Everything About Reverse Charge Mechanism Under GST

Reverse Charge Mechanism Under GST

The concept of Reverse Charge Mechanism was introduced in the erstwhile Service Tax laws. Generally, the tax mechanism follows a Forward Charge concept wherein the tax is payable by the person who makes a supply (i.e. Supplier).
The objective of the Reverse Charge Mechanism is to widen the scope of levy of tax on unorganized sectors and give exemption to a specific class of suppliers of goods or services. Therefore, under Reverse Charge Mechanism, the liability to pay tax is fixed on the Recipient of the supply of goods or services instead of the Supplier.

List Of Topics Covered:

What Does Reverse Charge Mean?

As per Section 2(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 Section 9(3) or 9(4) of the CGST Act or under Section 5(3) or 5(4) of the IGST Act.

Reverse Charge v/s Forward Charge v/s E-commerce Operator

Provisions of

Forward Charge (FCM) Reverse Charge (RCM)

E-commerce Operator (ECO)

Assessment The supplier has to assess tax & transfer to the Recipient. The recipient has to assess tax. Supplier will not charge GST in the invoice. Neither supplier nor recipient will assess the liability. ECO will assess the liability like the supplier.
Payment Liability Supplier is liable to make payment to the Government. Recipient is liable to make payment to the Government. ECO is liable to make payment to the Government.
Registration Supplier has to register under GST (subject to threshold) Recipient has to register under GST (compulsory registration u/s 24) ECO has to register under GST.
Due date of Payment Monthly. In some cases, quarterly. Monthly. In some cases, quarterly. Monthly. In some cases, quarterly.
Time of Supply Goods – Sec 12(2) of CGST Services – Sec 13(2) of CGST Goods – Sec 12(3) of CGST Services – Sec 13(3) of CGST Goods – Sec 12(2) of CGST Services – Sec 13(2) of CGST
Mode of Payment By using: → Electronic Credit Ledger → Electronic Cash Ledger By using: → Electronic Cash Ledger [Recipient cannot use his electronic credit ledger for payment of GST on such supply, but after payment of GST under RCM, ITC can be taken. By using: → Electronic Credit Ledger → Electronic Cash Ledger

RCM Under Previous Tax Regimes

  • VAT / CST

There was no Reverse Charge in VAT but Purchase Tax was leviable if a dealer purchased goods from the unregistered dealers in the State and disposed of such goods either in the State or Inter-State without payment of VAT. In such a case, the buyer of such goods was liable to pay purchase tax at the applicable rate.

  • SERVICE TAX

The concept of Reverse Charge Mechanism was introduced under Service Tax. The same is summarised below:

100% REVERSE CHARGE
→ Services by an insurance agent to any person carrying on insurance business
→ Services by a recovery agent to a banking company or a financial institution or a non-banking financial company
→ Services by a mutual fund agent or distributor, to a mutual fund or asset management company
→ Services by a selling or marketing agent of lottery tickets to a lottery distributor or selling agent
→ Services by a goods transport agency in respect of transportation of goods by road
→ Services by way of sponsorship
→ Services by an arbitral tribunal
→ Services by an individual advocate or a firm of advocates by way of legal services
→ Services by a director of a company or a body corporate to the said company or the body corporate
→ Services by Government or a local authority by way of support
→ Services by way of supply of manpower for any purpose or security services
→ Import of services
→ Services by any person who is located in a non-taxable territory and received by any person located in the taxable territory
→ Services by a person involving an aggregator in any manner

PARTIAL REVERSE CHARGE
→ Rent-a-cab service:
If the Service provider is not availing abatement then, the service provider is liable to pay the Service tax on 50% and the service receiver is liable to pay on rest under the Reverse charge mechanism. However, if the Service provider is availing abatement then the service receiver is liable to pay 100% of service tax payable on abated value.
→ On service portion in execution of works contract service provider is liable to pay service tax on 50% portion and on rest; service receiver is liable to pay under reverse charge mechanism.

