APPLICABILITY OF REVERSE CHARGE MECHANISM AS WELL AS RECENT AMENDMENTS IN THE RELEVANT NOTIFICATIONS FOR RCM UNDER SECTION 9(3) OF THE CGST ACT, SECTION 5(3) OF IGST ACT 2017 & SECTION 9(4) OF THE CENTRAL GOODS AND SERVICE TAX ACT 2017

Introduction

Reverse Charge Mechanism, is a system of collection GST where the tax is payable by the ‘service recipient’ on behalf of the ‘service provider’. Normally under the GST Law the onus for payment of GST is on the Supplier of Goods or Services but under special and specified circumstances it has been shifted to the Recipient of Supply. As defined under Section 2(98) of CGST Act, 2019, “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 sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act.

Applicability of ‘Reverse Charge Mechanism’ under GST and its clear understanding in the light of business transactions to be able to take necessary compliance as well as corrective action in Monthly Return as well as Accounts & Records is essentially required.

Provisions as per Law relating to Reverse Charge Mechanism

Section

9 (3)

 The Government may, on the recommendations of the council, by Notifications, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or service, or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in-relation to the supply of such goods or services or both.
Section

9 (4)
Applicable till 1.2.2019 Notification No. 02/2019- Ct. dt. 29.01.2019 applicable after 1.2.2019
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 and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both. The Government may, on the recommendation of the Council, by Notification, specify  a class of registered person who shall, in respect of supply of specified categories of goods or services or both received from an un-registered supplier, pay the tax on reverse charge basis as the recipient of such supply goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.

 

Discussion on Section 9(3)-Reverse Charge Mechanism on supply of Goods and Services

  1. In simple words the Central Government has notified certain good and services on which GST has to be paid by the recipient on reverse charge basis. In other words in case of such notified goods and services it is not the supplier of goods and/or service who is liable to pay the GST on forward charge like in normal circumstances but it is actually the recipient of the goods or service who is liable to pay the GST under Reverse Charge basis.
  2. Some of the relevant services received by the trade and industry under the above category are Services rendered by (i) Goods Transport Agency, (ii) Services rendered by Advocates, (iii) Services provided by way of Sponsorship, (iv) Services rendered by the Central and State Governments, (v) Security services, (vi) Renting of a motor vehicle provided to a body corporate etc.

For details of such services, the chart and the specific 4 notifications as given below in para 3 may be referred. There are now 16 following services which have been notified till date (Lastly on 30th Sept, 2019) on which GST has to be paid on Reverse Charge Mechanism.

 

Sl. No. Category of Supply of Services Supplier of Service Recipient of Service
(1) (2) (3) (4)
1 Supply of Services by a goods transport agency (GTA) in respect of transportation of goods by road to-

(a) any factory registered under or governed by the Factories Act, 1948(63 of 1948);or

(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or

(c) any co-operative society established by or under any law; or

(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or

(e) anybody corporate established, by or under any law; or

(f) any partnership firm whether registered or not under any law including association of persons; or

(g) Any casual taxable person.

 

 Goods Transport Agency (GTA) (a) Any factory registered under or governed by the Factories Act, 1948(63 of 1948); or

(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or

(c) any co-operative society established by or under any law; or

(d) any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or

(e) anybody corporate established, by or under any law; or

(f) any partnership firm whether registered or not under any law including association of persons; or

(g) any casual taxable person;

Located in the taxable territory.
2 Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity. An individual advocate including a senior advocate or firm of advocates.

 

 Any business entity located in the taxable territory.

 
3 Services supplied by an arbitral tribunal to a business entity. An arbitral tribunal. Any business entity located in the taxable territory.
4 Services provided by way of sponsorship to anybody corporate or partnership firm. Any person

 

 Anybody corporate or partnership firm located in the taxable territory.
5 Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, –

(1) renting of immovable property, and

(2) services specified below-

(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority;

(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

(iii) Transport of goods or passengers.

 Central Government, State Government, Union territory or local authority

 

 Any business entity located in the taxable territory.

 
“5A Services supplied by the Central Government, State

Government, Union territory or local authority by way of

renting of immovable property to a person registered

under the Central Goods and Services Tax Act, 2017 (12

of 2017).

 Central

Government,

State

Government,

Union

territory or

local

authority

 Any person registered under the

Central Goods and Services Tax Act, 2017.
6 Services supplied by a director of a company or a body corporate to the said company or the body corporate.

 

 A director of a company or a body corporate The company or a body corporate located in the taxable territory.

