What is RCM under GST? Where RCM Applies in GST? How is RCM Works? On which GST Goods RCM Applicable? What Are Practical Aspect of This? How Under GST RCM Credit Received? How Should be Invoices Under RCM? What Aim Of RCM under GST? Whether Any Abatement in RCM Services?
There are lots of questions which need clarification on different aspects of the GST Provisions when the time comes to practically apply it.Let us start with the basics and understand what Reverse Charge Mechanism actually has in it’s purview and how to go about it.
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Q.1. What is Reverse Charge Mechanism? What is the aim of the same?
Ans. Unlike the usual method, where the Provider of Service pays the tax, in Reverse Charge Mechanism, it is the Recipient of Service who pays the tax. 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 subsection (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 The aim of the Reverse Charge Mechanism provisions is to bring the unorganised sector under the purview of Tax. It removes the burder of tax compliance from the hands of individuals with limited resources to large entities with sufficient resources.
Q.2. What are the sections under which the services in the purview of Reverse Charge Mechanism are explained?
Ans. As per Section 9(3) of CGST Act and Section 5(3) of IGST Act, the Govt may on the recommendations of the Council,by notification specify categories of supply of goods or services,or both,the tax on which will be paid on reverse charge basis
As per Section 9(4) of CGST Act and Section 5(4) of IGST Act,the 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 registered person
Q.3.What does the liability to pay tax under Reverse Charge Mechanism depend upon?
Ans.Liability to pay tax under RCM depends upon category of goods or services,the category of recipient, category of supplier and place of provision of such supplies
Q.4 When does the liability to pay tax arise?
Ans. The liability to pay tax on goods or services or both,arise at the time of supply.
The time of supply for goods and services are provided by different provisions.
As per Section 12(3),the time of supply of goods in respect of reverse charge mechanism shall be the earliest of the
(a) the date of receipt of goods OR
(b) the date of payment OR
(c) the date immediately after THIRTY days from the date of issue of invoice by the supplier.
Provided that if any of the above clauses is not determinable,the time of supply shall be the date of entry in the books of accounts of the recipient of supply
As per Section 12(3),the time of supply of services in respect of reverse charge mechanism shall be the earliest of following:
The date on which payment is made
The date immediately following 60 days from the date of issue of invoice by the supplier
Provided that if any of the above clauses is not determinable, the time of supply shall be the date of entry in the books of accounts of the recipient of supply
Date of receipt of goods June 14, 2018
Date of payment July 12,2018
Date of invoice August 1, 2018
Date of entry in books of recipient June 17,2018
Time of supply of goods June 14,2018
If for some reason time of supply could not be determined,then it would be June 17,2018 i.e., date of entry in the books of recipient
Q.5. What is the time of supply in the case of Associated Enterprises,where the supplier is located outside India?
Ans. In case of Associated Enterprises, where the supplier of service is located outside India,the time of supply shall be the earlier of the following:
The date of entry in the books of accounts of the recipient OR
The date of payment
XYZ Ltd. in India has a subsidiary named DEF in USA. DEF provides services to XYZ Ltd. for which XYZ Ltd. paid $50,00,000 on
May 10,2018.XYZ Ltd. recorded the same in the books of accounts on May 15,2018. Hence, XYZ Ltd. will pay the tax based on
Reverse Charge provision as the DEF is located outside India. The time of supply will be the earlier of the two dates, i.e., May
Q.6. How will the Tax Invoice be generated under the Reverse Charge Mechanism?
Ans. Firstly,the supplier has to mention in the tax invoice that the tax is payable on reverse charge.
As per Section 31(3),the following clauses are important:
(f) a registered person who is liable to pay tax under sub-sections (3) and (4) of Section 9 shall issue an invoice in respect of
goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services
(g) a registered person who is liable to pay tax under sub-section (3) or (4) of Section 9 shall issue a payment voucher at the
time of making payment to the supplier
Q.7. What is the new notification regarding exemption granted for transaction that do not exceed Rs.5000 per day
Ans.As per Notification No.8/2017 dated June 28,2017, on the recommendations of the Council, hereby exempts Intra-State supplies of goods or services or both received by a registered person from any supplier,who is not registered,from the whole of the central tax leviable thereon under sub-section (4) of Section 9 of the CGST Act,2017.
Provided that the said exemption shall not be applicable where the aggregate value of such supplies of goods or services or both received by a registered person from any or all the suppliers,who is or are not registered,exceeds Rs.5000 in a day.
The above notification is explained in simple words with examples below.
