Know All About Reverse Charge Mechanism in GSTR 1

The reverse charge mechanism in GST shifts the tax liability to purchasers from sellers. Thus, the recipient of goods and services needs to pay the tax (Goods and Services Tax) instead of suppliers. This mechanism specifically applies to cases where goods or services are purchased from unregistered suppliers.

Further, if the taxable person lacks a physical presence, then the e-commerce operator with which it operates, will be liable to pay tax. Explore the provisions and eligibility to reverse charge mechanism (RCM) here to make informed decisions.

Present Scenario of Reverse Charge Mechanism in GST 

Under the GST system, a supplier of goods and services pays taxes on supply. However, under the reverse charge mechanism, the goods or service recipients are liable to pay taxes on supply wherein there is a reversal of chargeability.

The government aims to enhance the scope of levying taxes on different unorganised sectors (such as goods transportation), to exempt specific suppliers and impose a tax on the import of services through the reverse charge basis of taxation.

Notably, specific businesses are liable to pay taxes under the reverse charge mechanism. The reverse charge mechanism applies to Insurance Agent, Goods Transport Agencies, Manpower supplies and others wherein no partial reversal is applicable.

RCM Provisions Under GSTR Forms

Here are the RCM (Reverse Charge Mechanism) provisions under GSTR forms:

●  The RCM system is a continuation of the VAT regime (Value-added Tax).

●  A registered supplier under the reverse charge mechanism cannot claim input tax credit (ITC).

●  Importers of goods need to pay taxes under RCM on imports in addition to import duties, to the Government.

●  Form GSTR-1 mentions the charges associated with the inward supply of goods or services (purchase of goods and services).

●  GSTR-2 Form mentions the details of inward supply.

●  Regardless of the annual turnover, a taxable person under the reverse charge mechanism needs to be registered under GST.

●  If ITC is used for business furtherance, goods or service suppliers can receive an input tax credit.

The following list highlights the services under RCM:

●  Recovery Agent

●   Goods Transport Agency

●   Director of a Body Corporate or Company

●   A Firm of Advocates or an Individual Advocate

●   Insurance Agents

When Is Reverse Charge Applicable?

The Sections 9(3), 9(4) and 9(5) of the CGST Act and SGST Act (Central Goods and Services Tax Act and State Goods and Services Tax Act) regulate RCM for intrastate transactions (supplies within one state). On the flip side, Sections 5(3), 5(4) and 5(5) of the IGST Act (Integrated Goods and Services Tax Act) regulate RCM for interstate transactions (Supplies between two or more states).

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Here are the details for different scenarios:

1. Supply of Certain Goods and Services Mentioned by the CBIC

The CBIC issued the list of goods and services applicable under RCM in Section 9(3) of the CGST Act as follows:

Description of Supply of Goods	Description of Supply of Services	Supplier	Recipient
Not shelled or peeled cashew nuts	-	Agriculturist	Any registered person
Silk Yarn or Raw Silk	-	Silk yarn manufacturers	A registered person
Raw Cotton	-	Agriculturist	Any registered person
Used vehicles, old and used goods, seized and confiscated goods, waste and scrap,	-	Central or State Government, Local Authority or Union Territory	A registered person
-	Supply of services by a person in non-taxable locality to a taxable online recipient	A person in a non-taxable locality	A person in a taxable locality other than a non-taxable online recipient
-	GTA services	Goods Transport Agency (GTA) that has not paid integrated tax at 12%	Factory, society, cooperative society, corporate entity, registered person, partnership firm, casual taxable person in a taxable territory
-	Advocate’s legal services	Firm of advocates, individual advocate under the guidance of a senior advocate	A business entity in a taxable territory
-	Services that an arbitral tribunal renders to a business entity	An arbitral tribunal	Any business entity in a taxable territory
-	Sponsorship services provided to corporate entities or partnership firms	Any person	Corporate entities or partnership firms in taxable territory
-	Services that the Central Government, State Government, Local authority or Union Territory supplies to business entities (exclusions: immovable property rental, services by the Department of Posts, speed post express parcel post or others, life insurance and agency services rendered to other than the supplying entities, aircraft-related services, transport of goods or passengers.	Central Government, Union Territory or State Government, Local Authority	A business entity in a taxable territory
-	Services that directors of a company or a corporate entity supply to the company	A company director or corporate entity	A corporate entity in a taxable territory
-	Insurance agent-supplied services	An insurance agent	A person undertaking an insurance business in a taxable locality
-	A bank, financial institution, or a non-banking financial institution in a taxable territory supplying services	A recovery agent	Services supplied by a person in a non-taxable locality through goods transportation by a vessel from outside India to the customs station of clearance in the country
-	Services that a music composer, author, photographer, or artist supplies for entertainment under copyright in Section 13(1)(a0 of the Copyright Act, 1957. It is associated with original literary, and artistic works, dramatic music, music companies, producers and others	A person in non-taxable territory	Importer under Section 2 clause (26) of the Customs Act, 1962 (52 of 1962) located in a taxable territory
-	Services provided by an author, photographer, music composer or artist to publishers, music companies or producers under Section 13(1)(a0 of the Copyright Act, 1957	Music composer, author, photographer, artist or other similar professionals	Publisher, producer, music company or others in a taxable territory
-	Services that members of the Overseeing Committee supply to the Reserve Bank of India	Members of the Overseeing Committee that the Reserve Bank of India constituted	Reserve Bank of India

