You already know that GST is an indirect tax that is applicable on the sale of goods and services. However, did you know that in case of certain transactions, buyers need to pay this tax directly to the government?
This is applicable under the reverse charge mechanism in GST. Keep reading to learn more.
Reverse Charge Mechanism in GST – A Deep Dive
Usually, businesses are responsible for collecting GST during the sale of goods and services. They collect it on behalf of customers and pay it to the government via GST filing.
However, in case of certain transactions, the responsibility of paying GST to the government falls on the buyer. This system is known as reverse charge mechanism in GST or RCM.
Additionally, in certain special circumstances, both the buyer and the seller can bear joint/partial responsibility in paying this tax.
Provisions for this tax in case of intra-state transactions are present under the following Sections of the State GST and Central GST Acts:
- Section 9(3)
- Section 9(4)
- Section 9(5)
For inter-state transactions, the applicable rules for GST reverse charge are mentioned under the following Sections of the Integrated GST Act:
- Section 5(3)
- Section 5(4)
- Section 5(5)
Applicability of Reverse Charge Mechanism in GST
RCM GST is applicable on the sale of both goods and services in case of the following:
- When a registered business owner receives goods or services from an unregistered vendor.
For instance, if a registered retailer or wholesaler buys goods from an unregistered vendor, he/she is liable to pay GST to the government.
- Services provided by e-commerce operators or aggregators.
As per the Central Board of Excise and Customs (CBEC), here is a list of goods for which reverse charge mechanism under GST is applicable:
| Goods Description | Goods Supplier | Recipient of Supply |
| Tobacco leaves | Agriculturist | Registered taxable individual |
| Bidi wrapper (tendu leaves) | Agriculturist | Registered taxable individual |
| Cashew nuts (not shelled or peeled) | Agriculturist | Registered taxable individual |
| Lottery | Union Territory, State Government or any local authority. | Lottery selling agent or distributor |
| Silk yarn | Individuals manufacturing silk yarn from silk worm cocoons or raw silk. | Registered taxable individual |
Here are the services that are applicable for reverse charge under GST:
| Services Description | Provider of Service | Supply Recipient |
| Legal services | Legal advocate or firm. | Registered taxpayer |
| Goods transportation by road. | Goods Transportation Agency | Registered taxpayer |
| Services provided by individuals in a non-taxable territory | Service provider in the non-taxable territory. | Registered taxpayer |
| Sponsorship services | Individuals or corporates | Partnership or corporate firms |
| Services offered by an arbitral tribunal | Arbitral Tribunal | Registered taxpayer |
| Services by a corporate body or director to their own organization. | Corporate body or director | The enterprise to which they offer services |
| Services offered by the government or local authorities.(Excluding postal services, renting immovable property, services provided to ships or aircrafts at Indian ports or airports, insurance and agency services, and transportation of passengers or goods.) | Local authorities or Governments | Registered taxpayer |
| Services offered by recovery agents. | Recovery agent. | Banking or financial services institution. |
| Services by insurance agents. | Insurance agent. | Insurance company |
| Providing/transferring permission to copyrighted content (as per Section 13(1) of the Copyright Act, 1957) | Musician, artist or any other creative professional. | Publishing company |
| Taxi services via an e-commerce operator | Taxi driver | e-commerce operator |
| Overseas transportation of goods via vessel to an Indian customs office | Transportation firm | Individual or business importing the goods |
Reverse Charge Mechanism Under GST – Requirements
Here are some requirements for taxpayers to follow in order to adhere to the reverse charge mechanism under GST:
- Recipients of goods or services need to register under GST by using GST Login Portal.
- All registered business owners need to maintain accurate supply records that are applicable for reverse GST charges.
- In case of transactions where supply charge is applicable, suppliers need to clearly mention on the invoice that the tax payable is via reverse GST charge. Additionally, this needs to be mentioned in case of both refund and receipt vouchers.
- For advanced tax payments, assesses must also pay the applicable tax for supplies that fall under reverse charge under GST.
What is Time of Supply Under RCM GST?
Time of supply for a transaction falling under reverse charge mechanism GST refers to the dates on which this tax is levied on supplies. It shall be the earliest of the following:
- Payment date.
- Date on which goods are received.
- After 30 days and 60 days from the invoice date of goods and services respectively.
Note – In case none of the above dates are applicable, then the entry date in the receiver’s books will be eligible.
Examples of Reverse Charge Mechanism
Let’s take the help of some examples to help you understand better.
For instance, you buy raw materials from an unregistered vendor on 14th March 2024. They are delivered to you on 17th March and you disburse payment for it on 19th March. As the supplier is unregistered, you are liable to pay reverse charge under GST.
Additionally, your date of receipt of goods will be 17th March 2024.
Now, let’s take an example for services.
Suppose you are a provider of overseas transportation services. So, the clients availing your service are liable to pay reverse charge under GST. Now, let’s say they opted for your service on 22nd April 2024 and you received payment on 25th April 2024.Thus, the time of supply for this transaction shall be 25th April 2024.
Input Tax Credit on Reverse Charge
Buyers can claim input tax credit on items eligible for RCM on GST as long as they use it for business purposes. However, suppliers cannot claim any deduction in this regard.
To gain the benefits of input tax credit under the reverse charge mechanism in GST, proper return filing is necessary. Moreover, you must remember that this tax is not applicable on intra-state less than or equal to ₹5,000 on purchases from unregistered sellers.
Thus, opting for the services of a tax professional while filing returns is advisable.
FAQs
What happens if we do not pay RCM?
If you do not pay RCM, you will not be eligible to claim input tax credit on the tax amount. This in turn can significantly increase your tax liability.
Who is not eligible for paying RCM?
Departments under the Central Government, State Government and Union Territories; local authorities who have taken CHST registration for deducting tax under Section 51 and registered taxpayers making tax payments under Section 10.
Can we claim input tax credit for RCM in the same month?
Yes, you can claim input tax credit in the same month for tax paid on reverse charge mechanism under GST.
What is the impact of GST if you are applying for GST?
Lenders provide GST Business Loans, which are contingent upon the company’s GST returns. Consequently, these loans are accessible to self-employed individuals, as well as non-professional service providers and retailers.