CONDITION BASED REVERSE CHARGE
→ If Service Receiver- Business Entity registered as Body Corporate and Service Provider – Individual, HUF, proprietary or partnership firm, AOP then only Reverse charge mechanism applies in the following services:
1. Rent-a-cab
2. Works Contract
3. Supply of manpower for any purpose or security services

→ If Service Receiver is Business Entity:
1. Services of Arbitral tribunal
2. Legal Services of Advocate or Advocate Firms
3. Support Services by Government

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Section 9(3)

Section 9(3) covers reverse charge under notified cases. The Government may, on the recommendations of the Council, specify categories of goods or services or both by way of a notification and the tax on these 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 the recipient as if he is the person liable for paying the tax in relation to supply of such goods or services or both.

  • GOODS

The goods on which GST shall be levied under Reverse Charge have been announced in N/N 04/2017 dated 28.06.2017 as follows:

Sr. No.

Description Supplier Recipient

1

Cashew nuts, not shelled or peeled Agriculturist Any registered person

2

Bidi wrapper leaves (tendu) Agriculturist Any registered person

3

Tobacco Leaves Agriculturist Any registered person

4

Silk Yarn Any person who manufactures silk yarn from raw silkworm cocoons for the supply of silk yarn Any registered person

5

Supply of Lottery State Government/ Union Territory/ Local Authority Lottery Distributor or Selling Agent
  • SERVICES

Activities covered in N/N 13/2017-CT (Rate) and N/N  4/2017-IT (Rate) and N/N  4/2017-UTT (Rate) dated 28.06.2017

SECTOR:  TRANSPORTATION & RENTING OF MOTOR VEHICLE
  • SUPPLY OF SERVICES IN RELATION TO TRANSPORTATION OF GOODS BY ROAD

By a Goods Transport Agency [who has not paid CGST @6% & SGST @6% – via N/S 22-2017 CT (Rate)] to the following, where the person liable to pay freight is:

→ Factory
→ Registered Society
→ Co-operative Society
→ Any person registered under GST Acts
→ Body Corporate
→ Partnership Firm whether registered or not (including LLP and AOP)
→ Casual Taxable Person

Exception
However, nothing in this entry shall apply to  services provided by a Goods Transport Agency by way of transport of goods in a goods carriage by road to:

→ A department/ establishment of the Central Government or State Government or Union Territory
→ Local Authority
→ Governmental agencies that have taken registration under the CGST Act only for the purpose of deducting tax u/s 51 (i.e. TDS) and not for making a taxable supply of goods or services, as per N/N 29/2018-CT (Rate) dated 31.12.2018.

While understanding this entry, it is also necessary to understand an Exemption related to the same.
No. 21A of notification provides an exemption to service provided by GTA to an unregistered person, including an unregistered Casual Taxable Person, other than the 6 recipients notified in the original entry.
To summarise, GTA service is taxable as follows:SUPPLY OF SERVICES IN RELATION TO TRANSPORTATION OF GOODS BY ROAD

  • RENTING OF MOTOR VEHICLE

Services provided by way of renting of a motor vehicle by any person other than body corporate (paying total 5% GST on renting of motor vehicles with ITC only of input service in the same line of business) → to anybody corporate located in the taxable territory.

(As per newly inserted N/N 22/2019 CT (Rate) dated 30.09.2019)

SECTOR:  LEGAL SERVICES
  • LEGAL SERVICES

Services provided by an individual advocate (including a senior advocate) or firm of advocates by way of legal services, directly or indirectly → to any business entity located in the taxable territory.

  • ARBITRAL TRIBUNAL

Services provided or agreed to be provided by Arbitral Tribunal → to any business entity located in the taxable territory.

SECTOR:  GOVERNMENT SERVICES
  • GOVERNMENT SERVICES

Services supplied by Central Government / State Government / Union Territory / Local Authority → to a business entity in the taxable territory.

