Reverse Charge Mechanism (RCM)

Section 9(3): Notified Categories Under RCM

Services Under RCM — Notification 13/2017-CT(R)

Notification 13/2017-Central Tax (Rate) dated 28 June 2017, as amended, specifies the services on which the recipient must pay GST under reverse charge. The key categories:

Service	Supplier	Recipient (Liable to Pay RCM)	Rate
Services by a Goods Transport Agency (GTA)	GTA (who has not opted for forward charge)	Factory, society, registered person, body corporate, partnership firm, casual taxable person	5% (no ITC) or 12% (with ITC)
Legal services	Individual advocate or firm of advocates	Any business entity	18%
Services by an arbitral tribunal	Arbitral tribunal	Any business entity	18%
Sponsorship services	Any person	Body corporate or partnership firm	18%
Services by a director	Director of a company (in personal capacity)	The company	18%
Insurance agent services	Insurance agent	Insurance company	18%
Recovery agent services	Recovery agent	Banking company or financial institution or NBFC	18%
Services by Central/State Government	Central/State Government or local authority	Any business entity	18%
Renting of residential dwelling (for business)	Any person	Any registered person	18%
Services by author/music composer/photographer to publisher	Author, music composer, photographer, artist	Publisher, music company, producer	18%
Security services (manpower)	Any person other than a body corporate	Registered person in the course of business	18%

Goods Under RCM — Notification 4/2017-CT(R)

Fewer categories of goods are under RCM compared to services. The key categories:

• Cashew nuts (not shelled or peeled): Supplied by an agriculturist to a registered person
• Bidi wrapper leaves (tendu): Supplied by an agriculturist to a registered person
• Tobacco leaves: Supplied by an agriculturist to a registered person
• Silk yarn: Supplied by any person to a registered person
• Raw cotton: Supplied by an agriculturist to a registered person
• Used vehicles, seized/confiscated goods, old/used goods: Supplied by Central/State Government to a registered person
• Metal scrap: Supplied by an unregistered person to a registered person (effective from October 2024)

Section 9(4): Supplies from Unregistered Persons

The history of Section 9(4) is marked by multiple amendments and suspensions:

1. Original provision (01-07-2017): Every registered person receiving taxable supply from an unregistered person had to pay RCM — this was unworkable and created massive compliance burden
2. Suspension (13-10-2017 to 30-09-2019): The provision was effectively suspended through exemption notifications, except for specific categories
3. Amendment (01-10-2019 onwards): Section 9(4) was amended to apply only to specified classes of registered persons as notified by the Government
4. Current scope: Section 9(4) RCM applies primarily to promoters of real estate projects (RREP/REP) receiving cement from unregistered suppliers and capital goods from unregistered suppliers beyond specified thresholds

Time of Supply Under RCM

The time of supply rules for RCM differ from the normal forward charge rules. These are prescribed in Sections 12(3) and 13(3) of the CGST Act.

Time of Supply for Goods Under RCM — Section 12(3)

The time of supply is the earliest of:

• Date of receipt of goods
• Date on which payment is entered in the books of the recipient
• Date of payment debited in the bank account of the recipient
• 30 days from the date of issue of invoice by the supplier

If the time of supply cannot be determined under these rules, it is the date of entry in the books of account of the recipient.

Time of Supply for Services Under RCM — Section 13(3)

The time of supply is the earliest of:

• Date of payment as entered in the books of the recipient
• Date of payment debited in the bank account of the recipient
• 60 days from the date of issue of invoice by the supplier

If the time of supply cannot be determined, it is the date of entry in the books of the recipient.

Practical Implication: The 30/60-Day Rule

Even if payment has not been made, the RCM liability arises on the 31st day (for goods) or the 61st day (for services) from the date of the supplier’s invoice. This is a common compliance trap — businesses assume RCM is triggered only on payment. The time-of-supply rule creates an automatic trigger even if payment is pending.

