Reverse Charge Mechanism under GST

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Under the GST regime, reverse charge means the liability to pay tax is on the recipient of supply of goods or services instead of supplier of such goods or services. Under forward charge mechanism, the supplier collects GST from the recipient and remits the same to the government. However, in case of reverse charge mechanism, the recipient is liable to pay and remit the GST to the government instead of the supplier of such goods or services.

Definition of Reverse Charge

‘Reverse charge’ has been defined under section 2(98) of the CGST Act, 2017 which reads as below:

‘(98) “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;’

Two types of Reverse Charge Scenario under GST regime

Under the GST framework, Sections 9(3) and 9(4) of the CGST Act, 2017 and Sections 5(3) and 5(4) of the IGST Act, 2017 speak about the reverse charge mechanism. Section 9(3) and section 9(4) of the CGST Act, 2017 reads as below-

“9(3) 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.”

“9(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of 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 such supply of goods or services or both.” [As substituted by the Central Goods and Services Tax (Amendment) Act, 2018 – Brought into force w.e.f. 01st February, 2019.]

Prior to its substitution, section 9(4) reads as below-

“(4) The central 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.”

Section 5(3) & section 5(4) of the IGST Act, 2017 read as below: –

“5(3) 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.“

“5(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of 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 such supply of goods or services or both.”[Substituted by The Integrated Goods and Services Tax (Amendment) Act, 2018 – Brought into force w.e.f. 01st February, 2019.]

Prior to its substitution, section 5(4) of the IGST Act, 2017 reads as below: –

 “5(4) The 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.”

Therefore, as per section 9(3) of the CGST Act, 2017 / section 5(3) of the IGST Act, 2017, the Government may, 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. As per amended section 9(4) of the CGST Act, 2017 / amended section 5(4) of the IGST Act, 2017, only specified class of registered persons shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis.

The amended section 9(4) of the CSGT Act, 2017

The original section 9(4) was applicable from 1st July, 2017 till 13th Oct, 2017. As per the said section tax in respect of the supply of taxable goods or services or both by a unregistered person to a registered person was required to be paid by the registered person on reverse charge basis as the recipient. However, the Central Government vide Notification No. 08/2017 Central Tax (Rate) dated 28-06-2017 exempted intra-state supplies of goods or services or both received by the registered person from any unregistered supplier where the aggregate value of such supplies of goods or services or both received by a registered person from any or all the unregistered supplier does not exceed Rs 5000/- in a day. The said monetary limit of Rs 5000/- was omitted vide N.N. 38/2017 Central Tax (Rate) dated 13.10.2017 w.e.f. 13.10.2017. As per the amended notification exemption was available to all registered persons till 31st March, 2018 without any limit. This exemption was further extended by the Central Government till 30th September, 2019 vide N.N. 22/2018 Central Tax (Rate), dated 06-08-2018. Finally, original section 9(4) was substituted by the Central Goods and Services Tax (Amendment) Act, 2018. The amended section 9(4) came into force with effect from 01st February, 2019. As per the amended section 9(4), notified class of registered person in respect of notified supply of goods or services received from unregistered supplier shall pay tax on reverse charge basis. Accordingly, the Central Government vide Notification No- 7/2019- Central Tax (Rate) dated 29.03.2019, notified categories of registered persons who are required pay tax on reverse charge basis on certain specified supplies of goods or services or both received from unregistered supplier. As per the said notification only promoter is liable to pay tax on reverse charge in respect of notified goods or services or both when received from an unregistered person. Corresponding notification was also issued under the IGST Act, 2017.

Now, reverse charge under section 9(4) is applicable on the following category of goods or services or both as per the Notification No. 7/2019- Central Tax (Rate) dated 29-03-2019 as amended by Notification No- 24/2019- Central Tax (Rate) dated 30-09-2019:-

  • Supply of such goods and services or both [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges, etc.) or FSI (including additional FSI)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in Notification No. 11/ 2017-Central Tax (Rate), dated 28th June, 2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.
  • Cement falling in Chapter Heading 2523 in the First Schedule to the Customs Tariff Act, 1975.
  • Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 supplied to a promoter for construction of a project on which tax is payable or paid at the rate prescribed for items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, in notification No. 11/2017-Central Tax (Rate), dated 28th June, 2017, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.

