Understanding Reverse Charge Mechanism (RCM) Services Under GST in India
The Reverse Charge Mechanism (RCM) in GST shifts tax liability from the supplier to the recipient for specific goods and services. This article elucidates the RCM concept, its legal basis under GST Acts, and provides a comprehensive list of services where RCM applies, including those from Goods Transport Agencies, legal professionals, and e-commerce operators. Understanding these provisions is crucial for businesses to ensure compliance, particularly when dealing with unregistered vendors or designated service categories under Indian GST law.
Businesses interacting with unregistered suppliers should be aware of the Reverse Charge Mechanism (RCM) under GST, as it may require them to remit taxes on behalf of these suppliers. This article provides a detailed overview of various services subject to RCM, facilitating smoother operations within both registered and unorganized supply chains.
Understanding the Reverse Charge Mechanism (RCM) under GST
The Reverse Charge Mechanism (RCM) mandates that the recipient of certain notified services or goods, rather than the supplier, is responsible for paying GST to the government. This reversal of tax liability typically occurs with specific services designated by the CBIC or when engaging with unregistered suppliers. Under RCM, the buyer is required to self-invoice for the procured items or services.
The legal framework for RCM is outlined in:
- Sections 9(3), 9(4), and 9(5) of the Central GST and State GST Acts for transactions within a state.
- Sections 5(3), 5(4), and 5(5) of the Integrated GST Act for interstate transactions.
The primary goal of RCM is to broaden the tax base and ensure compliance, particularly in unorganized sectors. It applies to specific scenarios, including imports, transactions with unregistered dealers, and the provision of certain identified goods and services.
Consider an example: if a shop owner hires a plumber, typically the plumber would charge GST. However, under RCM, the plumber does not add GST to the bill. Instead, the shop owner, as the recipient of the service, is obligated to calculate the GST and remit it directly to the government.
Services Subject to Reverse Charge Mechanism Under GST
Current GST regulations specify various services that fall under the Reverse Charge Mechanism:
Goods Transport Agency (GTA) Services
RCM applies when a Goods Transport Agency (GTA) provides road transportation of goods under specific conditions:
- The GTA charges 5% GST and does not claim Input Tax Credit (ITC).
- The GTA issues a tax invoice.
- The GTA has not opted for the forward charge mechanism (i.e., has not submitted a yearly declaration for forward charge).
The recipient is liable under RCM if they are one of the following:
- Factories (registered under the Factories Act, 1948)
- Societies (registered under the Societies Registration Act, 1860)
- Co-operative societies
- GST-registered persons
- Companies or body corporates
- Partnership firms (registered or unregistered)
- Casual taxable persons
If the GTA opts to charge 12% GST with ITC, RCM does not apply.
Legal Services by Advocates
Services rendered by an individual advocate, a senior advocate, or a law firm (including LLPs) to any business entity are subject to RCM. This encompasses all advisory, consultancy, and representation services provided in courts, tribunals, or other authorities.
- Supplier: Advocate or law firm
- Recipient (liable under RCM): Any business entity situated in a taxable territory
- GST Rate: 18%
Services by Arbitral Tribunals
- Supplier: Arbitral Tribunal
- Recipient: Any business entity
- GST Rate: 18% (under RCM)
Sponsorship Services
If any person provides sponsorship services to a body corporate or partnership firm, the recipient is required to pay GST under RCM.
Services Provided by Government or Local Authorities
When the Central/State Government, Union Territory, or a Local Authority provides services to a business entity, RCM is applicable.
Exclusions (RCM does NOT apply to these government services):
- Renting of immovable property (unless provided to a registered person)
- Postal services such as speed post, express parcel, life insurance, or agency services offered to non-government entities
- Services related to aircraft/vessels within or outside an airport/port
- Transportation of goods or passengers
Additional inclusions where RCM applies:
- Renting of immovable property to a registered person
- Renting of residential dwelling to a registered person
- Transfer of development rights or Floor Space Index (FSI), including additional FSI, for construction purposes by a promoter
- Long-term lease of land (30+ years) for construction by a promoter
Services by Company Directors
When a director of a company provides services to that company, the company is obligated to pay 18% GST under RCM.
Services by Insurance Agents
If an insurance agent provides services to an insurance company, the insurance company must pay 18% GST under RCM.
Services by Recovery Agents
Should a recovery agent provide services to a bank, financial institution, or Non-Banking Financial Company (NBFC), the recipient (bank, FI, or NBFC) is liable to pay 18% GST under RCM.
Copyright-Related Services
When creators such as authors, photographers, music composers, or artists transfer or permit the use of copyrights, the recipient must pay GST under RCM.
There are two main categories:
- To music company, producer, etc.: 12% GST.
- To publisher (literary works): RCM applies only if the author has not opted for forward charge by making a declaration.
Services by Members of the Overseeing Committee to RBI
Services provided by members of the Overseeing Committee, established by the RBI, to the Reserve Bank of India are exempt from GST. This means RBI is not required to pay GST under RCM, and committee members do not levy GST on their services.
Services by Individual DSAs
Services rendered by individual Direct Selling Agents (excluding companies or firms) to banks or NBFCs are subject to RCM.
Business Facilitator Services to Banks
Services provided by business facilitators to banks are taxable under RCM.
Business Correspondent Agent Services
If an agent of a business correspondent provides services to a Business Correspondent (BC), the BC is responsible for paying GST under RCM.
Security Services (Other than by a Company)
Security services provided by non-body corporates (e.g., individuals, partnership firms) to registered persons are covered under RCM.
Exceptions:
- Government departments/agencies registered solely for TDS under Section 51.
- Persons registered under the Composition Scheme.
If a non-body corporate rents a motor vehicle to a body corporate and opts for 5% GST (without ITC), then the recipient body corporate pays GST under RCM.
Lending of Securities (SEBI Scheme)
Under SEBI’s Securities Lending Scheme, if a person lends securities through an approved intermediary, the borrower is liable to pay GST under RCM.
Radio Taxi or Cab Services via E-Commerce Platforms
When a driver offers taxi services through an e-commerce operator (such as Uber or Ola), the e-commerce platform is the entity liable for GST under RCM.
Accommodation Services via E-Commerce Operators
Accommodation services (e.g., hotels, lodges, clubs, campsites) facilitated through e-commerce platforms are taxed under RCM, unless the service provider is already required to be registered under GST.
Housekeeping Services via E-Commerce Operators
Home services, including plumbing and carpentry, provided through e-commerce platforms are also taxed under RCM, unless the service provider is mandated to register for GST.
Additional IGST Services under RCM
These provisions apply when the supplier is located outside India:
- Any service by a person in a non-taxable territory (excluding services to a non-taxable online recipient). Recipients in India are required to pay IGST under RCM.
- Import of goods by vessel from a location outside India up to the point of customs clearance in India. Importers are liable to pay 5% IGST under RCM.