Compliance Mechanics: How to Discharge RCM

Step 1: Identify RCM Transactions

Maintain a register of all transactions that attract RCM. For each transaction, record:

• Supplier details (name, GSTIN if registered, address)
• Nature of supply (which Notification entry applies)
• Invoice details (number, date, value)
• Applicable GST rate
• Time of supply determination

Step 2: Issue Self-Invoice (for Unregistered Suppliers)

Where the supply is from an unregistered person, the recipient must issue a self-invoice under Section 31(3)(f) within 30 days of the supply. The self-invoice must contain:

• Supplier’s name and address
• Recipient’s GSTIN
• Description and value of supply
• GST amount under RCM
• A statement that tax is payable on reverse charge

Step 3: Pay RCM Through Cash Ledger

RCM liability must be paid through the electronic cash ledger. ITC in the electronic credit ledger cannot be used to discharge RCM liability. This is a critical distinction from forward charge payments. The payment is made through Table 3.1(d) of GSTR-3B.

Step 4: Claim ITC on RCM Paid

The GST paid under RCM is eligible for ITC under Section 16, subject to normal conditions. The ITC is claimed in Table 4(A)(3) of GSTR-3B. Key conditions:

• The supply must be used for furtherance of business
• The recipient must possess the tax invoice (supplier’s invoice or self-invoice)
• The tax must have been actually paid to the Government
• The GSTR-3B must be filed
• If the recipient is engaged in both exempt and taxable supplies, proportionate ITC reversal under Rule 42/43 applies

Step 5: GSTR-3B Reporting

GSTR-3B Table	What to Report
Table 3.1(d)	Inward supplies liable to reverse charge — report taxable value, IGST, CGST, SGST
Table 4(A)(3)	ITC on inward supplies from registered persons under RCM
Table 4(A)(4) (if applicable)	ITC on inward supplies from unregistered persons (import of services)

Import of Services: A Special RCM Category

Import of services is subject to RCM under Section 5(3) of the IGST Act (corresponding to Section 9(3) of CGST). When a registered person receives services from a supplier outside India, the recipient must pay IGST under reverse charge.

When Does Import of Services Attract RCM?

All three conditions must be met:

1. The supplier is located outside India
2. The recipient is located in India
3. The place of supply is in India (under Section 13 of the IGST Act)

The recipient must pay IGST on the value of imported services. The time of supply is the earliest of the date of payment or 60 days from the invoice date. The ITC on IGST paid is available in the same month.

Valuation for Import of Services

The value of imported services for RCM purposes is the value declared in the invoice. If the service is from a related party or associated enterprise and the recipient is entitled to full ITC, the value declared in the invoice is accepted. However, if the service is free of charge (e.g., from a group company), the value under Rule 28 (open market value or comparable value) must be used.

RCM on Director’s Services: A Detailed Analysis

Notification 13/2017, Entry 6 specifies that services supplied by a director of a company or a body corporate to the said company or body corporate are subject to RCM. The company must pay GST at 18% on the value of services.

What Qualifies as “Services by a Director”?

• Sitting fees: Paid for attending board meetings — this is a service, not salary. RCM applies
• Commission: Percentage of profits paid to directors — if paid for services in personal capacity, RCM applies
• Professional fees: If a director (who is also a CA or advocate) provides professional services to the company in personal capacity, RCM applies
• Salary to whole-time/executive directors: If the director is an employee (covered under Schedule III, Entry 1 — services by employee to employer), it is not a “supply” under GST. No RCM applies

The Employee vs Independent Director Distinction

The critical test: is the director rendering services in the capacity of an employee or in personal capacity?

• Whole-time director/managing director: Typically in employer-employee relationship. Salary and perquisites are covered under Schedule III. No GST/RCM
• Independent director/non-executive director: Not an employee. Sitting fees, commission, and other payments are consideration for services. RCM applies at 18%
• Nominee director: If nominated by a shareholder and paid by the shareholder, the service is from the shareholder to the company. If paid directly by the company, RCM applies

Common RCM Disputes and Defence

Dispute 1: Classification of Director’s Payment

The department issues a demand treating the entire remuneration paid to a managing director as subject to RCM. The defence: if the managing director is in a full-time employment relationship, the payment is salary under Schedule III and is outside the scope of GST. Evidence includes the appointment letter, employment terms, PF/ESI deductions, TDS under Section 192 (salary), and full-time engagement.

