The new Goods and Services Tax (GST) scheme was launched in India on July 1, 2017. In the years since, this tax regime has streamlined indirect taxes in the country significantly. It is now possible to complete GST registration online, make GST payments digitally and even file the GST returns online.
That said, there are many key provisions that manufacturers, suppliers and service providers within the purview of the GST system should know. One such important aspect is the Reverse Charge Mechanism (RCM).
What is the Reverse Charge Mechanism in GST?
Typically, under the GST system, the service provider or the supplier of goods is liable to collect and pay the tax to the government. However, in certain specific cases, the liability of paying the Goods and Services Tax (GST) lies with the recipient of the goods or services. This is known as the Reverse Charge Mechanism or RCM in GST.
When is the Reverse Charge Mechanism in GST Applicable?
RCM in GST is applicable in the following scenarios, as per different relevant sections of the CGST Act, 2017.
Supply of Goods and Services as per Section 9(3) of the CGST Act, 2017
Supply of the following goods is subject to reverse charge under the GST system.
| Description | Supplier | Recipient |
| Cashew nuts (not shelled or peeled) | Agriculturist | Any registered person |
| Bidi wrapper leaves (tendu) | Agriculturist | Any registered person |
| Tobacco leaves | Agriculturist | Any registered person |
| Following essential oils other than those of citrus fruits namely peppermint, other mints like spearmint oil, water mint oil, horsemint oil, and bergament oil | Any unregistered person | Any registered person |
| Silk yarn | Any person who manufactures silk yarn from raw silk or silkworm cocoons for the supply of silk yarn | Any registered person |
| Raw cotton | Agriculturist | Any registered person |
| Supply of lottery | State government, a union territory or any local authority | Lottery distributor or selling agent |
| Used vehicles, seized and confiscated goods, old and used goods, waste and scrap | The central government, state government, a union territory, or a local authority | Any registered person |
| Priority Sector Lending certificate | Any registered person | Any registered person |
Supply of the following services is also subject to reverse charge of GST.
| Description | Supplier | Recipient |
| Services supplied by any person located in non-taxable territory to any person located in the taxable territory other than the non-taxable online recipients | Any person located in a non-taxable territory | Any person located in the taxable territory other than non-taxable online recipients |
| Services rendered by a Goods Transport Agency (GTA) in respect of goods transported via road | Goods Transport Agency (GTA) | Any factory registered under Factories Act, 1948, society registered under Societies Act, 1860, cooperative society established by any law, person registered under CGST, SGST, IGST, or UTGST acts, a body corporate established by any law, a partnership firm, or a casual taxable person located in the taxable territory |
| Legal services | An individual advocate including a senior advocate or a firm of advocates | Any business entity located in the taxable territory |
| Services provided by an arbitral tribunal to a business | An arbitral tribunal | Any business entity located in the taxable territory |
| Sponsorship services provided to any body corporate or partnership firm | Any person | Any body corporate or partnership firm located in the taxable territory |
Services provided by central or state government, a union territory, or local authority to a business entity except:
|
Central or state government, a union territory, or local authority | Any business entity located in the taxable territory |
| Services provided by the central or state government, union territory or local authority by the way of renting of immovable property | Central or state government, a union territory, or local authority | Any person registered under CGST Act, 2017 |
| Services provided by any person by the way of transfer of developmental rights or Floor Space Index (FSI) (including additional FSI) for the purpose of construction of a project by a promoter | Any person | Promoter |
| Long term lease of land (i.e. 30 years or more) by any person in exchange for consideration in the form of an upfront amount (such as cost price, salami, premium, development charges, etc.) and/or periodic rent for construction of a project by a promoter | Any person | Promoter |
| Sponsorship services | Any person | Any body corporate or partnership firm |
| Services provided by the director of a company or a body corporate to the said company or a body corporate | The director of a company or a body corporate | The said company or body corporate located in a taxable territory |
| Services provided by an insurance agent | Insurance agent | Any person carrying on the insurance business in a taxable territory |
| Services supplied by a recovery agent | A recovery agent | Any banking company or a financial institution or a non-banking financial company |
| Services supplied by a by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India | A person located in non- taxable territory | Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory |
| Supply of services by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1) | An author, music composer, photographer, artist or the like | A publisher, music company, producer or the like, located in a taxable
territory |
| Supply of services by the members of Overseeing Committee to Reserve Bank of India | Members of Overseeing Committee | Reserve Bank of India |
| Services provided by Individual Direct Selling Agents (DSAs) except a body corporate, partnership, or limited liability partnership firm to a bank or NBFCs | DSA other than a body corporate, partnership, or limited liability partnership firm | A banking company or an NBFC located in the taxable territory |
Supply From an Unregistered Dealer to a Registered Dealer as per Section 9(4) of the CGST Act, 2017
If an unregistered dealer supplies any taxable goods or services to a registered dealer, the latter will be liable to pay GST as per the Reverse Charge Mechanism. However, if the value of the supply is below ₹5,000, the registered dealer need not pay any tax as per RCM in GST.
Supply of Services through E-Commerce Operators as per Section 9(5) of the CGST Act, 2017
Businesses may use e-commerce operators to sell and supply various products and services. In such cases, even though the business concerned is the actual provider of the goods or services, the onus of paying GST lies with the e-commerce operators.
The following specified services are covered under this section.
- Passenger transport services
- Accommodation services
- Housekeeping services
- Cloud kitchen services
Conclusion
If you fall under the purview of RCM in GST, it is best to complete your GST registration online and start paying the tax to the government as mandated by the law. If you have already completed the GST registration online or offline, you must make the GST payments under the reverse charge mechanism as needed. Ensure that you also file your GST returns on time to avoid penalties for any delay.
