Reverse charge Mechanism (RCM) in GST

[Yogesh Narang]

The taxability under reverse charge was introduced during the period of Service tax. There are two type of taxes one is “Forward Charge” and Second is “Reverse Charge”. To understand the same in the simple language, meaning of both are given herein below:

Forward Charge:

This is the common term of tax that where tax is payable by the service provider or by the seller of goods is called as Forward Charge.

Reverse Charge:

when the liability to pay the tax is shifted upon the recipent of service or goods the same is called as Reverse Charge.

In this article I am going to discuss the following issues regarding RCM under GST:

Introduction of RCM

Need and purpose of RCM under GST

Statutory provisions relating to GST

Notification issued by the government regarding RCM

Goods and services notified in RCM

Some important/recent decisions on RCM by the various authorities.

INTRODUCTION:

That as stated above the taxability under reverse charge was introduced in service Tax and then it is also carry forward in GST regime. Normally, the supplier of goods or services pays the tax on supply of goods or services or both. But in the case of Reverse Charge, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed.

NEED AND PURPOSE OF RCM UNDER GST:

That there are number of reasons to levy the tax on receipent of good or service or both under GST and the few of the main reasons for the same are given herein below:

1. Where supplier of goods or services or both is unregistered person and he make supply of goods or services or both to a registered person.
2. Where supplier of goods or services or both is located in non taxable tarritory and person receiving the goods is located in taxable tarritory.
3. Sometime legislature may exempt specific goods or services or both from levy of tax but indireclty tax is levied on that sector under reverse charge mechanism whereby the recipient of such goods or services or both has to deposit tax.
4. Sometime taxes are levied on reverse charge basis on certain goods or services or both wherein many people fall under unorgnised sector. The cost of administring and collecting tax from such local or unorgnised sector would be too high.

PROVISIONS OF RCM UNDER GST:

Section 2(98) of CGST Act, 2017 deals with reverse charge it contain defination of reverse charge and the same is reproduced herein below for the sake of conveineince:

(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;

Further section 9(3), 9(4), 9(5) of CGST Act and 5(3), 5(4), 5(5) of IGST Act, 2017 are deals with RCM under GST and the provisions of CGST and SGST are to be read togather and the same are given herein below:

Section 9(3) of the CGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows:

“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.”

Section 5(3) of the IGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows:

“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.”

Section 9(4) of the CGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows:

“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(4) of the IGST Act, 2017 provides the provisions of reverse charge and the same is reproduced as follows:

“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.”

Section 9(5) of the CGST Act, 2017 provides the provision of reverse charge and teh same is reproduced as follows:

“ 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 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 also he 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.”

Section 5(5) of the IGST Act, 2017 provides the provision of reverse charge and teh same is reproduced as follows:

“The Government may, on the recommendations of the Council, by notification ,specify categories of services, the tax on inter-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 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 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.”

NOTIFICATION ISSUED BY GOVERNMENT RELATED TO RCM UNDER GST:

Notification No. 4/2017-CentralTax(Rate), dated  the 28th June, 2017

Notification No. 8/2017- Union Territory Tax (Rate), dated the 28th June, 2017 

Notification No. 8/2017-Central Tax (Rate), dated the 28th June, 2017 

Notification No. 10/2017-Integrated Tax(Rate), dated  the 28th June, 2017

Notification No. 13/2017-Central Tax (Rate) dated  the 28th June, 2017

Notification No. 32/2017-Integrated Tax (Rate), dated the 13th October, 2017

Notification No. 38/2017-Central Tax (Rate), dated 13th October, 2017

Notification No. 22/2018-Central Tax (Rate), dated 6th Aug, 2018

Notification No. 23/2018-Integrated Tax(Rate), dated 6th Aug, 2018

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

Notifications No. 1/2019-Central Tax (Rate), dated the 29th Jan,2019

Notification No. 1/2019-Integrated Tax (Rate), dated the 29th Jan,2019

Notification No. 1/2019-Union Territory Tax(Rate), dated the 29th Jan,2019

Notification No. 7/2019-Central Tax(Rate), dated 29th March, 2019

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

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

Circular no. 130/2019–GST, dated 31st Dec, 2019

The above mentioned notifications and circular were timely issued by the government, which has also been amended time to time but all the notification issued by the Government regarding RCM under GST are placed here.

