A Guide to the Reverse Charge Mechanism in GST

The Goods and Services Tax (GST) is a unified indirect tax that has replaced multiple central and state taxes, thereby simplifying the tax structure in India. One of the significant provisions under this system is the reverse charge mechanism in GST, where the liability to pay tax is transferred from the supplier to the recipient of goods or services. This rule applies in certain notified transactions. Understanding Reverse Charge GST is essential for businesses to comply with tax regulations, file returns accurately, and avoid penalties or legal complications. In this blog, you will learn about the Reverse Charge Mechanism in GST.

What is the Reverse Charge Mechanism in GST?

Under the Reverse Charge Mechanism in GST, the responsibility for paying tax shifts from the supplier to the recipient. Usually, the supplier collects and deposits GST. However, in certain notified cases, the recipient must pay the tax directly to the government. This applies particularly in transactions involving unregistered suppliers. The mechanism ensures better tax compliance and transparency. It also helps the government prevent revenue leakage. Overall, the Reverse Charge Mechanism in GST brings more businesses into the formal tax system.

The purpose of this system is to include unorganised sectors under tax coverage, exempt certain classes of small suppliers, and ensure taxation on imported services from foreign suppliers. The reverse charge mechanism applies only to specified transactions and registered businesses. GST details of any entity can be verified using the GST search tool.

When is the Reverse Charge Mechanism Applicable?

The Central GST (CGST) and State GST (SGST) Acts govern reverse charge for intra-state supplies, while the Integrated GST (IGST) Act governs reverse charge for inter-state supplies. The applicable provisions are:

• Section 9(3), 9(4), and 9(5) of CGST/SGST Acts
• Section 5(3), 5(4), and 5(5) of IGST Act

These sections identify specific scenarios where the recipient of goods or services must pay GST instead of the supplier.

1. Supply of Goods and Services Notified by CBIC – Section 9(3) of CGST Act

The Central Board of Indirect Taxes and Customs (CBIC) issues official notifications that list goods and services where reverse charge applies, regardless of whether the supplier registers under GST.

Some common examples include:

• Legal services from an individual advocate or law firm to a business entity
• Goods transport services from a Goods Transport Agency (GTA)
• Sponsorship services to any body corporate or partnership firm
• Services from a director to the company or body corporate
• Security services to a registered person, excluding government departments

In these cases, the recipient pays GST under RCM and also claims input tax credit if eligible.

Refer to CBIC official reverse charge notifications for the complete and updated list.

2. Purchase from Unregistered Supplier – Section 9(4) of CGST Act

This section covers purchases where a registered buyer procures goods or services from an unregistered seller.

• Reverse charge applies only to notified categories of recipients, not all buyers.
• The registered buyer must issue a self-invoice for the purchase and pay GST.
• For intra-state purchases, the buyer pays CGST and SGST.
• For inter-state purchases, the buyer pays IGST.

Real Estate Sector Rules under Section 9(4)

The government sets specific reverse charge rules for promoters and builders:

• A promoter must purchase at least 80% of inward supplies from registered suppliers.
• If purchases fall short of 80%, the promoter pays 18% GST on the shortfall under reverse charge.
• If the promoter purchases cement from an unregistered supplier, the GST rate is 28%, regardless of the 80% rule.
• The promoter pays 18% GST on Transfer of Development Rights (TDR) or Floor Space Index (FSI) received from a landowner, even if the landowner does not carry on regular business.
• If one developer transfers TDR to another developer, the receiving developer pays GST under reverse charge.

3. Services Through E-Commerce Platforms – Section 9(5) of the CGST Act

This section makes the e-commerce operator responsible for paying GST on certain services supplied through its platform.

These services include:

• Passenger transport services through radio taxi, motor cab, maxi cab, or motorcycle (e.g., Ola, Uber)
• Accommodation services in hotels, inns, or guest houses, unless the individual service provider exceeds the GST threshold
• Housekeeping services like plumbing, carpentry, etc., unless the individual provider exceeds the GST threshold

In these cases, the platform operator (e.g., Urban Company, MakeMyTrip) pays GST, collects it from the customer, and remits it to the government.

If the e-commerce operator lacks a physical presence in India:

• The person who represents the operator in India pays GST.
• If no representative exists, the operator appoints one who becomes liable for the tax.

Time of Supply Under Reverse Charge Mechanism

Here is a detailed explanation of the time of supply under the Reverse Charge Mechanism (RCM):

1. Time of Supply for Goods under Reverse Charge

The time of supply for goods under RCM decides when the tax becomes payable. The law fixes this based on the earliest of the following:

• Date when the recipient receives the goods

The tax liability arises on the day the buyer gets physical possession of the goods.

• Date when the recipient makes payment

If the buyer records the payment in the books or the bank debits the amount, that date becomes the point of taxation.

• Date after 30 days from the date of the invoice

If the supplier raises an invoice and the recipient does not receive the goods or make the payment within 30 days, the liability arises on the 31st day.

• Date of entry in the books of account

If none of the above dates are available, the government considers the date of recording the purchase in the books of the recipient as the tax point.

This rule ensures that the recipient pays tax without delay.

2. Time of Supply for Services under Reverse Charge

The time of supply for services under RCM follows a slightly different approach. The liability arises at the earliest of these:

• Date when the recipient makes payment

If the books of accounts show the payment or the bank confirms the deduction, this date becomes the tax trigger.

• Date after 60 days from the date of the invoice

If the supplier issues an invoice and the recipient does not pay within 60 days, the tax becomes due on the 61st day.

• Date of invoice issued by the recipient

If the supplier does not issue an invoice, the recipient must issue one. The date on this invoice decides the tax point.

