Any person located in non-taxable territory
Any person located in taxable territory other than non-taxable online recipient.
At first glance, the RCM provision on services received from abroad seems straightforward. It states that whenever a service is received by a person located in India from a supplier located outside India, GST shall be paid by the recipient under reverse charge. This entry is notified under Entry No. 1 of Notification No. 10/2017-Integrated Tax (Rate) and is issued under Section 5(3) of the IGST Act, 2017.
To understand this provision better, let us first look at what the law defines as "taxable territory". As per Section 1 of all the GST Acts, the law extends to the whole of India. Hence, entire India is considered a taxable territory, and any supply made to a person in India from outside India falls within this RCM framework.
This entry effectively covers all import of services, whether the service is provided physically (e.g., a foreign consultant visits India) or digitally (e.g., cloud hosting, software download, or subscription). Among these, services delivered through the internet in an automated manner are referred to as OIDAR services
- i.e., Online Information and Database Access or Retrieval Services.
Now, to fully understand this RCM entry, we must answer two important questions,
As per Section 2(16) of the IGST Act, a non-taxable online recipient is :-
Any Government, local authority, governmental authority, individual, or any unregistered person, located in India, who receives OIDAR services for non-business purposes (i.e., not for commerce, industry, profession, or trade).
In simple terms, this includes :-
Unregistered individuals using foreign online services for personal use.
Government departments using such services for public administration.
Municipalities accessing foreign data for civic functions.
This question is answered by Section 14 of the IGST Act. Where the following three conditions are fulfilled:
- The service is an OIDAR service,
- The supplier is located outside India, and
- The recipient is a non-taxable online recipient,
then, the foreign supplier must register in India and pay IGST under forward charge.
This is a special mechanism to ensure tax collection on cross-border B2C digital services, where reverse charge cannot apply as the recipient is unregistered.
As per Section 2(17) of the IGST Act,
"online information and database access or retrieval services" means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as,--
- advertising on the internet;
- providing cloud services;
- provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet;
- providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;
- online supplies of digital content (movies, television shows, music and the like);
- digital data storage; and
- online gaming
Business import of service - RCM applies
ABC Pvt. Ltd., based in India, subscribes to a cloud-based project management tool from a foreign company. This is import of service, and ABC Pvt. Ltd. must pay IGST under RCM, and may claim input tax credit if eligible.
Non-business OIDAR service - Forward charge applies
Mr. Ramesh, an unregistered individual, subscribes to a foreign music streaming service for personal use. Since Mr. Ramesh is a non-taxable online recipient, the foreign supplier must register in India and pay GST under Section 14 of the IGST Act.
Government department using foreign e-library - Forward charge applies
A municipal corporation accesses a paid international urban planning database. Being a non-taxable online recipient, the foreign supplier must discharge GST liability in India.
Any service (including OIDAR)
Registered business in India
Unregistered, non-business person
(Non-taxable online recipient)
Forward Charge (Section 14)
Government dept. for non-business use
Forward Charge (Section 14)
Inclusion of Parliament and State Legislatures as Government
An Explanation was inserted in Notification No. 13/2017-CTR via Notification No. 29/2018-CTR dated 31st December 2018, clarifying that the reference to "Central Government" and "State Government" in the notification shall also include the Parliament and the State Legislatures.
Further Inclusion of Courts and Tribunals
Further, Notification No. 02/2023-CTR dated 28th February 2023 extended this interpretation by clarifying that the terms "Central Government" and "State Government" wherever referred to in the notification shall also be construed to include not just Parliament and State Legislatures but also Courts and Tribunals.
Originally, Section 9(4) of the CGST Act, 2017 provided for blanket reverse charge for supplies received by a registered person from an unregistered person. However, this section got amended by Section 4 of the CGST (Amendment) Act, 2018. Prior to this amendment section 9(4) was as under-
The central 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.
This blanket reverse charge created a huge trouble for the trade and industry. Considering the problems faced by the trade and industry, exemptions and extensions were provided from time to time. Finally through GST (amendment) Act, 2018 this section got substituted. To understand the history of this section and its effect let us refer table given below.
