Chapter 13 Reverse Charge Mechanism

13.1 Generally, the supplier of goods or services is

liable to pay GST. However, in specified cases like
imports and other notified supplies, the liability
may be cast on the recipient under the reverse
charge mechanism. Reverse charge means the
liability to pay tax is on the recipient of supply of
goods or services instead of the supplier of such
goods or services in respect of notified categories
of supply.
Normally, the supplier of goods or services pays the
tax on supply. In the case of Reverse Charge, the
receiver becomes liable to pay the tax, i.e., the
chargeability gets reversed.
Reverse charge is applicable on both, goods and services.
The following are the situations in which reverse charge
will be applicable:
1. A registered business owner receiving goods or
services from an unregistered vendor.
Example: A registered wholesaler or a retailer buying farm
produce (for the purpose of selling it to other
vendors/consumers) from unregistered vendors, has to pay
the GST associated with the purchase to the government.
2. Services offered by an aggregator or e-commerce
operator.
The following list of goods and services specified
by Central Board of Excise and Customs (CBEC) (later we
will discuss.)
13.2 Types of charge mechanism
a) Forward Charge: Forward Charge or direct charge is the
mechanism where the supplier of goods or services or
both is liable to pay tax.
For instance,
b) if a chartered accountant provided a service to his client,
the service tax will be payable by the chartered accountant.
c) Or for instance, if a car manufacturing company sold some
auto parts to a trader and collected tax from the trader, the
manufacturing company remits the tax.
d) Under the current tax system, most transactions are
covered under the forward charge mechanism.
B) Reverse Charge: Reverse Charge is only a mode of collection
of GST on Supplies of goods or services where the service
receiver will be liable to pay GST to government.
13.3 Difference Between Reverse Charge And
Forward Charge (imp)
S.
S.N BAISIS
BAISI S Forward
Forward Charge
Charge Reverse
Reverse Charge
Charge
N
1 Liability to pay tax Supplier of goods/services Receiver of goods/services
2 Threshold Limit It is available The threshold limit is not
1 Liability to pay tax Supplier of Receiver
available of
3 Invoice and documentation i.goods/services
Tax invoice goods/services
i. Tax invoice (if not
ii. Receipt invoice received from supplier)
2 Threshold Limit It
iii. isRefund
available
voucher The threshold
ii. Payment limit is
voucher
4 Mode of payment of tax Both electronic credit ledger
not available
Only electronic cash ledger
3 Invoice and i. electronic
& Tax invoice
cash ledger are i. available.
is Tax invoice (if not
available.
documentation ii. Receipt invoice received from
iii. Refund voucher supplier)
ii. Payment voucher
4 Mode of payment of Both electronic credit Only electronic cash
tax ledger & electronic ledger is available.
cash ledger are
available.
13.4 Miscellaneous important points about reverse
charge
1. Expanded scope:- the scope of reverse charge is
expanded goods that may be notified, even if the
supplier is registered.
2. No partial reverse charge:- under service tax laws,
there was scheme of partial reverse charge of joint
charge on supplier and recipient. In GST, the
concept has been discontinued.
3. Not included in aggregate turnover:- the supplies
on which reverse charge is applicable would be
included in turnover of supplier and not in the
turnover of recipient.
4. Compulsory registration:- the person who are
required to pay tax under reverse charge are
required to be registered, irrespective of the
threshold limit specified.
5. Concessional composite rate not applicable:- the
composition suppliers being recipients of supplies
on which tax is payable on reverse charge basis, will
have to remit tax at the applicable rates, and not
the concessional composition tax rates.
(composition dealer)
6. Detail of inward supplies:- every person liable to
pay tax under reverse charge is required to furnish
details of inward supplies.
7. Issue of invoice:- the recipient paying tax on
reverse charge basis on account of effecting inward
supplies from unregistered person, should issue an
invoice in respect of the goods or services in
warded, at the time of receipt of such goods or
service.
8. Payment voucher:- the recipient paying tax on
reverse charge basis, should issue a “payment
voucher” at the time of making payment to the
supplier.
13.5 Mode of payment under reverse charge
GST is payable under reverse charge, it should be paid
by cash only. It means it will be paid through
electronic cash ledger only.
e.g. 13.2 Varun is a registered person under GST Laws.
During March, 2022, he purchased goods at
4,00,000 + GST @18%. This transaction is covered
under Reverse charge mechanism. Varun has 90,000
as ITC in his E-credit ledger. He directs his
accountant to pay GST on inward supply (72,000)
under RCM using the balance of ITC. Comment.
13.6 Outward VS. Inward Supply under Reverse charge.
(Imp)
S .N BASIS OF OUTWARD SUPPLY UNDER RCM INWARD SUPPLY UNDER RCM
o SUPPLY UNDER
RCM