Exception
In the following cases, Supplier (i.e. Government/ Local Authority) will pay GST under forwarding Charge:

→ Renting of Immovable Property
→ Services by the way of speed post, express parcel post, life insurance and agency services provided to a person other than Central Government / State Government / Union Territory / Local Authority
→ Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport.
→ Transport of goods or passengers.

  • RENTING OF IMMOVABLE PROPERTY SERVICES

Services supplied by Central Government / State Government / Union Territory / Local Authority by way of renting of immovable property → to any registered person under GST.

SECTOR:  CONSTRUCTION

N/N 5/2019-CT dated 29.03.2019 and N/N 5/2019-IT(R) dated 29.03.2019

  • SERVICES SUPPLIED BY WAY OF TRANSFER OF DEVELOPMENT RIGHTS/ FSI / ADDITIONAL FSI FOR CONSTRUCTION OF A PROJECT

By Any Person → To The Promoter.

  • LONG TERM LEASE OF LAND (30 YEARS OR MORE) AGAINST CONSIDERATION IN THE FORM OF UPFRONT AMOUNT AND/OR PERIODIC RENT FOR CONSTRUCTION OF A PROJECT

By Any Person → To The Promoter.

Note: This upfront amount can be called a premium, salami, cost, price, development charges, or any other name.

SECTOR:  BANKING & INSURANCE
  • INSURANCE AGENT SERVICE

By insurance agent → to any person carrying insurance business-

Note: For the Insurance companies who are selling their policies through ECO, not being licensed as an insurance agents under Section 42 of the Insurance Act, shall not be liable under Reverse Charge. The forward charge shall apply in such cases.

  • RECOVERY AGENT SERVICE

By Recovery Agent To → Banking Company

→ Financial Institution or
→ NBFC

  • SERVICE BY OVERSEEING COMMITTEE

By Members Of Overseeing Committee To RBI

  • DIRECT SELLING AGENT SERVICE

By Individual Direct Selling agent (IDSA) other than a body corporate, partnership, or LLP → to baking company or NBFC located in the taxable territory.

  • BUSINESS FACILITATOR SERVICE

Business Facilitator → To A Baking Company located In The Taxable Territory.

(As per N/N 29/2018 – CT (R) dated 31.12.2018)

  • SERVICE BY AGENT OF BUSINESS CORRESPONDENT

Service By An Agent Of Business Correspondent → To A Business Correspondent Located In The Taxable Territory.

SECTOR  :  COPYRIGHT & DEVELOPMENT RIGHTS
  • SUPPLY OF SERVICES BY WAY OF TRANSFER OR PERMITTING USE OR ENJOYMENT OF A COPYRIGHT COVERED UNDER SECTION 13(1)(A) OF THE COPYRIGHT ACT, 1957 RELATING TO ORIGINAL DRAMATIC, MUSICAL OR ARTISTIC WORKS

By music composer, photographer, artist → To a music company, producer or the like located in the taxable territory.

  • SUPPLY OF SERVICES BY WAY OF TRANSFER OR PERMITTING USE OR ENJOYMENT OF A COPYRIGHT COVERED UNDER SECTION 13(1)(A) OF THE COPYRIGHT ACT, 1957 RELATING TO ORIGINAL LITERARY WORKS

By Author → To a Publisher located in the taxable territory.

Exceptions:

Reverse Charge shall not be applicable where:

→ The Author has taken registration and filed a declaration within the time limit with the jurisdictional GST Commissioner that he exercises the option to pay central tax on the service under forwarding charge & will comply with all the provisions as they apply to a person liable for paying the tax in relation to the supply of goods or services or both
→ He shall not withdraw the said option within a period of 1 year from the date of exercising such an option.
→ The Author makes a declaration on the invoice issued by him in Form GST Inv-I to the Publisher.