For the purpose of this notification,—

(i) the term “promoter” shall have the same meaning as assigned to it in clause (zk) of section 2 of the Real Estate (Regulation and Development) Act, 2016;

(ii) “project” shall mean a Real Estate Project (REP) or a Residential Real Estate Project (RREP);

(iii) the term “Real Estate Project (REP)” shall have the same meaning as assigned to it in clause (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016;

(iv) “Residential Real Estate Project (RREP)” shall mean a REP in which the carpet area of the commercial apartments is not more than 15 per cent of the total carpet area of all the apartments in the REP.

(v) the term “floor space index (FSI)” shall mean the ratio of a building’s total floor area (gross floor area) to the size of the piece of land upon which it is built.

The phrase ‘minimum value of goods or services or both required to be purchased by a promoter for construction of project’ as specified in this notification means 80% of value of input and input services, [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI), electricity, high speed diesel, motor spirit, natural gas], used in supplying the service shall be received from registered supplier only.

Inputs and input services on which tax is paid on reverse charge basis u/s 9(3) of the CGST Act, 2017 shall be deemed to have been purchased from registered person. However, if, value of input and input services received from registered suppliers during the financial year (or part of the financial year till the date of issuance of completion certificate or first occupation of the project, whichever is earlier) falls short of the said threshold of 80 per cent, GST shall be paid by the promoter on value of input and input services comprising such shortfall at the rate of 18% on reverse charge basis. Again, where cement is received from an unregistered person, the promoter shall pay tax on supply of such cement at the applicable rates i.e. 28% on reverse charge basis.

Persons registered under Composition Scheme

A person registered under composition scheme is also required to pay tax under reverse charge, although he will not get input tax credit of the tax so paid. He has to pay tax under reverse charge at the normal rate and not at the concessional rate applicable under composition scheme.

Time of Supply under Reverse Charge Mechanism

If reverse charge is applicable in a particular transaction, the next thing is when the recipient has to pay the tax. Section 12(3) of the CGST Act, 2017 speaks about the time of supply in case of goods and Section 13(3) of the CGST Act, 2017 speaks about time of supply in case of services under reverse charge.

Under reverse charge, time of supply in case of supply of goods shall be the earliest of the following dates:-

(a)the date of the receipt of goods; or
(b)the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(c)the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.

Where it is not possible to determine the time of supply as mentioned under (a), (b) or (c) above, the time of supply shall be the date of entry in the books of account of the  recipient of supply.

Time of supply, under reverse charge, in case of supply of services shall be the earlier of the following dates:-

(a)the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(b)the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.

Where it is not possible to determine the time of supply as mentioned under (a) or (b) above, the time of supply shall be the date of entry in the books of account of the recipient of supply.

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.

Invoice/Payment Voucher/Mode of Payment

Rule 46(p) of the CGST Rules, 2017, stipulates that invoice issued by a registered person should contain whether the tax is payable on reverse charge basis. Moreover, according to clause (f) of sub-section 3 of section 31 of the CGST Act, 2017, a recipient has to generate a self-invoice if such goods or services is received by him from an unregistered supplier. Clause (f) of sub-section 3 of section 31 of the CGST Act, 2017 reads as below-

“(f) A registered person who is liable to pay tax under sub-section (3) or subsection (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;”

The recipient of supply of goods or services is required to issue payment voucher at the time of making payment to the supplier. The recipient has to discharge the reverse charge liability by debiting his electronic cash ledger. The recipient can not use input tax credit for payment of RCM liability and has to discharge such liability through cash only.

Input Tax Credit

The recipient can claim input tax credit of the tax paid under reverse charge as definition of ‘input tax’ includes tax payable under reverse charge. At the time of filing of return, he has to enter the tax amount so paid under the head ‘Eligible ITC’ in serial number 4 (A) (3) of the GSTR 3B. However, a person registered under the composition scheme is not eligible to claim input tax credit of the tax paid by him under reverse charge. The recipient should claim input tax credit of the tax paid under reverse charge, only after making payment of the tax. As per rule 36(b) of the CGST Rules, 2017, a recipient can take credit of the tax paid under reverse charge on the basis of self invoice subject to making payment of tax.

