It has already been a fortnight of the historic overhaul of existing indirect taxes with the midnight rollout of GST in India and so far, the overall outlook is positive even though some people are questioning the haste with which it was brought in.
The world economy is viewing this reform as a major break through for ease of doing business as well as cutting red tape prevalent across the country. Through this article, I’ve tried to discuss the provisions of Reverse Charge Mechanism (RCM), the various goods/services attracting reverse charge and how such liability is to be discharged.
Concept of RCM
The concept of Reverse charge had been prevailing in some form in the VAT (purchase tax) and the Service Tax regime. The main concept of getting reverse charge is two-fold – to increase compliance and revenue in the Government treasury from supplies by the unorganised sector and taxing the recipient of such goods/services and also to shift the burden of taxes from certain types of registered persons to business entities.
Under normal cases the supplier of goods or services or both is supposed to collect the tax and pay the tax to the Government i.e. forward charge. In reverse charge mechanism, the recipient of service is supposed to pay tax instead of the supplier.
The Government has the power to collect tax on such reverse charge transactions vide sections 9(3) of CGST Act and 5(3) of IGST Act for notified goods and services and Sections 9(4) of CGST Act and 5(4) of IGST Act for inward supplies undertaken from unregistered persons.
RCM on notified Goods and Services
The Government as per Section 9(3) of the CGST Act and Section 5(3) of the IGST Act, on recommendation from the Council specify categories of goods or services or both on which tax shall be payable on reverse charge basis. The Act shall apply to such recipient as if he is the person liable to pay tax with regards to said goods or service or both.
Notification No. 04/2017 – Central Tax (Rate) and Notification No.4/2017 – Integrated Tax (Rate) both dated 28th June, 2017 specifies categories of goods notified by the Government to attract reverse charge and Notification No. 13/2017 – Central Tax (Rate) and Notification No. 10/2017 – Integrated Tax (Rate) specifies categories of services notified by the Government to attract reverse charge.
Very few goods like cashew nuts in shell, tobacco leaves etc. are notified at the moment and notified services are quite similar to the ones which were present in the service tax regime.
A brief summary of the categories of such goods and services are tabulated and reproduced hereunder for your ready reference.
| Notified Goods under RCM | ||
| Supplier of Goods | Recipient of Goods | GST payable by Service Recipient |
|
By agriculturist of
• Cashew nuts, not shelled or peeled • Bidi wrapper leaves (tendu) • Tobacco leaves |
Any registered person | 100% |
| Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn | Any registered person | 100% |
| Supply of Lottery by state government, union territory or any local authority | Lottery distributor or selling agent. Explanation.– For the purposes of this entry, lottery distributor or selling agent has the same meaning as assigned to it in clause (c) of Rule 2 of the Lotteries (Regulation) Rules, 2010, made under the provisions of sub- section 1 of section 11 of the Lotteries (Regulations) Act, 1998 (17 of 1998). | 100% |
|
Notified Services under RCM |
||
| Service Provider | Service Receiver | GST payable by Service Recipient |
| Goods Transport Agency | Any society, factory, any person registered under CGST, SGST, UTGST Act, body corporate, partnership firm or any casual taxable person located in taxable territory. | 100% |
| An individual advocate or firm of advocates | Any business entity located in a taxable territory. | 100% |
| An arbitral tribunal | Any business entity located in a taxable territory. | 100% |
| Any person providing sponsorship services | Any body corporate or partnership firm located in a taxable territory. | 100% |
|
Services supplied by the Central Government, State Government, Union Territory or local authority to a business entity excluding, –
(1) Renting of immovable property, and (2) Services specified below- (i) Services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) Transport of goods or passengers. |
Any business entity located in a taxable territory. | 100% |
| A director of a company or a body corporate | A company or a body corporate located in a taxable territory. | 100% |
| An insurance agent | Any person carrying on insurance business located in a taxable territory. | 100% |
| A recovery Agent | Banking Company, any financial institution or NBFC located in a taxable territory. | 100% |
| Author or music composer, photographer, artist, etc. (Transfer or permitting the use or enjoyment of a copyright) | Publisher, Music company, Producer located in a taxable territory. | 100% |
It is pertinent to note that there is no partial reverse charge mechanism where a portion is to be paid by the recipient and the rest by the supplier.
Also, please note that irrespective of the status of the supplier is registered or unregistered, the above supplies will attract RCM.
RCM on inward supplies from unregistered person
Any goods or services or both procured from an unregistered person by a registered person will attract reverse charge. The Act shall apply to such recipient as if he is the person liable to pay tax with regards to said goods or service or both.
However, some respite is given vide Notification No.8/2017 – Central Tax (Rate) as well as the respective state rate notifications which exempts intra-State supplies of goods or services or both received by a registered person from any unregistered supplier from the whole of the CGST/SGST where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the unregistered suppliers does not exceed ₹ 5,000/- in a day.
