When an Input Service Distributor (ISD) receives supplies that fall under the Reverse Charge Mechanism (RCM), it triggers specific tax obligations. This blog explores the responsibilities of ISDs in such scenarios, including tax calculation, payment, and accurate reporting.
Generally, the tax on supply is paid by the supplier of goods or services. The receiver is made liable for the tax in a reverse charge, reversing the charge ability. Let’s see what is reverse charge mechanism under GST.
When Is a Reverse Charge Applicable?
The reverse charge scenarios for intrastate transactions are governed by sections 9(3), 9(4), and 9(5) of the Central GST and State GST Acts. The reverse charge scenarios for interstate transactions are also governed under sections 5(3), 5(4), and 5(5) of the Integrated GST Act.
Let’s Take a Closer Look at Each of These Scenarios:
Supply of specific goods and services specified by the CBIC: CBIC has issued a list of goods and services for which reverse charge is applicable, in accordance with the powers conferred by section 9(3) of the CGST Acts.
Supply from an unregistered dealer to a registered dealer: Reverse charge applies if a vendor not registered under GST services Process goods to a registered person under GST, according to Section 9(4) of the CGST Act. This means that the receiver, rather than the supplier, will be responsible for paying the GST. The registered buyer who is required to pay GST under reverse charge must self-invoice for their purchases. The purchaser must pay CGST and SGST under the reverse charge mechanism (RCM) in intra-state purchases. In addition, the buyer must pay the IGST when making an interstate purchase. The government regularly publishes a list of goods and services subject to this provision. The RCM for supplies made by unregistered people to registered people has been postponed until 30 September 2019.
Previously, this provision took effect on 01 October 2018. In the real estate sector, the government has mandated that the promoter purchase 80 percent of inward supplies from registered suppliers. If purchases from registered dealers fall short by 80%, the promoter must charge GST at 18% on the reverse charge to the extent that inward supplies fall short by 80%. However, if the promoter buys cement from an unregistered supplier, he must pay a 28 percent tax. Regardless of the 80 percent calculation, this calculation must be completed. TDR or floor space index supplied on or after 01 April 2019, the promoter is liable to pay GST on a reverse charge basis. Even if a landowner does not conduct a regular business of land-related activities, the transfer of development rights to the promoter is subject to GST because it is considered a supply of service under section 7 of the CGST Act. In addition, when one developer sells TDR to another, GST is charged at 18 percent on the reverse charge.
Supply of Services Through an E-commerce Operator
Any type of business can use e-commerce operators to sell products or provide services by acting as an aggregator. A reverse charge will apply to the e-commerce operator if the service provider uses an e-commerce operator to provide specified services, according to Section 9(5) of the CGST Act.
The Following Services Are Included in This Section
- Providing accommodation services in hotels, inns, guest houses, clubs, campsites, or other commercial places intended for residential or lodging purposes, unless the person supplying such service through an electronic commerce operator is required to register due to a turnover exceeding the threshold limit. Take, for instance, Oyo and MakeMyTrip.
- Passengers are transported by radio taxi, motor cab, maxi cab, and motorcycle.
Time of Supply Under RCM
Time of Supply in Case of Goods
In the event of a reverse charge, the earliest of the following dates shall be used to supply goods:
- The date of receipt of goods
- Further, the date instantly after 30 days from the date of issue of an invoice by the supplier
- The date of payment.
If the time of supply cannot be determined, the time of supply shall be the date of entry in the recipient’s books of account.
Using a GST Calculator in India, you can find out how much GST you need to pay before registering for GST.
Illustration
- Date of entry in books of receiver 18 May 2023
- Date of receipt of goods 15 May 2023
- Date of invoice 01 June 2023
In this case, the service will be provided on 15 May 2023.
Time of Supply in Case of Services
The time of supply in the case of reverse charge shall be the earliest of the following dates:
- Date immediately after 60 days from the date of issue of invoice by the supplier
- Payment date
- If the time of supply cannot be determined, the time of supply shall be the date of entry in the recipient’s books of account.
If the time of supply cannot be determined, the time of supply shall be the date of entry in the recipient’s books of account.
Illustration:
- Date of payment 15 July 2023
- Date of entry in books of receiver 18 July 2023
- Immediate date after 60 days from the date of issue of the invoice
- Suppose, the date of the invoice is 15 May 2023, then 60 days from this date will be 14 July 2023
- The time of supply of service, in this case, would be 14th July 2023.
Registration for RCM (Reverse Charge Mechanism):
RCM registration is a necessary step for businesses and individuals who must pay taxes on specific goods or services they receive. Here’s a simpler explanation:
- Understanding RCM: Before registering, understand that RCM means you pay tax on certain things you buy instead of the seller paying it.
- Check if it Applies to You: See if RCM rules apply to your purchases.
- Get a GSTIN: If they do, you need a GSTIN, a unique ID for tax purposes.
- Follow the Rules: You must keep good records, report RCM transactions in your tax returns, and pay the tax on time.
- Get Help if Needed: Some people hire experts to help with RCM rules.
- Stay Informed: Keep up with tax rule changes.
