The GST Council has introduced significant updates to the Reverse Charge Mechanism (RCM) under Notification No. 13/2017 (Central Tax – Rate), specifically Entry No. 4. These changes, effective from January 16, 2025, as per Notification No. 07/2025, aim to enhance tax compliance and clarify the responsibilities under RCM for sponsorship services.
RCM (Reverse Charge Mechanism)
Under RCM, the recipient of goods or services is liable to pay GST instead of the supplier. This mechanism is applicable in specific cases outlined in GST law.
Key Points:
- Applicable Scenarios:
- Services provided by an unregistered supplier to a registered recipient.
- Notified goods or services (e.g., services by a goods transport agency, legal services by an advocate, etc.).
- Tax Reporting:
- The recipient must report the tax under their GST liability.
- Input Tax Credit (ITC) can be claimed if eligibility criteria are met.
FCM (Forward Charge Mechanism)
Under FCM, the supplier of goods or services collects and pays GST to the government. This is the standard tax payment method under GST.
Key Points:
- Tax Collection:
- The supplier charges GST on the invoice and collects it from the recipient.
- ITC Eligibility:
- The recipient can claim ITC on the tax paid, subject to conditions.
Comparison of RCM and FCM
| Aspect | Reverse Charge Mechanism (RCM) | Forward Charge Mechanism (FCM) |
|---|---|---|
| Tax Liability | On the recipient | On the supplier |
| Applicability | Specified goods/services | General transactions |
| Tax Collection | Recipient pays directly to govt. | Supplier collects and remits |
| ITC Eligibility | Available if conditions met | Available if conditions met |
RCM on Sponsorship Services: Changes in Entry No. 4
The recent amendment in Entry No. 4 of Notification No. 13/2017 redefines who is responsible for paying tax under RCM for sponsorship services.
Key Definition:
A body corporate is a legal entity distinct and separate from its owners, established under the law with specific rights and obligations.
Examples of a Body Corporate:
- Private or public limited companies.
- Limited Liability Partnerships (LLPs).
- Government companies or statutory corporations.
- Foreign companies registered in India.
Changes Effective January 16, 2025:
| Sl. No. | Category of Supply of Services | Supplier of Service | Recipient of Service |
| Earlier | Services by way of sponsorship to any body corporate or partnership firm | Any person | Any body corporate or partnership firm located in the taxable territory |
| Now | Services by way of sponsorship to any body corporate or partnership firm | Any person other than a body corporate | Any body corporate or partnership firm located in the taxable territory |
Example:
- Supplier: A Pvt. Ltd. (a body corporate) provides sponsorship services.
- Recipient: Company B (also a body corporate) receives the sponsorship services.
- Agreement: Company B agrees to pay Rs. 1,50,000 to A Pvt. Ltd. for promoting its products during an event.
- GST Rate: 18%.
Since A Pvt. Ltd. is the supplier, it will charge GST on the sponsorship service under the Forward Charge Mechanism (FCM). A Pvt. Ltd. will collect the GST from Company B and remit it to the government.
Conclusion
The amendments to the Reverse Charge Mechanism for sponsorship services bring clarity and ensure proper tax compliance. Businesses should evaluate their arrangements and ensure adherence to the updated rules to avoid any non-compliance issues.
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Published on: January 20, 2025