1 Tax liability Supplier is not liable to pay Recipient shall be liable to pay
tax on such outward supply. tax on such inward supply.
2 Related input The supplier is not liable to After payment of GST, the
tax credit avail ITC on such outward recipient may avail ITC if he is
supply. otherwise fulfilling all
conditions relate to availment
of ITC.
3 Aggregate Such supply shall be Such supply being inward
turnover considered in as part of supply shall not be considered
aggregate turnover. in part of aggregate turnover.
4 Flat rate If supplier is composite If recipient is composite
taxation supplier, he shall not be supplier, he will be liable to
scheme liable to pay GST on such pay full GST on inward supply
outward supply. under reverse charge.
13.7 Provision under GST for Reverse Charge
a) Reverse charge under notification
b) Default reverse charge under act.
Basis Reverse charge Default reverse
1 Type of Applicable on notified supplies, It is applicable when the
supply which may be unregistered supplier
Notified goods and notified supplies to registered
services. recipient.
2 IGST Sec. 5(3) of IGST ACT Sec. 5(4) of IGST ACT

3 Registration a. If recipient is already registered The recipient is liable to pay

of recipient no separate registration is tax. It means the recipient is
required for discharge of already registered.
reverse charge liability
b. If not already registered as
taxpayer the separate
registration is required for
discharge of reverse charge
liability.
13.8 Reverse charge under notification
1.Notified goods under reverse charge
S. Description of supply of Supplier of goods Recipient of goods
No. goods
1 Cashew nuts, not shelled or Agriculturist Any registered person
peeled
2 Bidi wrapper leaves (tendu) Agriculturist Any registered person

3 Tobacco leaves Agriculturist Any registered person

4 Supply of lottery State Government, Union Territory or Lottery distributor or selling

any local authority agent
5 Silk yarn Any person who manufactures silk yarn Any registered person
from raw silk or silk worm cocoons for
supply of silk yarn
6 a. Used vehicles Government (central/state/UT/ LOCAL Any registered person
b. Seized confiscated goods Authority)
c. Old and used goods
d. Waste & scrap
7. Priority sector lending Any registered person Any registered person
certificate
e.g.13.3 Mr. Jagpal (a farmer) cultivated cashew nuts
not shelled or peeled in the state of KERELA. These
nuts are sold to M/s ABC (registered dealer in Kerala)
for 4,00,000. The GST rate applicable on Cashew nuts
is 5%. The ITC available with the parties as follows:
ITC Available CGST SGST IGST TOTAL
Mr. Jagpal 7,000 7,000 NIL 14,000
M/s ABC 4,200 4,200 5,000 13,400

You are required to answer the following:

a. Who is liable to pay GST?
b. The net tax liability in relation to above transaction?
c. In case, M/s ABC is not registered under GST, who
will be liable to pay GST and also calculate the net
tax liability.
a. Sol. M/s ABC is liable to pay GST under RCM.
b. The net tax liability of GST payable by M/s ABC in
respect of this transaction is as follows:
Particulars CGST SGST REMARKS
Tax on inward supply 10,000 10,000 The ITC is not allowed
under RCM (5% of to be utilised by
4,00,000) recipient while paying
(-) ITC NA NA GST under RCM

Net tax liability of M/s 10,000 10,000

ABC

(C) In case, M/s ABC is not registered under GST,

PARTICULARS CGST SGST REMARKS
Outward tax (on 10,000 10,000 The ITC is allowed to
outward supply) 5% of be utilised
4,00,000
(-) ITC 7,000 7,000
Net tax liability of M/s 3,000 3,000
ABC
e.g. 13.4 Mr. Ram Niwas being an agriculturist
cultivated Bidi wrapper leaves(Tendu) in the state of
Telangana. The produce are supplied to be registered
office of Windsor ltd, a registered person in the state
of Kerala, for 1,08,500 plus GST @5%.
You are required to answer the following:
(a) Calculate the amount of GST payable on
transaction.
(b) Who is liable to pay GST if Windsor ltd. Is:
Case 1: a registered person under GST.
CASE 2: not registered under GST, as its turnover is
less than 20,00,000
Sol. (a) GST payable:
POS is Kerala and location of supplier is Telangana,
IGST is payable. IGST = 5% of 1,08,500 = 5,425
(b) Liability to pay GST:
It depends upon the fact whether the recipient is
registered or not.
Case 1: Windsor ltd.
Case 2: Ram Niwas
13.8.2. Services notified under reverse charge
S.No Category supply Supplier of service Recipient of service
of service
1 GTA Services Goods Transport Any factory, society, co-operative
Agency (GTA) society, registered person, body
corporate, partnership firm, casual
taxable person; located in the taxable
territory
2 Legal Services An individual Any business entity located in the
by advocate advocate, including taxable territory
a senior advocate or
a firm of advocates
3 Services An arbitral tribunal Any business entity located in the
supplied by an taxable territory
arbitral tribunal
to a business
entity
4 Sponsorship Any person Any body corporate or partnership firm
Services located in the taxable territory
1. GTA Services:- GTA Services
GTA ITC Claiming
Yes ITC No ITC