For example,if the services provided by an unregistered supplier to a registered recipient is for Rs.4000 for a day, the recipient will not be liable to pay tax under RCM. The said example will be an exempted service.
Another Example, if the inward supply to a registered recipient by two different unregistered suppliers for invoices of Rs.4000 and Rs.1500 in the same day, the same has now crossed the limit of Rs.5000 in a day.Hence, the recipient will have to pay tax on Rs.5500.
The applicability of the above provision is to be understood from the point of view of the Recipient and not the unregistered supplier.
Q.8. Can the tax paid on Reverse Charge basis be considered as an Input Tax Credit(ITC)?
Ans. Yes,the tax paid under reverse charge basis is considered as an Input Tax Credit for the recipient.Therefore, Input Tax Credit is available to the Registered Recipient.But ITC cannot be availed if such input supply is otherwise specifically mentioned,to be of category of supplies on which ITC is not allowable under the Act.
AS per Section 2(62),Input Tax in relation to a registered person,means the Central Tax,State Tax,Integrated Tax,or Union Territory Tax charged on any supply of goods or services or both made to him and includes:
(b) the tax payable under the provisions of sub-sections (3) and (4) of Section 9
(c)the tax payable under the provisions of sub-sections (3) and (4) of Section 5 of the Integrated Goods and Services Tax Act
(d) the tax payable under the provisions of sub-sections (3) and (4) of Section 9 of the respective State Goods and Services
(e) the tax payable under the provisions of sub-sections (3) and (4) of Section 7 of the Union Territory Goods and Services Tax
Q.9. Can the tax liability under Reverse Charge Mechanism be adjusted against the Input Tax credit?
Ans.As per Section 2(82),Output Tax in relation to a taxable person,means that the tax chargeable under this Act on supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis
As per Section 49(4),the amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed
Hence, it is made clear by the above provision that the Input Tax Credit can only be used against the Output Tax Liability.
The Output Tax does not consider the liability under Reverse Charge basis.
Hence, tax liability under Reverse Charge Mechanism can only be paid through cash mode.
Q.10. Is Registration compulsory for the person who does not cross the threshold limit but is liable to pay tax under
Reverse Charge Mechanism?
Ans. Section 24 relates to the Compulsory Registration in certain cases
As per Section 24,Notwithstanding anything contained in sub-section (1) of Section 22,the following categories of persons shall be required to be registered under this Act:
(iii)persons who are required to pay tax under Reverse Charge
Hence, even if the threshold limit of Rs.20,00,000/- is not crossed by the person, but the concerned person is liable to pay tax under Reverse Charge Mechanism,then Registration is mandatory for such a person.
Q.11. What is the provision for a person who has opted for Composition Scheme?
Ans.As per Section2(62),Input Tax does not include tax paid under the composition levy.
As per Section 10(1),which explains about Composition Scheme,the Reverse Charge Mechanism provisions are not affected by the Composition Scheme.
Hence,it states that the person under Composition Scheme,will pay tax as per the normal tax rate under Reverse Charge basis and will not pay the tax as per the Composition Scheme provisions.
Q.12. What is an important provision related to Input Tax Credit under Reverse Charge Mechanism?
Ans. The Registered Recipient will be eligible to avail the tax liability paid under Reverse Charge basis as the Input Tax Credit. The only condition for availing it as an Input Tax Credit is that the goods and services that are used or will be used are only for business or furtherance of business.
Q.13. What are the few things to be looked into when under the purview of Reverse Charge Mechanism?
Ans. 1. Advance payments are also subject to Reverse Charge Mechanism
2. Exempt supply received from an unregistered person is not covered under reverse charge mechanism.
Q.14. What are the provisions for the Electronic commerce Operator?
Ans. As per Section 9(5) of CGST Act,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.
However 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. Furthermore, where an electronic commerce operator does not have a physical presence in the taxable territory and also does not have a representative in the taxable territory, such an 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.
Q.15. How is the Reverse Charge Mechanism applicable on goods computed?
Ans. This is for the first time, that the reverse charge is applicable on goods. Let us understand by an example on how the reverse charge works on goods.
For example, an unregistered dealer sells a product for Rs.1000/-. Buyer will deduct GST of (let’s say) 5% = Rs.50/- and pay this liability under reverse charge basis.Now, the confusion is that, will the seller receive Rs.1000 or Rs.950?
The seller will receive Rs.1000/- and the buyer will pay the liability of Rs.50/-. The buyer will subsequently consider Rs.50/- paid as Input Tax Credit and avail the same subject to conditions.