2. Payment of Tax on a Reverse Charge
Payment of Tax on a Reverse Charge:
Paying tax through the Reverse Charge Mechanism (RCM) is the next step after understanding RCM. Here’s a simplified explanation:
- What is RCM?: RCM means you pay tax on certain things you buy instead of the seller paying it.
- Calculate and Pay: Once you figure out you owe tax under RCM, you need to calculate it and pay it.
- Timely Payment: Make sure you pay the tax on time, following the rules.
- Keep Records: Keep good records of your RCM transactions to avoid issues.
- Consult Experts: Some people get experts’ help to understand and handle RCM tax calculations.
- Stay Updated: Keep up with any changes in the tax rules related to RCM.
3. What if an Input Service Distributor receives supplies liable to Reverse Charge?
Imagine you’re an Input Service Distributor (ISD) and you get supplies that require you to pay tax through the Reverse Charge Mechanism (RCM).
Calculation of Tax Liability: The ISD must calculate the tax liability arising from these supplies. The tax calculation is typically based on the applicable RCM rates and the value of the supplies received.
Payment of Tax: After calculating the tax liability, the ISD is responsible for making the tax payment to the government. This payment should be made as per the due dates and procedures specified by the tax authorities.
Correct Reporting: In the GST return filings, the ISD must accurately report the RCM transactions, including the details of supplies received and the corresponding tax paid under RCM.
Compliance with Documentation: Ensure that all necessary documentation, invoices, and records related to RCM transactions are maintained in an organized manner, as these may be subject to scrutiny during audits.
Consultation and Expertise: If the ISD finds it complex or challenging to navigate the RCM requirements, seeking guidance from tax experts or consultants is advisable to ensure accurate compliance.
4. What if the receiver of goods/services who is required to pay tax under RCM is an Unregistered Dealer?
If you are an unregistered dealer and are required to pay tax under the Reverse Charge Mechanism (RCM), you are still obligated to fulfill this tax liability. RCM means that even unregistered dealers must pay tax on certain purchases they make. Your responsibility in this scenario includes:
- Tax Calculation: Calculate the tax amount that is due under RCM for the specific goods or services you have received.
- Tax Payment: Pay the calculated tax amount to the government as per the prescribed schedule and guidelines.
- Compliance: Ensure compliance with all tax regulations related to RCM, including proper record-keeping and reporting of RCM transactions.
- Stay Informed: Stay informed about any changes in tax rules or notifications that might affect unregistered dealers and RCM.
Who should pay GST under the RCM?
The person supplying the goods must indicate on the tax invoice whether tax is payable under the RCM, according to GST law.
While making GST payments under RCM, keep the following points in mind:
Only if the goods or services are used for business or further business can the recipient of the goods or services claim an ITC on the tax amount paid under RCM.
While discharging liability under RCM, a composition dealer should pay tax at the normal rates, not the composition rates. They are also ineligible for any input tax credit for taxes paid.
The GST compensation cess can be applied to the RCM tax that is due or paid.
Input Tax Credit (ITC) under RCM
A supplier cannot claim an ITC for GST paid under the RCM. Only if the goods or services are used or will be used for business purposes can the recipient claim ITC on the GST amount paid under RCM on receipt of goods or services.
The recipient cannot use the ITC to pay output GST on goods or services that are subject to a reverse charge; instead, the recipient must pay in cash.
Examples of Transactions Covered Under Reverse Charge
Consider a practical scenario where a customer buys a car from a dealership priced at ₹300,000. The sale of the car is subject to an 18% GST rate. Here’s how the tax calculation unfolds:
The GST amount is calculated as follows:
GST Amount = (Price of Car * GST Rate) / 100
= (₹300,000 * 18) / 100
= ₹54,000
Therefore, the GST payable on the car purchase amounts to ₹54,000. Consequently, the total cost incurred by the customer, inclusive of GST, is: Total Cost = Price of Car + GST Amount
= ₹300,000 + ₹54,000
= ₹354,000
In this transaction, the dealership collects ₹354,000 from the customer, encompassing both the car price and the GST component. Subsequently, the dealership is responsible for remitting the GST amount of ₹54,000 to the government under the forward charge mechanism.
Key Differences Between Forward Charge and Reverse Charge in GST
| Particulars | Forward charge | Reverse charge |
| Liability to Pay Tax | Supplier of goods/services | Recipient of goods/services |
| GST Registration | Required when turnover exceeds the ₹40 lakh/₹20 lakh threshold limits (or ₹20 lakh/₹10 lakhs for services) as detailed here. | Mandatory for those under reverse charge, regardless of turnover. |
| Time of Supply (Goods) |
For goods, the time of supply is the earliest of the following:
|
For goods, the time of supply is the earliest of the following:
If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the recipient’s books of account. |
| Time of Supply (Services) |
For services, the time of supply is the earliest of the following:
|
For services, the time of supply is the earliest of the following:
|
What Is Self-Invoicing?
Self-invoicing is required when purchasing goods or services from an unregistered supplier. Such purchases are subject to reverse charges. Because your supplier is unable to issue you with a GST-compliant invoice, you are responsible for paying taxes on their behalf.
As a result, in this case, self-invoicing is required.
In addition, section 31(3)(g) requires a recipient who is liable to pay tax under sections 9(3) or 9(4) to issue a payment voucher to the supplier at the time of payment.
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