NO RCM Specified Recipient

Forward charge applicable
Yes Not

GST @ 12%
RCM Applicable @5%
Specified Recipient:- Factory, society, co-operative society, body
corporate, firm/AOP/BOI/CTP, any person registered under GST.
Note:- GTA services exempt:- supplier
• C.G./S.G./Local authority department
• Govt. dept. registration – T.D.S/T.C.S (ONL)
• Unregistered person
2. Legal Services by advocate:-An individual advocate,
including a senior advocate or a firm of advocates
service recipient is business entity
Yes No

Threshold/ turnover (20,10,40 lack.) EXEMPT

Yes No

R.C.M. EXEMPT
e.g. Mr. X (business entity) – Legal services from Mr. Y
(advocate)
Mr. X Turnover.
Threshold exceed

Yes NO IT MEANS Exempt

R.C.M
4. Sponsorship Services:- XYZ Construction Co.
sponsor IPL 2022 for 100 corer to B.C.C.I.
B.C.C.I XYZ Co.
Service provider brand promotion service recipient
100 corer – GST @18% - RCM – XYZ co. directly pay to the
govt.
Service recipient – body corporate /partnership firm.
 Supplier of service Recipient of
service
5 Services supplied by the Central government, Central Any person
A state government, union territory or local government, state registered
authority, by way of renting of immovable government, union under CGST
property to a person registered under CGST territory or local Act, 2017
Act, 2017 authority or

5 Services supplied by any person by way of Any person Promoter

B transfer of development rights or floor space
index (FSI) (including additional FSI) for
construction of a project by a promoter.
5 Long term lease of land (30 years or more) by Any person Promoter
C any person against consideration in the form
of upfront amount (called as premium,
salami, cost, price, development charges or
any by any other name) and/ or periodic rent
for construction of a project by a promoter.
 Supplier of service Recipient of service
6 Services by director A director of a co. or The co. or a body
Body of corporate corporate located in
the taxable territory
7 Insurance agent services An insurance agent Any person carrying
on insurance
business, located in
the taxable territory
8 Recovery agent services A Recovery agent A banking co or a
financial institution
or a NBFC, located
in the taxable
territory
6. Services supplied by a director of a company or a
body corporate to the said company or the body
corporate:-
KNOWLEDGE/EXPERIENCE
Director S.P Company S.R.
FEES
Company RCM
7. Insurance agent service:-
Insurance Co. Commission Mr. X Customer
agent of insurance

insurance service provide to co.

charge premium GST FCM.
Agent commission GST RCM (Insurance Co. is liable to pay tax).
8. Recovery agent services:- commission R.C.M
Recovery Loan recovery bank/NBFC/Financial
Agent (SP)
institution (SR)
Commission/remuneration

RCM
 Supplier of service Recipient of service
9 Supply of services by a music composer, Music composer, Music co, producer or
photographer, artist or the like by way of photograph the like, located in the
transfer or permitting the use or taxable territory.
enjoyment of a copyright relating to
original dramatic, musical or artistic works
to a music co., producer or the like.
9A Supply of services by an author by way of Author Publisher located in
transfer or permitting the use or the taxable territory
enjoyment of a copyright relating to
original literacy works to a publisher
10 Supply of services by the members of members of RBI
overseeing committee to RBI. overseeing committee
Constituted by the
RBI.
11 Services supplied by individual direct individual direct A banking co, NBFC,
selling agents other than a body selling agents other located in the taxable
corporate, partnership or limited liability than a body territory.
partnership or limited liability partnership corporate, partnership
firm to bank or non-banking financial co. or limited liability
partnership or limited
liability partnership
firm
9 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
relating to original dramatic, musical or artistic
works to a music co., producer or the like.
Music
composer/ Permit music/photograph Music co./ producer
or similar person
photographer
/ other like (SP) Remuneration/fees
e.g. new Bollywood songs:- old and new songs
Movie producer rights acquire from music composer
RCM
9 A) Transfer or permitting the use or enjoyment of a
copyright relating to the original literary work:- 2
option available
Author
yes (SP) Registered NO
FCM + RCM
Undertake to pay taxes on FCM
You have to follow 1 year.
11. Selling of financial products:-
Direct service financial assets Bank/NBFC/FI
agent
SP mutual funds/investment SR