8/2017-CTR
dated 28th June, 2017
If the aggregate value of supplies of goods or service or both received by a registered person from
any or all the suppliers, who is or are not registered, exceeds five thousand rupees in a day only then
RCM under section 9(4)
be payable
38/2017-CTR
dated
13th October, 2017
Operation of Section 9(4) deferred till 31st March, 2018.
Hence even if the aggregate value of supplies from unregistered persons exceed Rs 5000 in a day, RCM shall not be payable.
10/2018-CTR
dated
23rd March 2018
Operation of section 9(4) further deferred till
30th June 2018
12/2018-CTR
dated 29th June 2018
Operation of section 9(4) further deferred till
30th September 2018
22/2018-CTR
dated
6th August 2018
Operation of section 9(4) further deferred till
30th September 2019
02/2019-CT
dated
29th January 2019
New Section 9(4) got notified.
As readers can note from the above table, Government kept deferring the operation of section 9(4) and then finally the full section got substituted vide GST (Amendment) Act, 2018. The substituted section is as under-
The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of 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 such supply of goods or services or both.
Hence, with effect from 1st February 2019 the RCM under section 9(4) is not applied in blanket manner but is applied only for notified supplies and that too only to specified class of registered persons. The supplies and the recipients notified under this section are as under.
services or both [other than
services by way of grant of
development rights, long term
lease of land (against upfront
premium, salami, development
charges etc.) or FSI (including
additional FSI)]which constitute
minimum value of goods or
services or both required to
promoter for construction of
project, in a financial year
(or part of the financial
earlier) as prescribed in
notification No. 11/ 2017-
Central Tax (Rate), dated
28th June, 2017, at items
(i), (ia), (ib), (ic) and
(id)against serial number 3 in
Gazette ofIndia vide G.S.R.
No. 690, dated 28th June,
Cement falling in chapter
heading 2523 in the first
Tariff Act, 1975 (51 of 1975).
constitute the shortfall from
the minimum value of goods or
services or both required to be
for construction of project,
in a financial year (or part
of the financial year till the
completion certificate or first
earlier) as prescribed in
notification No. 11/ 2017-
Central Tax (Rate), dated 28th
June 2017, at items (i), (ia),
(ib), (ic) and(id) against serial
number3in the Table, published
28th June 2017, as amended
Capital goods falling under
promoter for construction of a
project on which tax is payable
or paid at the rate prescribed
for items (i), (ia), (ib), (ic) and
(id)against serial number 3 in
the Table, in notification No.
11/ 2017-Central Tax (Rate),
published in Gazette ofIndia
dated 28th June, 2017, as
Following explanations are also given in the notification no 7/2019-CTR
the term "promoter" shall have the same meaning as assigned to it in in clause (zk) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
("project" shall mean a Real Estate Project (REP)or a Residential Real Estate Project (RREP);
the term "Real Estate Project (REP)" shall have the same meaning as assigned to it in in clause (zn) of section 2 of theReal Estate (Regulation and Development) Act, 2016(16 of 2016);
"Residential Real Estate Project (RREP)" shall mean a REP in which the carpet area of the commercial apartments is not more than 15 per cent. of the total carpet area of all the apartments in the REP.
the term "floor space index (FSI)" shall mean the ratio of a building's total floor area (gross floor area) to the size of the piece of land upon which it is built
Readers can note that the supplies mentioned in the above notification are related to real estate sector. Hence, to understand these entries we need to have a brief idea about the change in the scheme of GST on real estate sector. This change is made with effect from 1st April 2019. As per the amended scheme, As far as the commercial projects are concerned, there is no change in GST mechanism however, there is a change for residential projects (this includes projects in which not more than 15% carpet area is occupied by commercial apartments). For residential projects commencing on or after 1/4/2019, there is no option to pay GST at 8% or 12%. They compulsorily need to pay GST at 1% and 5% as mentioned earlier and cannot take ITC.
Let us now take a brief overview of the GST on real estate sector so that the three RCM entires mentioned in the notification 07/2019-CTR can be understood properly. Readers can note that we shall have a fully dedicated chapter on taxation on real estate sector. Here our discussion is limited for the purpose of understanding the three RCM entires.
GST rates for residential apartments shall be 1% in case of affordable residential apartments. Affordable Residential Apartment means apartment having carpet area not exceeding 60 square meter in metropolitan cities or 90 square meter in cities or towns other than metropolitan cities and for which the gross amount charged is not more than Rs 45 lakhs. Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR) with their geographical limits prescribed by Government.