It is pertinent to note that this ₹ 5,000/- limit is to be applied per day and the moment this limit for the day is breached, the entire amount will attract tax under RCM. This limit as discussed herein is applicable per GSTIN Registration that is even if a company has multiple registrations it is to be applied individually for each registration per day. Simply put this limit is available per state per day.
Illustration
Inward Supplies from Unregistered dealer – ₹2000 for plumbing and ₹ 3,100 for stationary purchase for a single day.
Since, the aggregate value of supplies from all unregistered dealers exceeds ₹ 5,000/- the entire amount will attract tax under RCM. Stationary will attract the rate applicable to such goods and plumbing will attract the rate applicable to plumbing. The rate is to be applied as if he is the person liable to pay tax.
An unregistered person below the threshold limit(20Lakhs) cannot make inter-state supplies and thus, the Government also has notified the ₹ 5,000/- per day limit only in the CGST Act. That means there will not be a case where there will be inter-state purchases from an unregistered dealer.
Registration
Normally registration is attracted only in cases where a person doing business exceeds a prescribed threshold limit (₹ 20 lakhs other than for special category States). As per Sec 24 any person who is required to pay tax under reverse charge is liable to take compulsorily registration irrespective of the threshold limit prescribed under the Act.
However, this is only in respect of notified services/goods under Sec 9(3) of CGST Act and 5(3) of IGST Act and not with regards to RCM on account of purchases from an unregistered dealer. This is because Sec 9(4) of the CGST Act and Sec 5(4) of the IGST Act requires a REGISTERED person undertaking inward supplies from an unregistered dealer to pay tax under RCM. Since, the person is not registered this section will not be attracted.
Therefore, as stated earlier for notified supplies irrespective that the supplier is registered or unregistered, the recipient will be required to take registration and pay tax under RCM.
Illustration: A clinical establishment providing health care services is exempted in GST. Under Sec 23 he is not required to be registered. However, say the establishment avails legal services of an advocate. Then As per Sec 24 he will be liable for registration and pay tax under RCM.
Time of Supply
Time of Supply is required for determining the point of taxation for levy of tax. There are specific provisions to determine time of supply under RCM.
i) For Goods
Earliest of
a) the date of the receipt of goods; or
b) the date of payment as entered in the books of account or date on which the payment is debited in bank account of recipient, whichever is earlier; or
c) the date immediately following 30 days from the date of issue of invoice
ii) For Services
Earliest of
a) the date of payment as entered in the books of account or date on which the payment is debited in bank account of recipient, whichever is earlier; or
b) the date immediately following 60 days from the date of issue of invoice
where it is not possible to determine the time of supply 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 view of the above one will have to ascertain the time of supply in respect of the goods and services or both separately and then offer it for tax.
Documentation and Invoicing
A registered person who is liable to pay tax under RCM i.e. the recipient shall issue an invoice of the goods or services or both received by him from the unregistered supplier on the date of receipt of the same.
He is also required to issue a payment voucher at the time of making payment to the supplier.
Returns
A registered supplier of goods/service or both which attracts RCM (tax is payable by the recipient) will have to show said supplies in his GSTR-1 – statement of outward supplies and these supplies will auto-populate in the recipient’s GSTR-2 – statement of inward supplies. The recipient will also have to add other supplies from unregistered dealers in his GSTR-2 to claim ITC but said input tax will only be eligible after said tax under RCM has been paid by him.
Payment of Tax
Sec 49(1) of the CGST Act requires payment of tax, interest, penalty, fee or any other amount into the electronic cash ledger. The phrase any other amount, in the present context, may include payment in respect of RCM.
Sec 49(4) provides that the amount available in the electronic credit ledger may be used for making any payment towards output tax. Sec 2(82) defines output tax which excludes tax payable on reverse charge basis.
In this background, the issue arises as to whether the claim of ITC in respect of the tax paid under RCM is admissible in the month in which the liability to pay RCM arises or only after the RCM tax is paid physically in the Government Treasury i.e. in the following the month.
Sec 41(1) provides that the registered person can take the credit of eligible input tax [which includes tax paid under RCM – Sec 2(62)] on a provisional basis to his electronic credit ledger. Sec 41(2) states that the credit of the available credit electronic credit ledger shall be utilized only for the payment of self-assessed output tax as per the return on provisional basis.
In view of these categorical provisions, the ITC in respect of RCM can be claimed only after the payment thereof is made in the Government treasury. Therefore, the credit would be available only upon admission of liability in one month and the payment thereof in the returns.
In the outset, RCM though might not bring a lot of revenue for the Government but it sure will regularize credit utilization in the flow of transactions as well as help the Government to track erring unregistered dealers. Every person will need to have a robust accounting system to track purchases attracting reverse charge and appropriately account for it.