SECTOR:  SECURITY  SERVICES
  • SECURITY SERVICES PROVIDED BY WAY OF SUPPLY OF SECURITY PERSONNEL

By any person other than a body corporate → to a registered person

Exceptions:

Reverse Charge shall not be applicable to:

→ A department/ establishment of the Central Government or State Government or Union Territory
→ Local Authority
→ Governmental agencies that have taken registration under the CGST Act only for the purpose of deducting tax u/s 51 (i.e. TDS) and not for making a taxable supply of goods or services
→ A Registered Person paying tax under Section 10 of this Act (i.e. under Composition Scheme)

SECTOR:  OTHER MISCELLANEOUS SERVICES
  • SPONSORSHIP SERVICES

In the relation of sponsorship services by any person → to any body corporate or partnership firm (including LLP) located in the taxable territory.

  • DIRECTOR SERVICES

Services supplied by Director of a Company or Body Corporate → to said Company or Body Corporate

Note:

Director of Company Status as per Companies Act, 2013
Whole-time Director An employee of the Company. GST does not apply.
Non-Executive Director Not an Employee of the Company. Hence, sitting fees, commission etc. is taxable.

(However, there is advance ruling with a contrary view. The same is covered towards the end.)

  • SERVICES OF LENDING OF SECURITIES UNDER SECURITIES LENDING SCHEME, 1997 OF SEBI

By Lender → to Borrower

N/N 10/2017-IGST (Rate) dated 28.06.2017

• IMPORT OF SERVICES
By any person from a non-taxable territory → to any person other than non-taxable online recipient (NTOR)

• IMPORT OF GOODS BY VESSEL
In respect of services provided or agreed to be provided by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India:
By any person located in non-taxable territory → to Importer

Section 9(4) covers the cases of Reverse Charge when the supply of goods or services is done by an unregistered person to a registered person. It states that:

The Central tax in respect of the supply of specified category of goods or services or both by a supplier who is not registered to a specified class of registered person shall be paid by such person 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 the supply of goods or services or both.

As per N/N 07/2019 CT(R) dated 29.03.2019
Activity By To
Value of inputs and input services purchased from a registered supplier is less than 80% (RCM applicable to the extent of shortfall) Purchase from Unregistered Person Promoter / Builder
In the case of Cement Supplied by an unregistered person Promoter / Builder
In the case of Capital Goods Supplied by an unregistered person Promoter / Builder
Note: Above Reverse Charge applies in case: → Promotor is opting for 1% or 5% scheme of N/N 11/2017 → Promoter has to pay GST under section 9(4) of the CGST Act, at the rate of 18% on all such inward supplies (to the extent short of 80% of the inward supplies from registered supplier). → Where cement is received from an unregistered person, the promoter shall pay tax on supply of such cement on, under section 9(4) of the CGST Act, at the applicable rate which is 28% (CGST 14% + SGST 14%) at present. → Moreover, GST on capital goods shall be paid by the promoter on reverse charge basis, under section 9(4) of the CGST Act at the applicable rates.

→ Section 9(3) is applicable to notified goods or services where recipient is liable to pay tax, irrespective of whether the supplier is registered or not.
→ However, Section 9(4) is applicable to notified goods or services supplied by unregistered person to registered person where recipient is liable to pay tax.

The Government may, on the recommendations of the Council, by notification, specify categories of services, the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services.

→ Provided that where an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such an electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax.
→ Provided further that where an electronic commerce operator does not have a physical presence in the taxable territory and he also does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax.

According to Sec 2(45), E-Commerce Operator means any person who owns, operates, or manages digital or electronic facility or platform for electronic commerce.

N/N 17/2017 – CT (Rate) dated 28.06.2017
It has notified the following categories of services supplied through ECO for this purpose as follows:

• TRANSPORTATION OF PASSENGERS BY CAB ETC.
Services by way of transportation of passengers by a radio-taxi, motorcab, maxicab and motor cycle

• RENTING OF ACCOMMODATION BY UNREGISTERED HOTELS
Services by way of providing accommodation in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes

Except: Where the person supplying such service through ECO is liable for registration under Section 22(1) of the CGST Act.