How to show in GST return

The particulars of the supplies attracting reverse charge should be entered by the recipient in the row “(d) Inward supplies (liable to reverse charge)” of table “3.1- Details of Outward supplies and inward supplies liable to reverse charge” in the GSTR 3B. Further, the details of GST paid under RCM should be entered by the recipient in Table 4A(3) of GSTR 3B. This figure is not auto populated in GSTR 3B and has to be entered manually.

NOTIFICATIONS RELATED TO RCM

Notification issued under sub-section (3) of section 9 of the CGST Act, 2017
  • For Goods

Original Notification: Notification No. 04/2017- Central Tax (Rate) dated 28.06.2017

Amending Notifications:

Notification No. 36/2017- Central Tax (Rate), dated 13-10-2017

Notification No. 43/2017- Central Tax (Rate), dated 14-11-2017

Notification No. 11/2018- Central Tax (Rate), dated 28-5-2018

Notification No. 10/2021- Central Tax (Rate), dated 30-9-2021

  • For Services

Original Notification: Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017

Amending Notifications:

Notification No. 22/2017- Central Tax (Rate), dated 22-8-2017,

Corrigendum GSR 1199(E), dated 25-9-2017,

Notification No. 33/2017- Central Tax (Rate), dated 13-10-2017,

Notification No. 3/2018- Central Tax (Rate), dated 25-1-2018,

Notification No. 15/2018- Central Tax (Rate), dated 26-7-2018,

Notification No. 29/2018- Central Tax (Rate), dated 31-12-2018,

Notification No. 5/2019- Central Tax (Rate), dated 29-3-2019,

Notification No.22/2019- Central Tax (Rate), dated 30-9-2019

Notification No. 29/2019- Central Tax (Rate), dated 31-12-2019

Notification issued under sub-section (4) of section 9 of the CGST Act, 2017

Original Notification: Notification No. 07/2019- Central Tax (Rate) dated 29.03.2019

Amending Notification:

Notification No. 24/2019- Central Tax (Rate) dated 30.09.2019

Notification issued under sub-section (3) of section 5 of the IGST Act, 2017
  • For Goods

Original Notification: Notification No. 04/2017- Integrated Tax (Rate) dated 28.06.2017

Amending Notifications:

Notification No. 37/2017- Integrated Tax (Rate), dated 13-10-2017

Notification No. 45/2017- Integrated Tax (Rate), dated 14-11-2017

Notification No. 12/2018- Integrated Tax (Rate), dated 28-5-2018

Notification No. 10/2021- Integrated Tax (Rate), dated 30-9-2021

  • For Services

Original Notification: Notification No. 10/2017- Integrated Tax (Rate) dated 28.06.2017

Amending Notifications:

Notification No. 22/2017- Integrated Tax (Rate), dated 22-8-2017

Corrigendum GSR No. 1200(E), dated 25-9-2017

Notification No. 34/2017- Integrated Tax (Rate), dated 13-10-2017

Notification No. 3/2018- Integrated Tax (Rate), dated 25-1-2018

Notification No. 16/2018- Integrated Tax (Rate), dated 26-7-2018

Notification No. 30/2018- Integrated Tax (Rate), dated 31-12-2018

Notification No. 5/2019- Integrated Tax (Rate), dated 29-3-2019

Notification No.21/2019- Integrated Tax (Rate), dated 30-9-2019

Notification No. 28/2019- Integrated Tax (Rate), dated 31-12-2019

Notification issued under sub-section (4) of section 5 of the IGST Act, 2017

Original Notification: Notification No. 07/2019- Integrated Tax (Rate) dated 29.03.2019

Amending Notification:

Notification No. 23/2019- Integrated Tax (Rate) dated 30.09.2019

Conclusion

Before applying reverse charge one has to check whether the said supply has been exempted under any exemption notification. If a particular supply is exempted under an exemption notification, then neither reverse charge nor forward charge is applicable in respect of such supply. Therefore, levy of RCM is also subject to the exemption notification no- 2/2017 Central Tax (Rate) & 2/2017 Integrated Tax (Rate) for goods and notification no- 12/2017 Central Tax (Rate) and 9/2017 Integrated Tax (Rate) for services.

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