Under the Goods and Services Tax (GST) Reverse Charge Mechanism (RCM), the recipient (buyer) of goods or services is liable to pay tax directly to the government instead of the supplier. This applies to specified goods/services (Section 9(3)/5(3)) or supplies from unregistered persons to registered recipients (Section 9(4)/5(4)).
In reverse charge, recipient is liable to pay GST. Thus time of supply for supplies under reverse charge is different from the supplies which are under forward charge.
The time of supply is the point when the supply is liable to GST. One of the factor relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, the recipient is liable to pay GST.
RCM is applicable on notified goods/services, purchases from certain unregistered suppliers, and e‑commerce specified supplies.
The reverse charge rule is intended to level the playing field between local and foreign suppliers. It ensures GST is paid on business purchases of services from abroad, even if the seller isn't registered in Australia.
Rule 47A, effective 1 Nov 2024, introduced new self-invoicing and time-of-supply provisions for RCM. Recipients must now generate self-invoices within 30 days of receiving goods or services from unregistered suppliers to remain eligible for ITC.
In principle, applying the reverse charge is mandatory for B2B transactions when the supplier is not established in the Member State where VAT is due. At the same time, some Member States apply the reverse charge optionally for certain transactions or sectors, based on national rules under EU VAT law.
Exclusions (RCM does NOT apply to these government services): Renting of immovable property (except when to a registered person) Postal services like speed post, express parcel, life insurance, or agency services provided to non-government entities. Services related to aircraft/vessels within/outside airport/port.
The reverse charge is a method of self-accounting for VAT. Instead of the overseas supplier charging you VAT, you calculate and report the VAT as if you had received the service from a UK supplier. This applies to most services, including consultancy, software licences, legal services, and marketing support.
The recipient of the goods, services & supplies will issue self-made invoices for RCM transactions, irrespective of the supplier being an unregistered person. If the supply is liable to RCM, then the recipient will have to issue the invoices for himself & declare them in their GSTR-1 & GSTR-3B.
The Central Board of Indirect Taxes and Customs (CBIC) notifies certain goods and services where reverse charge is mandatory. In such cases, the recipient of goods or services pays GST instead of the supplier.
Common DRC exemptions are:
Cons of Reverse Charge VAT:
The 3 most common mistakes with reverse charge
When the reverse charge applies, the supplier issues an invoice without charging VAT but includes a mandatory reference indicating that the reverse charge applies. The customer then accounts for the VAT by declaring it on their VAT return as output tax (as if they had charged it themselves).
GST RCM Explained
RCM helps the government ensure it collects taxes from sectors or transactions that are hard to track otherwise —for example, when goods or services are bought from a supplier that isn't registered, or when services like legal or transportation services are requested.
As a general rule, businesses charge VAT on supplies and deduct VAT on purchases. The reverse charge mechanism is a deviation from this rule where the supplier does not charge VAT on the invoice and the customer pays and deducts VAT simultaneously through the VAT return.
The reverse charge applies to transactions that occur between VAT registered businesses in two different countries within the EU. In typical transactions within a country, it's the responsibility of the seller to record the VAT on their sales. The reverse charge transfers this responsibility to the buyer.
Only notified items under Section 9(3) & 9(4) like GTA freight, legal services from advocates, security services (if applicable) and certain imports would attract RCM. Rest of the listed expenses fall under FCM.
Office supplies, equipment, rental costs, and professional services are examples of expenses on which input tax can be claimed. Further, input tax cannot be claimed on the following expenses: private use, non-business entertainment, and motor vehicle expenses.
Example: Healthcare services, educational services, and public utility services (e.g., water supply) are exempt from GST. This exemption is unconditional, meaning the supply is fully exempt from GST without any terms or conditions attached.
The reverse charge works as follows:
The reverse charge mechanism does not apply to transactions within the United States, as the U.S. uses a sales tax system rather than value-added tax (VAT). However, U.S. businesses selling to VAT-registered companies in the EU may need to comply with reverse charge rules when invoicing their customers.
Input Tax Credit in Reverse Charge Mechanism
The only condition is that the goods and services are used or will be used for business or furtherance of business. Unfortunately, ITC cannot be used to pay output tax, which means that payment mode is only through cash under reverse charge.