• SERVICE BY UNREGISTERED PLUMBER, HOUSEKEEPER ETC.
Services by way of house-keeping, such as plumbing, carpentering, etc.

Except: Where the person supplying such service through ECO is liable for registration under Section 22(1) of the CGST Act – N/N 23/2017

Clarification regarding taxability of supply of securities under Securities Lending Scheme, 1997 (Circular No. 119/38/2019-GST dated 11/10/2019) Issue: Whether the supply of securities under Securities Lending Scheme, 1997 by the lender is taxable under GST. Clarification: → It has been clarified that the lending of securities is not a transaction in securities as it does not entail the disposal of securities. → The activity of the lending of securities would be treated as a supply of services by the lender. Thus, GST is required to be discharged by the lender on the fee charged with respect to the lending of securities.
Sr. No. Date of Transaction Person liable to pay tax Nature of tax
1 01.07.2017 to 30.09.2019 Lender under forwarding Charge IGST In case the lender has already paid CGST/SGST/UTGST, they would not be required to pay IGST again in lieu of those transactions.
2 01.10.2019 & onwards The borrower under Reverse Charge IGST
Some advance rulings in relation to Reverse Charge have been summarised below:
Sr. No. Advance Ruling Order No. Brief facts & ruling
1 KAR ADRG 30/2020 dated 04.05.2020 Karnataka Authority for Advance Ruling Facts: The applicant is in receipt of a certain amount termed as salary as Director of a private limited company. The first possibility that the applicant is the employee of the said company (Executive Director), in which case GST is not applicable. The second possibility that the applicant is the nominated director (non-Executive Director) of the company and provides the services to the said company. In this GST would be payable under RCM. Ruling:  The applicant receives the remuneration as a Non-Executive Director, such remuneration is liable to tax under reverse charge mechanism under section 9(3) of the CGST Act 2017 in the hands of the company. Thus, the value of the said services of the applicant being a Non-Executive Director are includable in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company, under reverse charge mechanism.
2 GOA/GAAR/04 of 2019-20/3118 dated 28/02/2020 Goa Authority of Advance Ruling Facts: The applicant seeks Advance Ruling as to whether royalty paid in respect of Mining Lease can be classified under “Licensing services for the right to use minerals including its exploration and evaluation” falling under the SAC 9973 and what is the rate of GST on the said supply.  In this context, the applicant seeks Advance Ruling as to whether the contribution/ payment made to the funds can be treated as a consideration against supply and whether the same is subject to levy of GST under Reverse Charge. Ruling: Reverse Charge Mechanism is applicable for certain notified services as mentioned in the Notification No. 13/2017 -Central Tax (Rate) dated 28.06.2017. As per Sr. No. 5 of the said Notification, services supplied by the Central Government, State Government, Union Territory or Local Authority to a business entity attracts GST under reverse charge basis.
3 RAJ/AAR/2019-20/33 dated  02/2020 Rajasthan Authority of Advance Ruling Facts: A doubt has arisen about whether GST is payable under the Reverse Charge Mechanism on the salary paid to the Director of the company who is paid a salary as per contract. And whether the situation would change from above if the Director also is a part-time Director in another company also. Ruling: The consideration paid to the Directors is against the supply of services provided by them to the applicant company and are not covered under Schedule Ill Entry 1 of CGST Act, 2017 as the Directors are not the employee of the Company. In the instant case, the Director is the supplier of services and the applicant company is the recipient of the services. So it is very clear that the services rendered by the Director to the company for which consideration is paid to them in any head are liable to pay GST under RCM. The situation will remain the same in case the Director also is a part-time Director in other companies also and will attract GST under the reverse charge mechanism.

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