What is Reverse Charge Mechanism (RCM) in GST

Last updated at Dec. 16, 2024 by

Normally, Seller Collects GST from Buyer and Pays to Government

However, in some cases, Buyer Pays GST Directly to Government

This is called Reverse Charge in GST

 

What is Normal Charge and Reverse Charge Mechanism (RCM) in GST

Normal Charge

Normally, Seller Collects GST from Buyer and Pays to Government This is called Normal Charge

Example

Suppose A provides Service to B of 100000 + GST 18000

In this case, B will pay A Rs 118000 ,A will deposit 18000 GST to Government

Reverse Charge

Seller gives Buyer bill without GST

In this case, Buyer Pays only bill amt to seller and deposit GST Directly to Government

This is called Reverse Charge in GST

Example

A will provide Service to B of 100000 (without tax)

In this case, B will pay A Rs 100000 and deposit GST of 18000 directly to Government

 

RCM Normal charge image.jpg

GST in Case of Goods

Earlier Reverse Charge was applicable in Case of Services only (in Service Tax)

It was not applicable in case of Goods (There was no reverse charge concept in Vat)

However, now in GST, it is applicable in Goods Also

 

Example

X Sold Goods to B of Rs 100000 Suppose GST Rate is 5%, X will sell goods to Y for Rs 100000 + GST 5% = 105000

Y will pay X Rs 105000 and X will pay 5000 to Government

 

However , If X is Unregistered in GST, then X cannot charge GST on it Then Reverse Charge will also be applicable on it

Y will pay X 100000 and deposit 5000 Directly to Government

 

normal charge and reverse charge.jpg

When is Reverse Charge Applicable?

It is applicable as per Section 9(3) and Section 9(4)

  1. Section 9(4) - Purchases from Unregistered Dealer were covered here Local Purchases upto 5000 per day were exempt.
  2. Section 9(3) - Certain Goods and Services notified by Government were covered like Goods Transport Agency, Freight etc.

As per decision in GST Council Meeting Section 9(4) has been stopped by Government However, Section 9(3) is still applicable. Hence GST is still applicable on following services

Earlier Now Image 3.jpg

 

Reverse Charge List

NAME OF SERVICE SERVICE PROVIDER SERVICE RECEIVER
Advocate Service Any Lawyer/Law firm Any Business Entity
Manpower Service(From 1 Jan 2019) Any Unregistered Person Registered Person
Import of Service (Service provided from  Non-Taxable Territory) Foreign Party Indian Co
Transport of Goods by Road(GTA) Goods Transport Agency Any person Registered Under CGST, UTGST, SGST
Any Factory,
Any Society/Cooperative Society Registered in India
Any body corporate(Company)
Any Partnership Firm
 
Sponsorship Service Any Person Any body corporate(Company) or Partnership
Service by Director Director Any body corporate(Company) 
Insurance Agent Service Insurance Agent Insurance Co
Recovery Agent Service Recovery Agent  Bank or Financial Institutions
Ocean Freight(Transport of Goods by Vessel from place outside India to customs clearance in India) Foreign Party(Person located in Non-Taxable Territory) Importer
Copyright Service related to literary, dramatic, musical, artistic work Author, music composer, photographer, artist Publisher, Music Composer, Producer
Radio Taxi Service Taxi Driver E Commerce Company
All Service by Government except Govt Business Entity
Renting of Immovable Property
Service by Department of Posts
Service in Relation to Aircraft or vessel
Service of Transport of Goods or Passengers

 

Reverse Charge on Goods

Description of supply of goods Supplier of goods Recipient of goods
Cashew nuts, not shelled or peeled Agriculturist Any registered person
Bidi wrapper leaves (tendu) Agriculturist Any registered person
Tobacco leaves Agriculturist Any registered person
Supply of lottery State Government, Union Territory or any local authority Lottery distributor or selling agent
Silk yarn Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn Any registered person

Whether we get input of Reverse Charge?

On Certain Items, No Input will be available like Food, Catering, etc

On Other Items, Input Available Next Month

GTA Bill of My Co. 10000.jpg

GTA(Goods Transport Agency) Service To Unregistered Person Exempted

Earlier If Goods Transport Agency (GTA) provided services to Unregistered Persons, they had to pay GST

Because of this GTA were not willing to supply services to Unregistered persons.

Now,

This service has been exempted.

 

GTA Registered Person.jpg

What will be entry of Reverse Charge?

It depends upon whether we get Input of

Ajay Transport

Bill to My Co.

A LTD

Freight Charges

100000

TOTAL

100000

 

Suppose GST Rate is 5% (2.5% CGST, 2.5% SGST)

Entry

Case 1  

                Bill Received on 10 April

                Payment made on 29 April

View Answer

Case 2

                Bill Received on 10 April

                Payment not made within 61 Days

View Answer

Case 3

               First Payment in Advance  on 25 April then Bill Received later on 18 june

View Answer

When is Output GST Payable, on Bill or Payment?

It depends upon Time of Supply of Goods and Services

Time of Supply Reverse Charge of Goods Time of Supply Reverse Charge of Services

We have to consider earlier of
• Date of Payment
• 31 Days of Invoice
• Date of Receipt

We have to consider earlier of
• Date of Payment
• 61 Days of Invoice

 

Whether Input can be used to Pay Reverse Charge Liability

No we have to deposit GST Reverse charge Liability from cash Ledger

We cannot reduce it from Input Tax Credit available to us

 

Example

Output GST on Sales 100

Output GST on Reverse Charge 30

Total Output 130

Input GST 110

 

In this case,

We have to Pay GST on Reverse Charge of 30

We can adjust input of 100 against our Output

Remaining 10 we can carry forward

Summary

Expense Bill.jpg

 

Download in PDF

Reverse Charge.pdf 

 

Registration Threshold Limit under Reverse Charge in GST

There is Compulsory Registration in GST In case of Reverse Charge

Buyer cannot say that his Invoice amount is less, so need to pay GST

In this case, he has to compulsorily get himself registered in GST and pay tax

Comparison of Normal Charge and Reverse Charge

 

NORMAL CHARGE

REVERSE CHARGE

Registration Limit

If Aggregate Turnover is greater than  40 lacs (for goods)  and 20 lacs(for services), then Compulsory Registration

(Limit is  20 lacs(for goods)  and 10 lacs (for services) for North Eastern States)

 

Aggregate turnover includes all types of Sales

like

  1. Taxable Sales
  2. Exempt Sales
  3. Export Sales
  4. Interstate Sales
  5. Sales by Agent of Principal

(Amount of taxes not to be included)

 

However Compulsory Registration Required for MAKING

  1. Interstate Sales
  2. Supplying goods on behalf of Other Persons
  3. Casual Taxable Person
  4. Non-resident taxable persons
  5. If liable to deduct TDS in GST
  6. If liable to deduct TCS in GST
  7. Input Service Distributor
  8. 8.Making Sale on Behalf of other person (Franchise/Agent)
  9. Reverse Charge
  10. E-Commerce Companies
  11. Online Database Service Provider from Outside India into India
  12. Others as may be Notified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reverse Charge

There is Compulsory Registration

No Limit of  40 lacs  /20 lacs here

 

 

 

 

 
Go Ad-free
CA Maninder Singh's photo - Co-founder, Teachoo

Made by

CA Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 14 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.