GOODS AND SERVICES NOTIFIED UNDER RCM:

That there are numbers of goods and services notified in GST on which recipient of goods or services or both shall be liable to pay tax on reverse charge basis. The detail of the same is given herein below:

CHART OF NOTIFIED GOODS UNDER GST:

Description of Goods	Supplier of Goods	Recipent of Supply
Cashew nuts, not shelled or peeled	Agriculturist	Any registered person
Bidi wrapper leaves(tendu)	Agriculturist	Any registered person
Tobacco leaves	Agriculturist	Any registered person
Silk yarn	Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn	Any registered person
Raw cotton	Agriculturist	Any registered person
Supply of lottery	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 2 provisions of sub-section (1) of Section 11 of the Lotteries (Regulations) Act, 1998.
Used vehicles seized and confiscated goods, old and used goods, waste and scrap	Central Government, State Government, Union territory or a Local authority.	Any registered person
Priority Sector Lending Certificate	Any registered person	Any registered person

CHART OF NOTIFIED SERVICES UNDER GST:

Description of Goods	Supplier of Services	Recipent of Supply
GTA Services : Supply of Services by a Goods Transport Agency (GTA) who has not paid central tax @ 6% in respect of transportation of goods by road to – (a) any factory registered under or governed by the Factories Act, 1948; or (b) any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India; or (c) any cooperative society established by or under any law; or (d) any person registered under CGST/ IGST/SGST/or UTGST Act; or (e) anybody corporate established, by or under any law; or (f) any partnership firm whether registered or not under any law including association of persons; or ( g ) any casual taxable perso n ; located in the taxable territory. “Provided that nothing contained 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) a Department or Establishment of the Central Government or State Government or Union territory; or (b) local authority; or (c) Governmental agencies, which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under Section 51 and not for making a taxable supply of goods or services.”	Goods Transport Agency (GTA)	(a) any factory registered under or governed by the Factories Act, 1948; or (b) any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India; or (c) any cooperative society established by or under any law; (d) any person registered under CGST/IGST/ SGST/UTGST Act; or (e) anybody corporate established, by or under any law; or (f) any partnership firm whether registered or not under any law including association of persons; or (g) any casual taxable person located in the taxable territory
Services provide by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly. Explanation. – ‘Legal service’ means any service provided in relation to advice, consultancy or assistance in any manner and includes representational services before any Court, Tribunal or Authority.	An individual advocate including a senior advocate or firm of advocates	Any business entity located in the taxable territory.
Services supplied by an arbitral Tribunal to a business entity.	An arbitral Tribunal	Any business entity located in the taxable territory.
Service provided by way of Sponsorship Service to anybody corporate or partnership firm.	Any person	Anybody corporate or partnership firm located in the taxable territory.
Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding the following : (A) renting of immovable property service, and (B) services specified below :- (i) services by the Department of posts by way of speed post, life insurance, express parcel post 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.	Central Government, State Government, Union territory or Local Authority	Any Business Entity located in the taxable territory.
Services by the Government: Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the Central Goods and Services Tax Act, 2017.	Central Government, State Government, Union territory or Local Authority	Any person registered under the Central Goods and Services Tax Act, 2017
Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter.	Any Person	Promoter
Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount (called as premium, salami, cost, price, development charges or by any other name) and/or periodic rent for construction of a project by a promoter.	Any person	Promoter
Services supplied by a director of a company or a body corporate to the said company or the body corporate.	A director of a company or a body corporate	A company or a body corporate located in the taxable territory
Services provided by an insurance agent to person carrying on insurance business.	An Insurance Agent	Any person carrying on insurance business, located in the taxable territory.
Services provided by a recovery agent to a banking company or a financial institution or a non-banking financial company.	A Recovery Agent	Banking company or financial institution or a non-banking financial company, located in the taxable territory.
Supply of Services by a music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of Section 13 of the Copyright Act, 1957 relating to original dramatic, musical or artistic works to a music company, producer or the like.	Music composer, photographer, artist, or the like.	The Music company, producer or the like, located in the taxable territory.
Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher.	Author	Publisher located in the taxable territory:- Provided that nothing contained in this entry shall apply where:- (i) the author has taken registration under the Central Goods and Services Tax Act,2017 (12 of 2017), and filed a declaration , in form at annexure I, within the time limit prescribed therein, with the jurisdictional CGST or SGST commissioner, as the case may be, that he exercises the option to pay central tax on the service specified in column (2), under forward charge in accordance with Section 9 (1) of the Central Goods and Service Tax Act, 2017 under forward charge, and to comply with all the provisions of Central Goods and Service Tax Act, 2017 (12 of 2017) as they apply to a person liable for paying the tax in relation to the supply of any goods or services or both and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option; (ii) the author makes a declaration, as prescribed in Annexure II on the invoice issued by him in Form GST Inv-I to the publisher. ”;
Supply of services by the members of Overseeing Committee to (Reserve Bank of India)	Members of Overseeing Committee constituted by the Reserve Bank of India.	Reserve Bank of India
Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate partnership or limited liability partnership firm to bank or nonbanking financial company (NBFCs).	Individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm.	A banking company or a non-banking financial company, located in the taxable territory.
Services provided by Business Facilitator (BF) to a banking company.	Business facilitator (BF)	A banking company, located in the taxable territory.
Services provided by an agent of Business Correspondent (BC) to Business Correspondent (BC).	An agent of Business Correspondent (BC).	A business correspondent, located in the taxable territory.
Security Services (services provided by way of supply of security personnel) provided to a registered person : Provided that nothing contained in the entry shall apply to,- (i)(a) a Department or Establishment of the Central Government or State Government or Union territory; or (b) local authority; or (c) Government agencies; which has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017 ) only for the purpose of deducting tax under Section 51 of the said Act and not for making a taxable supply of goods  or services ; or (ii) a registered person paying tax under Section 10 of the said Act.	Any person other than a body corporate.	A registered person, located in the “taxable territory.
Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate.	Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6% to the service recipient.	Any body corporate located in the taxable territory”.
Services of lending securities of Securities under Lending scheme, 1997 (Scheme). Securities and Exchange Board of India (SEBI), as amended.	Lender i.e. a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the scheme of SEBI.	Borrower i.e. a person who borrows the securities under the Scheme through an approved intermediary of SEBI).
Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient.	Any person located in a nontaxable territory.	Any person located in the taxable territory other than non-taxable online recipient.
Services supplied by a person located in non-taxable territory 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 a non taxable territory.	Importer, as defined in Sec 2(26) of the Customs Act,1962, located in the taxable territory.

