In Reverse Charge Mechanism (RCM), the responsibility for paying the tax under Goods and Services Tax (GST) shifts from the supplier to the recipient of the goods or services. This is different from the regular GST system where the supplier is responsible for collecting and remitting the tax to the government.
Reverse Charge Mechanism (RCM) applies to specific situations as defined by the GST law. One of such services defined to be covered under Reverse charge mechanism (RCM) is services provided by a lawyer or a legal professional.
RCM applies to a legal service provided by a firm of lawyers or an individual lawyer or individual Advocate including a Senior Advocate or firm of Advocates to a business entity.
Legal service” means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.
Reverse Charge Mechanism (RCM) will not apply when legal services are provided by a lawyer to a non business entity.
For instance, when legal services are provided by individual Advocate including a Senior Advocate or firm of Advocates to individuals for personal or non-business purposes such as family dispute, property dispute or individual legal advice, RCM provisions will not be applied.
Rate of tax and input tax credit under RCM
The individual Advocate including a Senior Advocate or firm of Advocates does not charge GST on their invoice. Instead, the recipient pays GST at the rate of 18% on the value of legal services received.
The recipient can claim input tax credit for the GST paid under Reverse Charge Mechanism. This means, the recipient can use the credit to offset its output tax liability.
Return and Documentation under reverse charge mechanism
The recipient in their GST return must report the tax paid under Reverse Charge Mechanism (RCM). This means they must include it in GST return forms such as GSTR1 and GSTR 3B.
As a proof of tax paid under Reverse Charge Mechanism, the recipient should keep the invoice from the lawyer and records for tax payment under RCM.
For instance, if a company is charged 1,00,000 rupees by a lawyer for legal services, then being the recipient of the legal service, tax at the rate of 18% on 1,00,000 rupees should be paid under RCM, which is calculated to 18,000 rupees.
The company is required to report 18,000 rupees paid under RCM in their GST return and claim input tax credit if such legal service is used in the regular course of business.