1. Supply from an Unregistered Dealer to a Registered Dealer

Here are the conditions for supply from an unregistered dealer to a registered dealer:

●  Under Section 9(4), a reverse charge mechanism applies when an unregistered vendor supplies goods or services to a registered person under GST.

●  The receiver will be liable to pay GST instead of the supplier.

●   A registered buyer paying GST will have to raise self-invoicing for purchases made.

●   The purchaser has to pay CGST and SGST in the case of intra-state purchases.

●   In the case of inter-state purchases, the buyer has to pay IGST.

●  The government reserves the right to revise the list of goods and services eligible under the reverse charge mechanism.

●  In the real estate sector, promoters can buy inward supplies under government notification to the extent of 80% from registered suppliers solely.

●  The concerned promoter needs to pay GST under RCM on a TDR (for outward supplies) basis or floor space index (FSI) supplied from 1st April, 2019 onwards.

●  For the transfer of development rights, the promoter needs to pay GST under Section 7 of the CGST Act for service supply.

3. Supply of Services Using an E-commerce Operator

Under Section 9(5) of the CGST Act, if a supplier of service uses an e-commerce operator as an aggregator, he/she will have to pay GST for the following services:

●  Transportation of passengers by a motor cab, radio-taxi, maxi cab and motorcycles such as Uber or Ola.

●  Rendering accommodation services in guest houses, hotels, inns, clubs, campsites and additional commercial places which are used for residential or lodging purposes. Exclusions however are suppliers of services using electronic commerce operators required to register under GST for exceeding the turnover threshold limit. For instance, Makemytrip or Oyo.

●  Housekeeping services including carpentering, plumbing and others excluding services rendered using an electronic commerce platform.

Time of Supply Under RCM in GST

The time of supply under RCM in GST varies for goods and services as follows:

Time of Supply of Goods

The time of supply of goods is the earliest of the following:

● The date of goods received

●  That payment date or

●  The date is immediately after 30 days from the invoice issuance date by the supplier.

Notably, if you cannot determine the time of supply, the date of entry in the books of accounts of the recipient needs to be considered. Here is an instance to illustrate what the time of supply shall be:

Date of Receipt: 15th May 2021

Date of Invoice: 2nd June 2021

Date of Entry in Books of Accounts of the Receiver: 17th May 2021

In the above-mentioned scenario, 15th May 2021 will be the time of supply as it is the earliest date.

Time of Supply of Services

The time of supply of services is earliest of the below-mentioned dates:

●  The payment date

●  The date immediately after 60 days from the invoice issue date by an unregistered supplier

●  The date on which the recipient of service issues the invoice

If you cannot determine the time of service supply, consider the date of entry in the accounts book of the recipient as the relevant date. Here is an example to illustrate the scenario:

Date of payment: 15th July 2021

Date after 60 days: 14th July 2021 if the invoice issuance date is 15th May 2021

Date of Entry in the Books: 18th July 2021

Date of Issue of Invoices or Payment Vouchers by the recipient: 24th July 2024

The time of service supply will be 14th July 2021 being the earliest date among the above-mentioned dates.