 
7 Services supplied by an insurance agent to any person carrying on insurance business. An insurance agent

 

 Any person carrying on insurance business, located in the taxable territory.
8 Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company. A recovery agent A banking company or a financial institution or a non-banking financial company, located in the taxable territory.
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 covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original dramatic, musical or artistic works to a music company, producer or the like Music composer, photographer, artist, or the like Music company, producer or the like, located in the taxable territory. ”;
“9A Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub -section (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher. Author Publisher located in the taxable territory:

Provided that nothing contained in this entry shall apply where, – (i) the author has taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017), and filed a declaration, in the form at Annexure I, within the time limit prescribed therein, with the jurisdictional CGST or SGST commissioner, as the case may be, that he exercises the option to pay central tax on the service specified in column (2), under forward charge in accordance with Section 9 (1) of the Central Goods and Service Tax Act, 2017 under forward charge, and to comply with all the provisions of Central Goods and Service Tax Act, 2017 (12 of 2017) as they apply to a person liable for paying the tax in relation to the supply of any goods or services or both and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option;

(ii) The author makes a declaration, as prescribed in Annexure II on the invoice issued by him in Form GST Inv-I to the publisher. ”;
“10 Supply of services by the members of Overseeing Committee to Reserve Bank of India

 

 

 

 Members of Overseeing Committee constituted by the Reserve Bank of India Reserve Bank of India.”
“11 Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs). Individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm. A banking company or a non-banking financial company, located in the taxable territory.”;
“12 Services provided by business

facilitator (BF) to a banking

company

 Business facilitator (BF) A banking company, located in the taxable territory
13 Services provided by an agent of business correspondent (BC) to business correspondent (BC). An agent of business

correspondent (BC)

 A business correspondent, located in the taxable territory.
14 Security services (services

provided by way of supply of security personnel) provided to a registered person:

Provided that nothing

contained in this entry shall

apply to, –

(i) (a) a Department or

Establishment of the Central

Government or State

Government or Union

territory; or

(b) local authority; or

(c) Governmental agencies;

which has taken registration

under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax under section 51 of the said Act and not for making a taxable supply of goods or services; or

(ii) a registered person

Paying tax under section 10 of the said Act.

 Any person other than a

body corporate

 A registered person, located in the taxable territory.”
“15 Services provided by way of renting of a motor vehicle provided to a body corporate. Any person other than a body corporate, paying central tax at the rate of 2.5% on renting of motor vehicles with input tax credit only of input service in the same line of business Anybody corporate located in the taxable territory.
16 Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”), as amended. Lender i.e. a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the Scheme of SEBI Borrower i.e. a person who borrows the securities under the Scheme through an approved intermediary of SEBI.”.

3.The relevant notifications in respect of the above services which attract GST under ‘Reverse Charge Mechanism’ are as follows-

  • Notification No.13/2017/28.06.2017-Central tax
  • Notification No.15/2018/26.07.2018-Central tax
  • Notification No. 29/2018/31.12.2018-Central tax
  • Notification No. 22/2019/30.09.2019-Central tax
  1. Some goods on which GST is payable on ‘Reverse Charge Mechanism’ include Cashew Nuts, Silk Yarn etc which are notified under Notification No: 04/04/28.06.2017-Central tax
  2. Similar provision exists under Section 5(3) of the Integrated Goods and Services Tax Act 2017 which attract ‘Reverse Charge Mechanism’ on import of services.
  3. GST under ‘Reverse Charge Mechanism’ has to be paid in cash first by the goods and service recipient and subsequently ITC of the same is available to him.

Discussion on Section 9(4) – Reverse Charge Mechanism on supply of Goods and Services

  1. In addition to Section 9(3) the Central government has by virtue of Section 9(4) of the CGST Act 2017 has imposed CGST under Reverse Charge Mechanism with a different perspective on interstate supply of goods or services received by a registered persons from unregistered persons who are not registered under GST. The liability to pay GST on such supplies was fastened on the recipient under Notification No.8/2017/28.06.2017-Central Tax which granted an exemption till a value of Rs.5000/- of such supplies in a single day. In other words any supply received in excess of Rs.5000/- on a day was taxable under Reverse Charge Mechanism.
  2. The above notification was amended by Notification No.38/2017/13.10.2017-Central Tax when complete exemption from the levy of GST on Reverse Charge Mechanism was granted till 31.03.2018. In other words no GST was payable on reverse charge mechanism under Section 9(4) irrespective of the amount of the value of goods and services received from unregistered persons.
  3. The above period for granting complete exemption was extended from time to time till 30.09.2019 and continues to be in force.
  4. In the meanwhile the CGST Act was amended vide CGST (Amdt.) Act 2018 (31 of 2018) dt. 30th August 2018 and Section 9(4) was substituted by a new section. As per the new Section 9(4) the Central government is empowered to notify certain class of registered persons who would be liable to pay GST under Reverse Charge in respect of supply of goods and services from the unregistered persons.
  5. The Central government has not notified any class of registered persons till date under the above provisions of law. In other words as on date no GST under Reverse Charge is payable on any goods and services received from unregistered persons.

Conclusion

It is very important to look at the given notifications, read them with concentration to come out with appropriate interpretation under the specific facts and circumstances. These updated notifications must be kept in mind and applied while recording the transactions in the Books of Accounts and filing the returns to avoid notices from the department or errors while filing resulting in the penalties.