SOME IMPORTANT OR RECENT DECISIONS ON RCM UNDER GST:

Mohit Minerals Pvt. Ltd. Vs. Union of India, special civil Application no. 726 of 2018, dated 23.01.2020, [2020 (1) TMI 974 - GUJARAT HIGH COURT] wherein the Hon’ble High court of Gujrat has declared ultra vires the impugned Notification No. 8/2017, Integrated Tax (Rate), dated 28.06.2017 and Entry no. 10 of Notification No. 10/2017 Integrated Tax (Rate), dated 28.06.2017 held that we have reached to the conclusion that no tax is leviable under the Integrated Goods and Services Tax Act, 2017, on the ocean freight for the services provided by a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India and the levy and collection of tax of such ocean freight under the impugned Notifications is not permissible in law.

M/s Clay Craft India Pvt. Ltd. Advance Ruling No. RAJ/AAR/2019-20/33 Dated 20.02.2020,[2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN] wherein the Hon’ble Rajasthan AAR, deciding the following questions raised before the hon’ble AAR regarding reverse charge on salary paid to director of the company passes the following rulings:

Q: Whether GST is payable under Reverse charge Mechanism (RCM) the salary paid to director of the company who is paid salary as per contract.

Ans: The consideration paid to Directors by the applicant company will attract GST under reverse charge mechanism as it is covered under entry No. 6 of Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act, 2017.

Q: whether the situation whould change from (a) above if the Director also a part time Director in other company also.

Ans: Situation will remain same as (a) above and will attract GST under reverse charge mechanism.

 

Discussions to this article

[Sadanand Bulbule]

Dear Sir,

Please be it noted that,the Karnataka bench of the Authority for Advance Rulings (AAR) vide its recent Advance Ruling No. KAR.ADRG.30/2020 dated 04/05/2020 =  rendered in the case of M/s. Anilkumar. Agarawal, Bangalore, reported in 2020 (5) TMI 221, has held that the salary of a director is not subject to Goods and Services Tax (GST). This ruling is contradictory to the Rajasthan bench where the authority has ruled that all directors are liable to pay GST, reported in IN RE: M/S. CLAY CRAFT INDIA PVT. LTD 2020 (4) TMI 228.

For clear benefit of the stake holders, the facts of both the Advance Rulings of Rajasthan & Karnataka (supra) with contrast decisions need to be distinguished in detail to demystify the issue.

The author is requested in this matter.

With respects.

[Sadanand Bulbule]

Please read 2020 (4) TMI 228 instead of 2020 (4) TMI 2018.

Regrets the typographical error.

[Yogesh Narang]

Dear Sir,

First of all I am thankful to you, that you have read the article and gives worthfull suggestions. I will consider both the decisions as mentioned by you and try my best to distinguish both the decisions.