Registration Rules Under RCM

The following rules apply under the reverse charge mechanism:

●  Under Section 24 of the CGST Act, 2017 a person required to pay GST should be registered.

●  The threshold limit set by the GST authorities of ₹20 lakh to ₹40 lakh will not apply in the case of reverse charge mechanism.

Who Should Pay GST Under RCM?

Here are the factors to remember while paying GST under RCM:

● As a recipient, you can claim ITC on the tax amount under RCM if you use the goods and services for the furtherance of businesses. You can release the tax liability using an electronic cash ledger.

● If you are a composition dealer, you need to pay tax at the normal rates instead of composition rates while releasing RCM liability. Notably, such dealers cannot claim ITC for the tax they pay.

●  GST compensation cess applies to the tax amount payable or paid under the reverse charge mechanism.

Input Tax Credit (ITC) Under RCM

Suppliers cannot claim ITC (Input Tax Credit) under RCM for the GST they pay. Under the reverse charge mechanism, the recipient can claim ITC on goods and services received for business furtherance.

The time limit to avail ITC under Section 16(4) of the CGST Act is the same financial year in which the self-invoice is issued, as per CBIC circular number 211/5/2024-GST issued on 26th June 2024.

Late issuance of tax invoices attracts interest on delayed tax payments. The interest is charged on the tax payable by the taxable person. Further, the recipient might be liable to penal action under Section 122 of the CGST Act. However, the recipient cannot utilise ITC claims to pay output tax liability on goods or services under RCM. Rather, the recipient should pay GST in cash solely.

Registration Requirements Under Reverse Charge Mechanism

Here are the registration requirements under RCM:

1. Threshold Limit: In the case of RCM, the GST registration threshold is not applicable; rather irrespective of the annual turnover, individuals need to register under GST under the reverse charge mechanism.
2. Supplier Vs Recipient: Suppliers need to mention on the invoice if a transaction is undertaken under the reverse charge mechanism. However, he/she cannot claim ITC (Input Tax Credit) on the GST they pay. Recipients can claim and avail ITC under the reverse charge mechanism for the GST paid for goods or service supplies.
3. Composition Dealers: Such dealers need not pay taxes at usual composition rates rather are liable to pay GST at standard rates.
4. GST Compensation Cess: In addition to the regular GST amount at the applicable tax rate, you need to pay compensation cess under the reverse charge mechanism.
5. E-commerce Services: If a supplier renders services using an e-commerce operator, the operator will be responsible to collect and remit GST to the government.

Benefits of Reverse Charge Mechanism on Businesses

You can reap the following benefits under RCM:

1. Enhanced Compliance: RCM allows smaller companies to compete with larger companies while adhering to the same compliance standards. The government aims to reduce instances of tax evasion with RCM by implementing similar tax obligations.
2. Cost-effective with Tax Credits: As RCM allows recipients to claim input tax credits, they can reduce tax liabilities enhancing cash flow for business purposes.

Challenges of Reverse Charge Mechanism for Businesses

Here are the challenges pertaining to reverse charge scenarios:

1. Increased Burden of Compliance: Individuals have to adhere to additional tax burdens to comply with GST laws under the reverse charge supplies.
2. Documentation Complexities: Under RCM, you need to maintain additional documentation to claim ITC and avoid penalties followed by interest for late payment of GST.

What Is Self-Invoicing?

Buyers generate a self-invoice themselves rather than receiving it from sellers. The self-invoice generation process helps shift the tax liability under RCM when a registered buyer purchases goods or services from unregistered persons.

Buyers can raise multiple self-invoices if necessary. In addition, they can consolidate monthly GST-compliant invoices if the aggregate value of supplies liable to raise the invoice is more than ₹5,000 per day. Notably, purchases from unregistered suppliers do not require self-invoice unless it is under the reverse charge mechanism.

Conclusion

The reverse charge mechanism in GSTR-1 helps purchasers claim input tax credits to reduce their tax liabilities. Purchasers can raise a self-invoice for the purchase proceeds instead of acquiring one from the seller. The reverse charge mechanism aims to minimise tax burden and simplify tax standards for small and large companies ensuring tax compliance.

All you need to do is make sure to issue invoices within the right time to avoid paying penalties and interest for delayed GST payments.

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