher" at the time of making payment to the supplier. This ensures proper documentation and compliance for RCM transactions.

Can Input Tax Credit (ITC) be claimed on tax paid under RCM?

Yes, Input Tax Credit (ITC) can generally be claimed on the GST paid under the Reverse Charge Mechanism (RCM), provided certain conditions are met.

When a recipient pays GST under RCM, this payment is considered as tax paid by them on their inward supplies. Therefore, this tax becomes eligible for ITC, just like tax paid on regular forward charge supplies. The conditions for claiming ITC on RCM payments are:

Registered Recipient: The recipient must be a registered person under GST.
Tax Paid: The recipient must have actually paid the tax under RCM to the government.
Used for Business: The goods or services on which RCM was paid must be used or intended to be used in the course or furtherance of the recipient's business.
Possession of Documents: The recipient must possess a self-invoice and a payment voucher.

The ITC on RCM is typically claimed in the same month in which the tax liability under RCM is discharged. It's a common practice for businesses to pay RCM liability and claim ITC in the same tax period, effectively making it a 'wash-through' entry, provided all conditions are met.

Comparison: Forward Charge vs. Reverse Charge Mechanism

Feature	Forward Charge Mechanism (FCM)	Reverse Charge Mechanism (RCM)
Tax Payer	Supplier	Recipient
Tax Collection	Supplier collects tax from recipient and remits to government	Recipient directly pays tax to government
Invoice Issuer	Supplier issues tax invoice	Supplier may issue bill of supply; Recipient issues self-invoice
Applicability	General rule for most goods and services	Notified goods/services, specific transactions (e.g., GTA, legal services)
GST Registration	Supplier must be registered if turnover exceeds threshold	Recipient must be registered if receiving RCM supplies, even if turnover is below threshold
Input Tax Credit	Supplier cannot claim ITC on tax collected; Recipient claims ITC on tax paid to supplier	Recipient pays tax and can claim ITC on the same, subject to conditions
Compliance Burden	Primarily on supplier	Primarily on recipient (payment, self-invoicing, ITC claim)
Example	Sale of electronics by a retailer to a customer	A business entity receiving legal services from an advocate

How SP & SC helps

Navigating the complexities of GST, especially the Reverse Charge Mechanism, can be challenging. Our experts at SP & SC Legal and Taxation Services provide comprehensive support for GST compliance, including accurate calculation and timely filing of your GST returns, ensuring you meet all RCM obligations and maximise your Input Tax Credit claims. Visit our GST Return Filing service page for more details.

Frequently asked questions

What happens if I don't pay GST under RCM?

Failure to pay GST under RCM can lead to penalties, interest on the unpaid tax, and disallowance of Input Tax Credit. The recipient is legally obligated to discharge the RCM liability.

Is RCM applicable to all unregistered suppliers?

No, Section 9(4) of the CGST Act, which dealt with RCM on supplies from unregistered persons, has been largely withdrawn. Currently, RCM applies to supplies from unregistered suppliers only for specific notified goods and services to specific registered persons (e.g., a promoter receiving supplies for construction of a project).

How do I show RCM in my GST returns?

RCM liabilities are reported in GSTR-3B under "Tax payable under reverse charge." The corresponding Input Tax Credit (ITC) on RCM is claimed in Table 4 of GSTR-3B. Details of RCM inward supplies are also reported in GSTR-2A/2B and GSTR-2.

Do I need to be registered under GST to pay RCM?

Yes, if you are liable to pay tax under RCM, you must be registered under GST, irrespective of your aggregate turnover. This is a mandatory requirement under the GST law.

What is the time of supply for RCM?

The time of supply for goods under RCM is the earliest of: (a) the date of receipt of goods, (b) the date of payment, or (c) the date immediately following thirty days from the date of issue of invoice by the supplier. For services under RCM, it is the earliest of: (a) the date of payment, or (b) the date immediately following sixty days from the date of issue of invoice by the supplier.