What is Reverse Charge Mechanism under GST For Import of Services? 

For entrepreneurs in India, navigating the complex taxation landscape can prove to be challenging. As one of the leading chartered accountant firms in Gurgaon, we provide professional guidance through processes such as FEMA Compliance to help entrepreneurs navigate every challenge in taxation laws with ease. 

In the next section of the blog, we will discuss RCM under GST, who pays tax under RCM, and its implications for businesses. As the top tax consultant in Gurgaon, we will shed light on why knowing who pays tax under reverse charge is important. Let's get started:

What is Reverse Charge Mechanism?

The Reverse Charge Mechanism (RCM) is a method of goods and services tax (GST) where the recipient of goods or services is liable to pay GST instead of the supplier. Usually, the supplier is liable to collect and remit taxes to the government. This is applicable in specific situations where the services are imported from a supplier based outside of India, in unorganized sectors, or to exempt a particular class of suppliers.

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What is Import of Services under Reverse Charge Mechanism?

When a recipient receives a supply of services from a supplier residing outside of India, it is known as RCM for import of services in GST. In such a case, the place of supply would be in India because the recipient is residing in India. The import of services will be subject to RCM under IGST, where the recipient will be required to pay tax on reverse charge basis.

The Importance of RCM Applicability for Import of Services

To ensure fair taxation of GST on reverse charge basis, the government specifies the liability under RCM for the import of services. This also helps the government to keep track and regulate international transactions, and to make sure that there is no unfair advantage of foreign services when compared with local services. 

When is Reverse Charge Applicable under GST?

Under Section 9(3), Section 9(4), and Section 9(5) of CGST Act and SGST Act, RCM is applicable for intrastate transactions. Also, GST tax is paid under RCM for Section 5(3), Section 5(4), and Section 5(5) of IGST Act for interstate transactions. Usually, the reverse charge basis applies when:

• Tax is payable under RCM for CBIC's specified list of goods and services.
• You need to pay GST under reverse charge mechanism for the supply of services through e-commerce operators. This includes transportation services, accommodation services, and housekeeping services. The e-commerce operators need to collect the RCM, instead of registered service providers(E.g, if there's an electrician working under the e-commerce operator).
• Supply from unregistered suppliers or registered dealers. It must be noted that the government has notified the real estate sector that the reverse charge is applicable to only 80% of inward supplies from registered sellers. 

Time of Supply Under RCM

The time of supply for goods and services under Reverse Charge Mechanism is a crucial concept for determining when the buyer has to pay GST. According to GST law, the time of supply under RCM is determined by:

For Goods:

• The date of receipt of goods
• The date of payment (not applicable, as mentioned in Notification No.66/2017 - Central Tax)
• 30 days after issuing an invoice by the supplier

For Services:

• The date of payment
• 60 days after issuing an invoice by the supplier

This is critical to maintain compliance during the supply of goods or services and to maintain accuracy when reporting tax returns in accordance with the GST Act.

How To Determine Reverse Charges Under GST For Import of Services?

The RCM tax under GST for import of services is determined in the following ways:

• Location of supplier: The supplier must reside outside of India.
• Location of recipient: The recipient must reside in India.
• Place of supply: The place of supply must be in India.

Registration Rules Under Reverse Charge Mechanism Under GST

Section 24 of the CGST Act, 2017, mentions that businesses that are required to pay GST under RCM for imported services must be registered under GST. If a business is not already registered, it must register for GST registration in Gurgaon in order to comply with regulations stated by the GST council.

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Who Needs To Pay GST Under RCM?

Under the Reverse Charge Mechanism, the recipient of the service (the importer) is responsible for paying the GST. The business supplying the goods needs to mention the RCM applicable to the consumer in their invoice. It is advisable to use a GST calculator for such purposes. For businesses, this means they must ensure that the tax is paid by the consumer and that compliance is maintained to avoid any penalties during the transaction.

These are some important points when paying GST under RCM:

• Receipents of goods or services can claim ITC under RCM if they use the goods or services for their business operations.
• Composition dealers cannot claim ITC under RCM and must pay normal GST rates.
• GST compensation cess may be applicable if you pay GST on reserve charge basis.

Therefore, for the import of services, the GST amount payable for the import of services will be applicable to the recipient. 

Input Tax Credit (ITC) Under RCM For Import of Services

Receipents can claim Input Tax Credit (ITC) on the tax paid under reverse charge mechanism. The recipient of the service can claim ITC for the GST paid on the imported services, provided you pay the tax as stated IGST. 

Read More: Understanding Place of Supply Rules Under GST for Goods & Service

Conclusion

The Reverse Charge Mechanism ensures that imported services are fairly taxed under GST law and helps the government track and regulate international transactions. Businesses must understand and comply with the regulations to ensure compliance and avoid penalties.