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March 5, 2025

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Exemption from Reverse Charge for GST Composition Scheme: Eligibility, Conditions & Compliance

Exemption from Reverse Charge to Persons Under GST Composition Scheme

The Goods and Services Tax (GST) introduced by the government on 1st of July 2017 defined in Article 366 (12A) of the Indian Constitution. The Goods and Services Tax (GST) regime offers a composition scheme formed to ease tax compliance for low slab taxpayers. The scheme lets eligible businesses pay tax at fixed rate, in their turnover. Allowing a reduction of tax and compliance burden. It's very important to understand the implications of Reverse Charge Mechanism (RCM) for businesses eligible under such a scheme.

Understanding Reverse Charge Mechanism (RCM)

What is Reverse Charge Mechanism?

Reverse Charge Mechanism under GST, where recipient of goods or services is liable to pay, Reverse Charge Mechanism (RCM) shifts such responsibility of paying tax from supplier to recipient. Under reverse charge recipients must pay tax to the government directly instead of the supplier. Reverse Charge Mechanism (RCM) is governed under section 9(3), 9(4) and 9(5) of Central GST and State GST, and also under sections 5(3), 5(4) and 5(5) of the Integrated GST Act.

Sections Governing Reverse Charge Mechanism

Section 9(3) covers a list of goods and services on which reverse charge mechanism (RCM) applies. Read as “the Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

Section 9(4) covers transfer of goods from an unregistered vendor to registered vendor. Read as “t the tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both. Accordingly, wherever a registered person procures supplies from an unregistered supplier, he needs to pay GST on reverse charge basis. However, supplies where the aggregate value of such supplies of goods or service or both received by a registered person from any or all the unregistered suppliers is less than five thousand rupees in a day are exempted.”

Section 9(5) covers services where e-commerce operators were used, such recipients of e-commerce service will be liable to pay GST. Read as “Electronic Commerce Operator (ECO) is required to pay tax on supply of services such as Passenger Transport Service, Accommodation services, Housekeeping Services & Restaurant Services, if such services are supplied through ECO”

Composition Scheme and RCM:

Exemption for Businesses Under Composition Scheme

Businesses eligible and registered under the GST composition Scheme are generally not required to pay tax under RCM. This exemption helps in reducing the tax liability for low slab taxpayers. There some conditions to the exemption

Eligibility for Exemption:

The exemption from RCM is applicable to all registered persons, even those under the Composition Scheme. This leaves composition dealers not liable to pay tax under RCM on inward supplies received from unregistered suppliers.

Conditions for Exemption:

This exemption is only applicable if the total value of such supplies from an unregistered person is not more than INR5000 a day. If such value is more than the threshold. The composition dealer is liable to pay tax on the entire value of supply under RCM received from an unregistered vendor.

Government Notifications:

The central government has issued notification to exempt intrastate supplies of goods and services received or purchased from any unregistered vendor or dealer. With a daily limit of INR 5000 a day, mentioned under section 11 (1) of CGST ACT, 2017, read as " Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.".

Other Compliances

Registered Dealer Requirements

A registered dealer or vendor who is liable to pay under Reverse charge mechanism (RCM) needs to register with no consideration of how much they earn. The threshold limit of INR 20 lakh and of INR 10 lakhs for special category states except J&K is not applicable to them.

Input Tax Credit (ITC) Regulations

A seller (unregistered vendor) cannot claim GST paid on goods or services where the buyer is liable to pay under Reverse Charge Mechanism.

Time of Supply Rules (When Tax is Due)

Times of supply of goods and services determine when such GST is paid. As buyers are liable to pay under Reverse Charge Mechanism (RCM) the timing rule is different from the supplies which are under forward charge.

For Goods must be paid earliest of:

1. When received

2. When payment made

3. 30 days after invoice

For Services must be paid earliest of:

1. When payment made

2. 60 days after invoice

If none applies, must be paid on the date the transaction is recorded in the buyer’s books.

Compliances for Reverse Charge Mechanism (RCM):

1. Every invoice must state if the tax is payable under RCM. Same rule applies to receipt vouchers and refund vouchers if RCM is applicable.

2. Maintenance proper record of all transactions of tax paid under RCM.

3. RCM is paid in cash and ITC can't be used to pay such tax. Buyer can claim ITC after payment of tax if eligible.

4. Records of all transactions under RCM to be maintained separately in Table 4B of GSTR-1.

5. On advance payment of goods and service by the buyer, RCM must be paid immediately.
Conclusion

The exemption for Reverse Charge Mechanism (RCM) for companies under the GST Composition Scheme is a significant relief in terms of compliance and outflows of taxes for low slab taxpayers.

By exempting composition dealers for payment of RCM for inward supplies received from unregistered dealers. Up to a value of INR 5000 per day. This government enables small companies to operate with ease free of undue financial burden. Companies must comply with utmost care with such terms and conditions, maintain books, and file statements under GST laws. Understanding of such provisions is significant for companies in terms of minimizing outflows of taxes and compliance with GST legislation.

FAQs

1. What is the purpose of the Reverse Charge Mechanism (RCM)?

RCM's purpose is to ensure tax compliance by shifting the tax burden from the supplier to the recipient, mainly in cases where tax evasion risks exist.

2. Are all businesses under the Composition Scheme exempt from RCM?

No, businesses under the Composition Scheme are exempt only if their inward supply from unregistered vendors does not exceed INR 5000 per day.

3. Does RCM apply to imported goods and services?

Yes, RCM applies to the import of goods and services under GST.

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