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In the normal course, indirect taxes are collected and paid by the supplier (trader, manufacture). For understanding, we may call it direct charge. But in certain cases, the receiver becomes liable to pay tax instead of the supplier. It is called reverse charge. Also, know as RCM.

Why reverse charge

It was observed that many unorganized sector like goods transport, labour contract etc. find difficult to make tax compliances. Hence burden of tax compliance shifted on receiver of such supply. The purpose of this charge is to increase tax compliance and tax revenues.

Existing system of Reverse Charge Mechanism

Reverse charge on services

Reverse charge first introduced in India by amendment in service tax act 1994 vide finance bill 2012. According to Section 68 (2) of the Finance Act read with Rule 2 (1) (A) every person providing taxable services i.e. provider of output services is liable to pay service tax. But in special cases service receiver is liable to pay service tax which termed as Reserve Charge mechanism. (full reverse charge)

On the other hand there are instances where both service provider and receiver are liable to pay service tax proportionally which is known as 'Partial reserve charge mechanism'.

List of services where RCM applicable notified by The Central Government vide Notification No.15/2012-Service Tax, dated 17/03/2012.

Reverse charge on goods: Presently there is no reverse charge concept in case of goods.

RCM under GST Regime
New in GST

1. There is no concept of partial RCM.
2. Goods are also covered under RCM.
3. Electronic commerce operator also liable for RCM even though he is neither supplier nor receiver.
4. Reverse charge also applicable on composite dealer if he makes inward supply of taxable goods or services from the unregistered person.

Situations when RCM applied

A. Supply by unregistered person to registered person:

According to section 9(4) 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. {Similar section 5(4) of IGST Act}

Registered persons take so many supplies like tea, printer computer repair, plant & machinery repair, Professional services, Labour, printing etc. In most of the cases, supplier is not registered. In these cases, registered person has to pay tax under RCM. Alternatively, he has to obtain supply from registered persons only.   

B. Supply of goods and services notified by the govt.

According to section 9 (3) The Government may specify categories of supply of goods or services or both, the tax on which shall be paid on the reverse charge basis by the recipient of such goods or services or both. {Similar section 5(3) of IGST Act}

Recently GST council has approved the list of services for RCM purpose. It is yet to be notified. Presently there is no list of goods approved by the council in this regard.

As per approved list of services the following will be covered under RCM:

1. Taxable services provided by person located in non taxable territory to person located in taxable territory.
2. GTA transportation of goods.
3.  Individual advocate and firm of advocate by way of legal service to business entity.
4. An arbitral tribunal to the business entity.
5. Sponsorship services to body corporate or partnership firm.
6. by government or local authority to any business entity.(exception: renting of immovable property, transport of goods and passenger, post office etc)
7. by director to the company.
8. by insurance agent to person carrying insurance business.
9. by recovery agent to Banks, FI and NBFC.
10. Transportation of goods by vessel from outside India to custom station.
11. Use of copyright related to original literacy, dramatic, musical and artistic work

Government may notify more services in near future.

C. Services through electronic commerce operator.

According to section 9(5) the Government may, 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.

GST council has approved radio taxi and passenger transport service provided through electronic commerce operator for this purpose.

Other related provisions

Collection and payment

GST is levied on supply, collected at prescribed rates on such value as determined as per section 15. But the liability to pay tax arises at the time of supply. Hence it is important to see time of supply in case of RCM.

Time of supply of goods (for RCM purpose)

1.  Date of receipt of goods or
2.  Date of payment by recipient of supply.
3.  30 days from the date of issue of invoice by supplier. 

Whichever is earlier.

Time of supply of service (for RCM purpose)

1. Date of payment by recipient of supply.
2. 60 days from the date of issue of invoice by supplier. 

Whichever is earlier.

Where it is not possible to determine time of supply as above , the time of supply shall be the date of entry in the book of account of the recipient of supply. 

Return filling, payment of taxes and ITC

Every person has to file details of outward supply, details of inward supply and monthly returns. There are separate rows in GSTR 1, GSTR2 and GSTR3 for supply under RCM. 

On the basis of return filed tax payable under RCM will be debited to Electronic tax liability register. and shall be paid through electronic cash ledger only. ITC cannot be used to make tax payable under RCM. {Section 49(4) allows the ITC to be used for payment of output tax only} 

After making payment it will become eligible for Input tax credit in the hand of receiver if otherwise eligible. Tax invoice issued by him is eligible document for this purpose.


According to section 24, registration is compulsory for persons who are required to pay tax under reverse charge irrespective of threshold limit given in section 21.

Tax Invoice

According to section 31( 3)(f) a registered person who is liable to pay tax under RCM shall issue an invoice in respect of goods or services received by him from the supplier who is not registered. 

In case of advance payment, a registered person shall issue a payment voucher at the time of making payment to the supplier.


Looking to the above we may say that it is improved version of RCM, which includes goods. RCM on supply from unregistered supplier will bring many persons under the tax net. Compliance burden will be increased on registered persons. They will try to purchase from registered persons only. And it is recommended to obtain registration, without taking care of threshold limit, by a person who supply to registered persons. Otherwise they may lose business also. 

The author can also be reached at sanjay singhal3014@gmail.com


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sanjay singhal
Category GST   Report

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