Case Study: Reverse Charge Mechanism (RCM) under GST
Introduction to Reverse Charge Mechanism (RCM)
Under GST, generally, the supplier of goods or services is liable to pay tax. However, under Reverse Charge
Mechanism, the recipient of goods or services is liable to pay the tax instead of the supplier.
Legal Basis:
- Section 9(3) of CGST Act, 2017 - Notified categories of goods/services.
- Section 9(4) of CGST Act, 2017 - Supply by an unregistered person to a registered person.
- Section 5(3) & 5(4) of IGST Act - Corresponding provisions for inter-state supplies.
Types of RCM under GST
1. RCM under Section 9(3): On notified goods/services based on government notification.
2. RCM under Section 9(4): Supply from unregistered to registered person (restricted cases).
3. Voluntary RCM: Chosen by registered person for compliance.
Compliance Under RCM
Time of Supply: Earlier of payment date or 60 days from invoice (for services).
Registration: Mandatory for person liable under RCM.
Payment: Must be paid in cash, not via ITC.
ITC: Can be claimed if used for business purposes.
Common Goods/Services under RCM
Examples include:
- Legal services
- GTA services
- Services by director
- Sponsorship
- Import of services
- Renting motor vehicle (conditional)
- Security services
Case Study: Legal Services
ABC Ltd. hires a law firm for legal services. Under Notification No. 13/2017, legal services are covered under RCM. ABC
Ltd. pays GST @18% under RCM and claims ITC.
Case Study: Import of Services
A company in India subscribes to Google Ads. Since Google is a foreign service provider, IGST is payable under RCM
and can be claimed as ITC.
Case Study: Director Services
A director receives Rs.1,00,000 sitting fees from a private company. The company must discharge GST @18% under
RCM as per Notification 13/2017.
Case Study: Real Estate Sector - Unregistered Supplier
A promoter purchases materials like cement from an unregistered supplier. As per Notification 07/2019, the promoter
Case Study: Reverse Charge Mechanism (RCM) under GST
must pay GST under RCM.
Case Study: Goods Transport Agency (GTA)
XYZ Ltd. hires a GTA who opts for 5% GST without ITC. XYZ Ltd. must pay tax under RCM and can claim ITC.
Case Study: Renting of Motor Vehicle
A company hires a vehicle from a non-body corporate. If supplier doesn't claim ITC and charges 5%, the company pays
GST under RCM.
Case Study: Sponsorship Services
Bright Ltd. sponsors a cricket event by a firm. Sponsorship services to a firm are taxable under RCM. Bright Ltd. pays
tax under RCM.
Conclusion
RCM shifts tax liability to the recipient, helping to cover the unorganized sector and imports. Proper compliance and
awareness are key to avoid penalties. RCM also ensures seamless input tax credit mechanism.