GST rates for residential apartments other than affordable residential apartments as mentioned above shall be 5%.
There are certain schemes where along with residential portion, there is some portion for commercial activities. For example, some shops are also being constructed in front portion of a residential building. Here if the carpet area occupied by the commercial construction does not exceed 15% of total carpet area of the project then the project shall be considered as residential complex only.
Above rates of 1% and 5% shall be applicable when consideration includes value of land also.
For making payment of the 1% or 5% GST, ITC cannot be used. The GST has to be paid through electronic cash ledger.
It is provided that the promoter must purchase cement from registered person only. If he purchases cement from unregistered person then promoter is required to pay GST under RCM under section 9(4) at 28%. (presently cement is taxable at 28%)
There is also a condition regarding procurement of other inputs and input services from registered persons. It has been provided that a promoter shall purchase at least 80% of value of inputs and input services from registered persons. For calculating this threshold, the value of services by way of grant of development rights, long term lease of land, floor space index, or
the value of electricity, high speed diesel, motor spirit and natural gas used in construction of residential apartments in a project shall be excluded. RCM paid on cement under 6 above shall be considered as fulfilment of condition of procurement from registered person. After this computation if there is a shortfall in fulfilment of this 80% threshold then the promoter needs to pay GST at 18% on the amount of shortfall.
Let us understand this with the help of following example. Mr A, who is a builder, has procured total inputs and input services worth Rs. 10,10,800/- during the month of June 2020. Out of this amount Rs. 10,800/- is procurement of high-speed diesel. He has purchased cement of Rs. 300,000/- out of which Rs. 200,000/- is from unregistered persons. Out of balance 700,000/- (10,10,800-10800-300,000) procurement of Rs. 400,000/- is from unregistered person. Let us compute how much Mr. A need to pay under RCM.
First Mr. A needs to pay GST at 28% on cement purchased from unregistered persons. Hence, he needs to pay Rs. 2,00,000/- * 28% = Rs. 56,000/- GST needs to be paid under RCM.
B. Less : High Speed Diesel
C=A-B. Net Amount as total procurement including cement
E. Procured from registered persons
300,000/- (700,000-400,000)
18% GST on shortfall (18% of G)
Hence, Mr A is require to pay GST under RCM of Rs. 56,000/- on cement plus Rs. 36,000/- on shortfall totalling to Rs. 92,000/-.
There are lot of procurements by promoter / builder from persons covered under composition scheme. There is also a composition scheme for service providers who pays tax at 6%. If promoter procures input/input services from a person covered under composition, then it shall be considered as procurement from registered persons.
There is also a provision whereby promoter is require to pay GST under RCM on capital goods acquired from unregistered persons irrespective of fulfilment of the threshold of 80% mentioned above. Hence, we can say that promoter must pay GST under RCM on cement and capital goods purchased from unregistered persons irrespective of the fulfilment of criteria of 80%.
There can also be inward supplies of exempted goods and services. These exempted goods or services shall also be considered as supplies received from unregistered persons for computation of the threshold of 80%.
Developer is required to maintain project wise accounts. Further, he needs to show ITC reversed and ITC not availed in respective place in GSTR 3B.
Developer may be receiving works contract services for construction of the project. Normally such works contract service is chargeable at 18% GST rate. However, in case total carpet area of the apartments qualified as affordable residential apartments is not less than 50% of total carpet area of the project then the input service of works contract shall be chargeable at 12% instead of 18%. Contractor will obtain declaration from the developer that the condition of affordable residential apartments being not less than 50% of total carpet area of the project is fulfilled. On receipt of the declaration, contractor will charge only 12% GST. Here, it is important to note that contractor's duty is limited to obtaining declaration from the developer. He is not expected to verify actual fulfilment of the condition. It is the developer who is duty bound to verify fulfilment of the criteria of 50%. If at the time of obtaining completion certificate, it is noticed that the condition of carpet area of the affordable residential apartments being not less than 50% of total carpet area of the project is not fulfilled, then the developer is required to pay balance GST of 6% (18-12) on reverse charge basis on the input service of works contract received by him.