Reverse Charge Mechanism (RCM) Under GST

Understanding Reverse Charge Mechanism (RCM) Under GST

What is a Reverse Charge Mechanism?

In the standard GST framework, the supplier of goods or services is responsible for collecting and remitting GST to the government. However, under the Reverse Charge Mechanism (RCM), this liability to pay GST reverse charge shifts from the supplier to the recipient of the goods or services.

This means that when a business procures certain goods or services covered under reverse charge GST, they are directly responsible for paying the applicable GST liability shift to the government instead of the supplier doing so.
The RCM under GST ensures better tax compliance and minimises tax evasion, particularly in transactions where the supplier is either not registered under GST or where the nature of the transaction makes tax collection difficult.

Why is Reverse Charge GST Used?

The Reverse Charge Mechanism GST impact is significant for both businesses and the government. Here’s why the government has introduced RCM under GST,

Brings Unregistered Dealers Under Tax Purview: When businesses procure goods or services from an unregistered dealer GST, the government ensures that tax is still collected through RCM, making the taxation system more inclusive.

Prevents Tax Evasion: Some businesses might attempt to avoid GST by purchasing from unregistered suppliers. By shifting the tax liability under GST reverse charge applicability, the government prevents this loophole and ensures taxpayer responsibilities under RCM are met.

Ensures Compliance with GST Laws: Businesses paying GST under RCM must maintain detailed records and ensure timely GST return filing, which improves GST compliance and transparency in tax payments.

Covers Specific Goods and Services: Certain RCM-applicable services and goods are inherently prone to tax leakages. To combat this, the government has designated specific reverse charge services under GST and goods under the GST RCM threshold where RCM applies.
 

Applicability of Reverse Charge Mechanism Under GST

The Reverse Charge Mechanism (RCM) under GST is applicable in two broad scenarios,

1. Purchases from Unregistered Suppliers
When a GST-registered person purchases goods or services from an unregistered supplier, RCM under GST applies. In such a scenario, the buyer is responsible for,

• Calculating the applicable GST on the transaction.
• Issuing a self-invoice since the supplier does not issue a GST invoice.
• Depositing the GST amount directly to the government under reverse charge GST provisions.

For example, if a registered business purchases office supplies from an unregistered dealer, the recipient must pay GST under RCM and report it in their GST returns filing.

2. Specified Goods & Services Subject to Reverse Charge
The government has listed specific goods and services where RCM under GST applies, even if the supplier is registered. This is done to ensure GST compliance and prevent revenue loss. Below are some of the key categories covered under GST reverse charge applicability,

Goods Subject to RCM

Certain goods are designated for GST reverse charge due to their supply chain nature, potential for tax evasion, or specific economic conditions,

• Cashew nuts (not shelled/peeled) – To regulate tax collection from agricultural suppliers. 
• Bidi wrapper leaves (tendu) – Common in the unorganized sector. 
• Tobacco leaves – High-value commodity prone to underreporting. 
• Silk yarn – To ensure taxation at an appropriate stage. 
• Lottery supplied by state governments – To regulate indirect tax collection on lotteries.

Reverse Charge Services Under GST

• Certain services have been specified under RCM applicable services, ensuring tax accountability for transactions that might otherwise be hard to monitor. Key examples include,
• Legal services GST RCM – When a company avails legal services from an advocate or a law firm, the recipient is responsible for paying GST under RCM. 
• Sponsorship GST RCM – If a business sponsors an event, the tax liability shifts to the sponsoring entity. 
• Services by a director to a company – Companies must pay a GST reverse charge on fees paid to directors. 
• Goods Transport Agency (GTA) services – When a business avails transport services from a GTA, the recipient bears the GST liability shift. 
• Insurance agent services – When an insurance agent provides services to an insurance company, the tax liability falls on the recipient. 
• Government GST services – Certain government-provided services are also subject to RCM to streamline taxation.

By understanding these RCM-applicable services and goods, businesses can ensure GST compliance, avoid penalties, and effectively manage their tax liabilities. GST for business owners requires careful adherence to RCM provisions to remain compliant with the evolving tax framework.
 

Registration rules under RCM

Under India’s GST regime, registration is mandatory for anyone who becomes liable to pay tax under the Reverse Charge Mechanism (RCM), regardless of turnover. This means that even if a recipient’s total turnover does not otherwise meet the usual GST threshold limits, they still must register for GST if they are required to discharge tax under reverse charge provisions. 

This rule is set out in Section 24(iii) of the Central Goods and Services Tax Act, 2017, which specifies that persons obligated to pay GST under RCM must apply for registration in every State or Union territory where they become liable.

A few practical points to note:

• The threshold exemption for registration does not apply when RCM is triggered; registration is compulsory regardless of annual turnover. 
• Once registered due to RCM, all normal GST compliance obligations follow — including filing returns and maintaining records. 
• However, a supplier who only makes supplies on which tax is payable by the recipient under RCM may be exempted from registration, provided they have no other business supplies that make them otherwise liable to register. 

