PRINCIPLE OF TAXATION 2

MODULE 1: REVERSE CHARGE MECHANISM

BY: SUSHIL JAIN

ASSISTANT PROFESSOR, KPMSOL, NMIMS MUMBAI
 INTRODUCTION
In some cases , GST is payable by the recipient of goods
and services or both. The collection mechanism
when recipient is made liable to pay tax is called reverse
charge mechanism (RCM).
As per section 2(98) of CGST act, “The reverse
charge means the liability to pay tax by the recipient of
supply goods /services/both instead of supplier of
goods/services/both under section 9(3) & 9(4) of the act or
under section 5(3) & 5(4) of IGST act.
 FEATURES OF RCM
1)EXPANDED SCOPE:
•In the GST law , the scope of reverse charge is expanded to include 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)COMPULSORY REGISTRATION:
• The person who are required to pay tax under reverse charge are required to
be registered, irrespective of the threshold limit specified in section 22(1).
4)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 rates.
5)NOT INCLUDED IN AGGREGATE TURNOVER
FCM V RCM
 WHEN RCM IS APPLIED
A. Supply from an Unregistered dealer to a Registered
dealer
⚫ If a vendor who is not registered under GST, supplies goods to a
person who is registered under GST, then Reverse Charge would
apply . This means that the GST will have to be paid directly by
the receiver to the Government instead of the supplier.
⚫ The registered dealer who has to pay GST under reverse charge has to
do self-invoicing for the purchases made.
⚫ For Inter-state purchases the buyer has to pay IGST. For Intra-state
purchased CGST and SGST has to be paid under RCM by the
purchaser.
 WHEN RCM IS APPLIED
B. Services through an e-commerce operator
⚫ If an e-commerce operator supplies services then reverse charge will
be applicable to the e-commerce operator. He will be liable to pay
GST.
⚫ For example, urbanClap provides services of plumbers, electricians,
teachers, beauticians etc. UrbanClap is liable to pay GST and collect
it from the customers instead of the registered service providers.
⚫ If the e-commerce operator does not have a physical presence in the
taxable territory, then a person representing such electronic
commerce operator for any purpose will be liable to pay tax. If there
is no representative, the operator will appoint a representative who
will be held liable to pay GST.
C. Supply of certain goods and services specified by CBEC
⚫ CBEC has issued a list of goods and a list of services on which
reverse charge is applicable.
 MODE OF PAYMENT UNDER RCM
⚫ As per section 49(4),the amount available in the electronic
credit ledger may be used for making payment towards output tax
under CGST/IGST.
⚫ Section 2(82) of CGST Act specifically excluded tx payable on
reverse charge basis in “Output tax”.
⚫ Therefore, when section 49(4) is read with section 2(82),it
becomes clear that the GST under reverse charge cannot be paid by
utilizing input tax credit i.e the electronic credit ledger cannot be
utilized for it.
⚫ Hence ,when gst is payable under reverse charge, it should be
paid by cash only. It means it will be paid through electronic cash
ledger only.
INWARD V PUTWARD SUPPLY UNDER RCM
S.NO BASIS OUTWARD INWARD
SUPPLY SUPPLY UNDER
UNDER RCM
RCM
1. Tax liability Supplier is not liable Recipient shall be liable
to pay tax on such to pay tax on such
outward supply. inward supply.
2. Related input tax The supplier is not After payment of GST,
entitled to avail ITC the recipient may avail
credit on such outward ITC if he is otherwise
supply. fulfilling all conditions
related to availment of
ITC.
3. Aggregate supply As per section Shall not be considered
2(6),such supply in part of aggregate
shall be considered turnover.
as a part of aggregate
turnover.
4. Flat rate taxation If supplier is If recipient is composite
composite supplier , supplier, he will be liable
scheme he shall not be liable to pay full gst on inward
to pay gst on such
outward supply. supply under reverse
charge.
 PROVISIONS OF RCM UNDER GST
⚫ Under CGST act ,2017 there are two provisions given under section
9(3) and 9(4) of the act relating to reverse charge. There are
two types of reverse charge:
⚫ REVERSE CHARGE UNDER NOTIFICATION {section 9(3)}
⚫ REVERSE CHARGE UNDER ACT {section 9(4)}
SECTION 9 (3) V. SECTION 9 (4)
 CLARIFICATION TO SECTION 9 (4)
⚫ As per section 9(4), “The GST in respect of supply of taxable goods and
services or both by a supplier , who is not registered a registered person shall
be paid by recipient on reverse charge basis.”
⚫ This provision applies to any kind of taxable goods and / or services supplied
by unregistered person & a registered person.
 CASE LAWS
Mohit Minerals Pvt. Ltd. v. Union of India (2022): The case dealt with
the constitutionality of RCM on ocean freight services.
Judgment: The Supreme Court held that imposing RCM on ocean
freight is unconstitutional as it amounts to double taxation.

Kandla Export Corporation v. Union of India (2020): Validity of RCM

on GTA services.
Judgment: The Gujarat High Court upheld the validity of RCM on
GTA services, emphasizing its necessity for compliance.

Caltech Polymers Pvt. Ltd. v. State of Kerala (2018): Taxability of

food supplied to employees under RCM.

Judgment: The court ruled that such supplies are taxable, clarifying
ambiguities in RCM applicability.
 SAMPLE QUESTION
ABC Ltd., a registered manufacturing company in Maharashtra,
hires the services of a Goods Transport Agency (GTA) to
transport raw materials from a supplier in Gujarat to its factory
in Mumbai. The GTA does not issue a consignment note for the
transport. Additionally, ABC Ltd. avails the legal services of
Advocate Mr. Sharma (an independent legal practitioner) to
represent them in a contractual dispute case. Separately, the
company procures raw cotton worth Rs. 5,00,000 from an
agriculturist in Punjab.
1. Identify the supplier and recipient in each transaction.
2. Determine who is liable to pay GST under the Reverse
Charge Mechanism (RCM) for each transaction.
3. Calculate the tax liability under RCM for each case and
discuss whether ABC Ltd. can claim Input Tax Credit (ITC).
SAMPLE QUESTION
 SAMPLE QUESTION
ABC Ltd. (a registered company in Delhi) hires a freelance
consultant, Mr. Kumar, for market research services. Mr.
Kumar is a non-registered individual providing consultancy
services. Additionally, ABC Ltd. procures goods worth
₹5,00,000 from a registered supplier, Fast Movers Ltd., but
the delivery is made through a transport service provider,
ABC Logistics, who is a Goods Transport Agency (GTA)
registered under GST.

1. Identify the supplier and recipient for each transaction.

2. Determine who is liable to pay tax under RCM for both
transactions.
3. Specify whether the recipient can claim Input Tax
Credit (ITC).
SOLUTION
 SAMPLE QUESTION
MNO Ltd. (a registered company in Bengaluru) is organizing an
event called "TechCon 2025." To promote the event, MNO Ltd.
enters into a sponsorship agreement with a popular brand,
ABC Electronics. ABC Electronics is also a registered entity
under GST. As part of the agreement, ABC Electronics will pay
₹20,00,000 to MNO Ltd. for branding and promotional rights at
the event. MNO Ltd. provides ABC Electronics with the space
for their branding, and the event will feature product displays
and marketing activities for the sponsor.

1. Identify the supplier and recipient for the sponsorship-

related transaction.
2. Determine who is liable to pay tax under the Reverse
Charge Mechanism (RCM) for this sponsorship transaction.
3. Specify whether the recipient can claim Input Tax Credit
(ITC) for the sponsorship-related services.
SAMPLE QUESTION