Sponsorship Insights: Understanding RCM Requirements
Sponsorship Insights: Understanding RCM Requirements
The Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) framework is a provision where the recipient of goods or services is liable to pay GST instead of the supplier.
In this article, we will discuss on Sponsorship service that is covered under Reverse Charge Mechanism (RCM).
Sponsorship Services: -
• Sponsorship services mean when one group (the sponsor) supports another (the sponsored) with money or other help in exchange for getting advertised. This help could be money, goods, or services.
• Sponsorship services fall under the Reverse Charge Mechanism (RCM), but it's necessary to examine the supplier's and recipient's types of constitution to determine whether the transaction will be subject to RCM.
RCM in Sponsorship Services: -
|
Supply Type |
Supplier of Service |
Recipient of Service |
|
Services provided by way of sponsorship to any body corporate or partnership firm |
Any person |
Any body corporate or partnership firm located in the taxable territory |
As per the above table sponsorship service being provided by any person to any body corporate partnership firm Located in taxable territory then tax has to be paid by the body corporate or the partnership firm under reverse charge. And if sponsorship service is given to any individual then there would not be any reverse charge the supply of service would attract normal charge.
Example: -
Scenario 1
Supplier: Az Events (A business entity - Providing the sponsorship services)
Recipient: Company B (The body corporate - Receiving the sponsorship services)
• Company B, enters into a sponsorship agreement with Az Events, for promoting its products during an event. The consideration for this sponsorship service is Rs.1,00,000. And the applicable GST rate is 18%.
• Here, this transaction attracts the Reverse Charge Mechanism of GST as Company B being the Recipient of Sponsorship services is a Body Corporate.
• Company B, being the recipient of the sponsorship services, is required to pay the GST on behalf of the supplier, Az Events (business entity).The GST amount to be paid by Company B would be Rs.1,00,000*18% = Rs.18,000.
• Company B will then self-invoice this transaction and pay the GST to the government.
• So, in this example, Company B, as the recipient, bears the responsibility of paying the GST to the government under the reverse charge mechanism for the sponsorship services received from Company B, Individual or the business entity.
Scenario 2
Supplier: Az Events (A business entity - Providing the sponsorship services)
Recipient: B&D Traders (A business entity - Receiving the sponsorship services)
B&D Traders, enters into a sponsorship agreement with Az Events, for promoting its products during an event. The consideration for this sponsorship service is Rs.1,00,000. And the applicable GST rate is 18%.
Az Events, being the supplier of the sponsorship services, is required to collect the GST from B&D Traders and pay to the Government under Forward Charge Mechanism (business entity). Here RCM will not attract as the provision of RCM are applicable on sponsorship services only if recipient of services is a Body Corporate or Partnership firm.
Compliance needs to be followed when the sponsorship service is covered under the Reverse Charge Mechanism:
Reporting in GSTR-1 (Outward Requirement): The supplier needs to mark "Supply covered under RCM" when filling out their GSTR-1.
Reporting in GSTR-3B (Liability Shift): The liability to pay GST shifts from the service provider (sponsor) to the service recipient. This will be reflected in both the payment section and the ITC table of GSTR-3B. Even if the supplier is not registered, but the recipient is a body corporate or partnership firm located in the taxable territory, they need to pay RCM through self-declaration, even if it is not reflected in auto populated transactions.
Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.