GST Compliance Under Reverse Charge Mechanism (RCM)

For businesses operating under the Reverse Charge Mechanism (RCM) under GST, ensuring GST compliance is crucial to avoid penalties and legal complications. Below are the key compliance requirements that businesses must follow,

1. GST Registration for RCM Transactions
Businesses that are liable to pay a GST reverse charge must obtain GST registration, even if their turnover is below the GST RCM threshold. Unlike regular GST rules where small businesses may be exempt, RCM transactions require mandatory registration to ensure tax collection and compliance.

For example, if a business procures services from an unregistered dealer GST, it must be registered to fulfil its GST reverse charge applicability obligations.

2. Invoicing Requirements Under RCM
The invoicing process under RCM under GST differs from regular transactions because the recipient must generate certain documents to maintain compliance,

Self-Invoice Generation: Since the supplier does not charge a GST reverse charge, the recipient must issue a self-invoice to account for the transaction.
Invoice Declaration: Every invoice generated must include the statement "Tax payable under Reverse Charge" to indicate RCM applicability.

Proper Record-Keeping: Businesses must maintain RCM-applicable services and goods-related invoices to ensure smooth audits and compliance checks.

3. Payment of GST Under RCM
One of the primary differences between reverse charge GST and regular GST is who makes the tax payment. Under the GST reverse charge, the recipient of the goods or services must,

• Calculate and pay GST directly to the government instead of paying it to the supplier.
• Report the transaction in GST returns filing, ensuring compliance with tax laws.
• Maintain detailed records of all RCM transactions, as the burden of proof lies on the recipient.

This process ensures that businesses dealing with RCM-applicable services and unregistered dealers contribute to tax compliance.

4. Input Tax Credit (ITC) on RCM Payments
A significant benefit of GST for business owners under RCM is the ability to claim Input Tax Credit (ITC) on GST reverse charge payments. However, businesses must meet certain conditions,

• The goods or services procured under reverse charge services under GST must be used for business purposes.
• The recipient must have valid GST registration and should comply with GST returns filing obligations.
• The ITC can only be claimed after the GST amount has been paid to the government.

For instance, if a company pays GST under RCM for legal services GST RCM, it can claim ITC on that payment, provided the service is used for business-related activities.

5. GST Returns Filing Under RCM
All businesses liable for RCM under GST must report their transactions in their GST returns filing. Key points include,

• Reporting self-invoiced transactions in GSTR-1 and GSTR-3B.
• Payment details are recorded under the appropriate reverse charge section.
•  ITC claims are documented correctly to avoid discrepancies in tax audits.

Failure to comply with GST reverse charge applicability can lead to penalties, making accurate and timely filing essential.
 

Time of Supply Under RCM

The GST time of supply determines when the tax liability arises under reverse charge GST. This ensures that businesses pay GST at the right time, preventing tax evasion or delayed payments.

For Goods:

The tax liability arises at the earliest of the following events,

• Date of receipt of goods
• Date of payment to the supplier
• 30 days from the invoice issued by the supplier

For Services:

The tax liability arises at the earliest of the following events,

• Date of payment
• 60 days from the invoice date

This ensures businesses adhere to GST compliance and do not delay tax payments under RCM under GST.
 

Impact of RCM on Businesses

The Reverse Charge Mechanism (RCM) under GST significantly affects business operations. While it enhances tax compliance, it also imposes additional responsibilities on businesses.

Advantages of RCM for Businesses

• Ensures GST compliance by covering unregistered suppliers.
• Prevents tax evasion by closing loopholes in tax collection.
• Allows businesses to claim ITC on GST paid under RCM, reducing the actual tax burden.
• Creates a level playing field by ensuring all transactions are taxed, whether the supplier is registered or not.

Challenges of RCM for Businesses

• Increases compliance burden, requiring additional paperwork and self-invoicing.
• Affects cash flow, as businesses must pay GST first and claim ITC later.
• Requires detailed record-keeping to avoid penalties during audits.
   

Conclusion: Mastering Reverse Charge GST Compliance

The Reverse Charge Mechanism (RCM) under GST plays a significant role in preventing tax evasion and ensuring a transparent tax system. By shifting the tax liability from the supplier to the recipient, RCM enhances GST compliance and brings unregistered suppliers within the tax framework. However, it also places additional responsibilities on businesses, requiring them to understand and adhere to GST regulations.

To stay compliant, all the businesses must first identify RCM applicable services and goods under reverse charge GST. If liable, obtaining GST registration is essential to fulfill tax obligations. Additionally, businesses must issue self-invoices, maintain proper records, and ensure accurate GST return filing to avoid penalties.

Another very important aspect is claiming the Input Tax Credit (ITC) on GST paid under RCM, which helps in reducing the overall tax burden. By staying informed and compliant, businesses can optimize tax benefits, avoid legal complications, and ensure seamless operations in an ever changing tax environment.