If direct selling agent:- body corporate/ firm:- FCM

12 Services provided by business facilitator Business facilitator A banking co, located
to a banking co. in the taxable territory
13 Services provided by an agent of business Any agent of business A business
correspondent to business correspondent correspondent correspondent,
located in the taxable
territory
14 Security services Any person other than A registered person,
a body corporate located in the taxable
territory
15 Services provided by way of renting of a Any person other than Any body corporate
motor vehicle designed to carry body of corporate located in the taxable
passengers where the cost of fuel is who supplies the territory
included in the consideration charged service to a body
from the service recipient, provided to a corporate and does
body corporate not issue an invoice
charging central tax at
the rate of 6% to the
service recipient
16 Services of lending of securities under Lender borrower
SEBI
14. Security services:-
security service
service provider (body corporate)

YES NO
registered person F.C.M. Registered person
(RCM)
No RCM:-
C.Govt., state govt, local authority
Composition scheme
U/S – T.D.S
15 Services provided by way of renting of a 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:-
Renting of a motor vehicle including the cost of fuel
Passengers
Service provider =body corporate

Yes FCM No
yes opt for Limited ITC GST@5%
no
yes e no
e.g. Mr. X car on rent to Mr. y including cost of fuel.
GST mechanisum applicable
(a) If X opts for ltd ITC = FCM
16. Services of lending of securities under SEBI:-
X
Security lend
Y BORRROWER
LENDER
security fees
RCM
13.9 Reverse charge under sec 9(4) of CGST Act 2017
The tax under reverse charge is payable by the
Notified class of registered person on Notified
categories of intra-state supplies of goods and / or
services received by such registered persons from
any unregistered supplier.
The following are the important interpretations from
the above provisions:
a. This section does not attract RCM provisions on
every purchases made by registered recipient from
unregistered supplier. It is applicable on specified
class of registered recipients and in respect of
specified categories of goods or services.
(b)The class of registered persons and goods or
services are not to be notified by the govt., on the
recommendations of the council.
© if the recipient is covered under sec.9(4), then he
will be held liable for payment of GST on such
transactions.
Amendments in GST in real estate sector
Position up to 31/3/19:
Effective rate of GST on real state sector was 8%/12%
with ITC
With effect from 1/4/19:-
With effective rates of GST for the new projects by promoters are as follows:
(i) GST @ 1% without ITC It is on construction of affordable houses (area 60 sqm in metros/90
sqm in non-metros and value up to 45 lakh.
(ii) GST @ 5% without ITC It shall be applicable on construction of:
(a) All houses other than affordable houses, and
(b) Commercial apartments such as shops, office etc. In a
residential real estate project in which the carpet area of
commercial apartments is not more than 15% of total carpet
area all apartments.

Conditions for the above tax rates:

(a) ITC not available.
(b) 80% of inputs and input services used in supplying the service shall be purchased from
registered persons.
Conditions for applicability on RCM on promoters

(a)If value of inputs and input services purchased from

registered supplier is less than 80%, promoter has to pay
GST on reverse charge basis, @ 18% on all such inward
supplies.
(b)When cement is received from an unregistered person,
the promoter shall pay tax on supply of such cement on
reverse charge basis @ 28% (CGST 14% + SGST 14%) at
present.
(c)GST on capital goods shall be paid by the promoter on
reverse charge basis.
13.9.2 supply of TDR, FSI, long term lease of land by
a landowner to a developer
The liability to pay TDR, FSI, long term lease has been
shifted from land owner to builder under RCM.
TDR, FSI, long term lease exempted if constructed
flats are sold before issuance of completion
certificate and tax is paid on them.
Exemption of TDR, FSI, long term lease shall be
withdrawn in case of flats sold after issue of
completion certificate, but such withdrawal shall be
limited to 1% of value in case of affordable houses
and 5% other than affordable houses .
13.10 additional services under reverse charge, as
per IGST Notifications
1. Import of services
Supplier :- any service supplied by any person who is
located in a non-taxable territory to any person
(other than non-taxable online recipient), is import
of service and reverse charge is applicable.
Recipient :- the recipient may be any person located
in the taxable territory (other than non-taxable
online recipient).
Comment:- there cannot be SGST OR CGST on
imports. In most cases, the IGST @18% is
applicable.
13.10.2. Inward ocean transport
Supplier:- services supplied by a person located in a
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.
Recipient:- the recipient is importer located in the
taxable territory.
Note 1: IGST @ 10% if the value of ocean freight is not
available
Note 2: IGST @ 5% ocean freight is available