Dispute 2: GTA — Forward Charge vs Reverse Charge

With effect from 18 July 2022, GTAs have the option to opt for forward charge at 12% (with ITC) by filing a declaration. If the GTA has opted for forward charge, the recipient does not have RCM liability. The dispute arises when the GTA’s option is not communicated clearly. The recipient must verify the GTA’s exercise of option before filing returns.

Dispute 3: Legal Services — In-House Counsel

An in-house counsel (employed full-time by the company) provides legal services. This is an employer-employee relationship under Schedule III — no GST, no RCM. However, an external advocate retained by the company (even if working exclusively for the company) is not an employee — legal services from such an advocate attract RCM at 18%.

Dispute 4: Government Services — What is Taxable?

Not all services from the Government attract RCM. Services by way of grant of liquor licence, spectrum allocation, mining rights, and similar statutory functions are specifically covered. However, services by Government in the nature of regulatory functions (approvals, clearances, permissions) may be exempt under Notification 12/2017. The distinction between a sovereign/regulatory function (exempt) and a business activity (taxable under RCM) must be analysed for each transaction.

Frequently Asked Questions

What is Reverse Charge Mechanism (RCM) under GST?

RCM reverses the normal GST collection responsibility — the recipient pays tax instead of the supplier. It applies in two situations: Section 9(3) covers Government-notified categories of goods and services (Notification 13/2017 for services, Notification 4/2017 for goods); Section 9(4) covers specified registered persons receiving supplies from unregistered persons. The recipient must pay RCM through the electronic cash ledger and can claim ITC on the tax paid.

Which services are covered under RCM as per Notification 13/2017?

Key services: GTA services to specified recipients (factories, body corporates, registered persons); legal services from individual advocates or law firms; arbitral tribunal services; sponsorship services; director services to the company; insurance agent services; recovery agent services; Government/local authority services to business entities; renting of residential dwelling for business use; security services from non-body corporates; and services by an author, music composer, or photographer to a publisher/producer.

Can ITC be claimed on GST paid under reverse charge?

Yes. GST paid under RCM is eligible for ITC under Section 16, subject to standard conditions — use for furtherance of business, possession of tax invoice or self-invoice, tax actually paid, and GSTR-3B filed. The ITC can be claimed in the same month’s return in which the RCM liability is discharged. If the recipient is engaged in both exempt and taxable supplies, proportionate ITC reversal under Rule 42/43 applies.

Is RCM applicable on rent paid to an unregistered landlord?

Yes. Renting of residential dwelling by a registered person for use in business attracts RCM at 18%. The registered tenant must issue a self-invoice, pay CGST+SGST (or IGST if inter-state) under reverse charge, and can claim ITC. This provision was introduced effective 18 July 2022 and applies regardless of whether the landlord is registered or unregistered.

What is the time of supply under reverse charge for services?

Under Section 13(3), the time of supply for services under RCM is the earliest of: date of payment (as entered in books or debited in bank), or 60 days from the supplier’s invoice date. If neither can be determined, the date of entry in the recipient’s books applies. This means the RCM liability arises on the 61st day from the invoice even if payment has not been made — a common compliance trap.

Do I need separate registration for RCM payments?

No. RCM payments are made through the existing GST registration. However, if you receive supplies attracting RCM in a state where you are not registered and do not have any other taxable supply, you must obtain registration in that state under Section 24(iii) — compulsory registration for persons required to pay tax under reverse charge. There is no threshold exemption for RCM liability. Contact Virtual Auditor for registration and compliance setup.

Can RCM liability be paid using Input Tax Credit?

No. Section 49(4) read with Rule 86(2) mandates that RCM liability must be discharged through the electronic cash ledger only. ITC available in the electronic credit ledger cannot be utilised for payment of RCM. The rationale: RCM is designed to ensure tax collection from the organised sector on behalf of the unorganised sector — allowing ITC set-off would defeat this purpose. After paying RCM through cash, the ITC on the RCM paid is credited to the electronic credit ledger and can be used for forward charge liabilities.

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