• Date of entry in the books of account

If the above methods do not apply, the entry date in the recipient's accounts finalises the time of supply.

This setup ensures that service recipients do not delay tax payments under RCM.

3. Self-Invoice Requirement (Rule 47A)

As per Rule 47A, the recipient of goods or services under RCM must create a self-invoice. This rule applies only when the supplier does not issue a proper invoice. The self-invoice must be prepared within 30 days of receiving the goods or services.

Failure to generate the invoice within this time may lead to penalties. Also, the recipient may lose the right to claim input tax credit (ITC) if the self-invoice is not in place.

This rule helps the government ensure that transactions under RCM follow documentation standards.

RCM Registration Requirements in GST

Under Section 24 of the CGST Act, 2017, a person who is required to pay tax under the reverse charge mechanism must register under GST. This applies even if their turnover is below the threshold of Rs. 20 lakh or Rs. 40 lakh. The law requires GST registration to ensure proper tax compliance in cases involving reverse charge.

Who is Responsible for GST Payment in RCM?

Under the reverse charge mechanism, the liability to pay GST shifts to the recipient of the goods or services instead of the supplier. However, the supplier must mention on the invoice that the tax liability falls under the reverse charge provision.

While paying GST under the Reverse Charge Mechanism, it is important to follow the  key rules:

• A registered person who pays GST under RCM can claim Input Tax Credit (ITC) only if the goods or services are used for business activities or to support business operations.
• A composition scheme dealer must pay GST at the standard rate when liable under RCM. They cannot use the composition rate for such payments, and also cannot claim any ITC on that tax.
• GST compensation cess may be added to the tax amount under RCM, depending on the type of goods or services involved.

Input Tax Credit Under the Reverse Charge Mechanism

Under the Reverse Charge GST mechanism, the liability to pay GST shifts from the supplier to the recipient of goods or services. In this scenario, the supplier is not eligible to claim Input Tax Credit (ITC) on the GST paid. Instead, the recipient bears the tax burden but can claim ITC only if the goods or services are used exclusively for business purposes. This provision ensures that ITC is allowed solely for genuine business-related expenses.

The Central Board of Indirect Taxes and Customs (CBIC) published Circular No. 211/5/2024-GST on 26 June 2024. This circular provides clarity on the time limit for claiming Input Tax Credit (ITC) under Section 16(4) of the CGST Act. It states that the relevant financial year for ITC calculation is the year in which the self-invoice is issued. It is not based on the financial year in which the actual supply was made. If a recipient issues the invoice after the prescribed time and pays tax later, interest becomes payable, and penalties under Section 122 may also apply.

Additionally, any GST liability under Reverse Charge GST must be paid in cash via the electronic cash ledger. ITC cannot be used to pay this tax. This rule reinforces timely and transparent compliance with reverse charge provisions under GST.

Recent Updates & Notifications

Here are the recent updates and notifications on the Reverse Charge Mechanism (RCM) under GST:

Union Budget Announcement – 23rd July 2024

As part of the Union Budget 2024, the Finance Minister proposed an important change to Section 13 of the CGST Act. This change relates to situations where the recipient of services, instead of the supplier, is responsible for issuing the invoice, such as in reverse charge cases involving unregistered suppliers. The proposal aims to define the time of supply for such services based on when the recipient issues the invoice. However, this amendment will become effective only after it is officially notified by the Central Board of Indirect Taxes and Customs (CBIC).

CBIC Clarification – 26th June 2024

The CBIC issued Circular No. 211/5/2024-GST to clear up confusion regarding input tax credit (ITC) claims under Section 16(4) of the CGST Act. According to this clarification, when a recipient issues a self-invoice under RCM, the financial year for ITC eligibility is based on the date the invoice is issued, not when the goods or services were received.

GST Council’s 53rd Meeting – 22nd June 2024

In the 53rd GST Council meeting, the Council reaffirmed the same understanding. When tax is payable under RCM for goods or services from unregistered suppliers, and the recipient must issue the invoice, the relevant financial year for ITC purposes is the one in which the invoice is raised.

Conclusion

The Reverse Charge Mechanism in GST plays an important role in improving tax compliance. It shifts the responsibility of paying tax to the recipient in specific cases. This ensures that transactions with unregistered suppliers are also taxed correctly. The mechanism helps reduce tax evasion and supports transparency. It also brings more businesses into the tax system. Following RCM rules allows businesses to stay compliant and avoid unnecessary penalties under the GST law.

FAQ

Q1. What is the Reverse Charge Mechanism in GST?

The Reverse Charge Mechanism in GST shifts the tax payment liability from the supplier to the recipient of goods or services. It typically applies when receiving supplies from unregistered dealers or for notified services under Section 9(3) or 9(4) of the CGST Act.

Q2. Can Input Tax Credit (ITC) be claimed on GST paid under RCM?

Yes, the recipient can claim ITC on GST paid under RCM, but only if the goods or services are used for business purposes and the tax is paid through the electronic cash ledger, not via existing ITC.

Q3. Has there been any recent change in the time limit to claim ITC under RCM?

Yes. As per CBIC Circular No. 211/5/2024-GST dated 26 June 2024, the relevant financial year for availing ITC under RCM is the year in which the self-invoice is issued by the recipient, not the year of actual supply.

Q4. What is the penalty for not complying with RCM provisions?

Failure to comply with RCM provisions may attract interest on delayed payment and penalties under Section 122 of the CGST Act, including a fine equal to the tax amount evaded.

Q5. Is GST payable under RCM required to be paid in cash only?

Yes, GST under RCM must be paid in cash via the electronic cash ledger. The taxpayer cannot use ITC to discharge this liability.