Reverse Charge Mechanism (RCM)

The Goods and Services Tax (GST) has brought about remarkable changes to the Indian tax system since its introduction in 2017. One such significant change is the introduction of the reverse charge mechanism under GST. No wonder this has had a significant impact on businesses.
The reverse charge mechanism is typical in which the recipients of goods and services are liable to pay the tax. In this case, the supplier has no such relation with tax payment. Nevertheless, the mechanism was introduced to elevate compliance and prevent tax evasion.
This article will give you informative insights into ‘what is RCM in GST’, its applicability, and how it affects businesses. Please keep reading until the article's end to learn more about it. Let’s begin.
 

What is Reverse Charge under GST?

If you are wondering ‘what is reverse charge under GST’, we have some quick answers for you.
Reverse Charge under GST is a mechanism where the recipient is liable to pay taxes instead of the supplier. The responsibility of paying taxes is deliberately shifted from the supplier to the recipient.
The primary motive behind the introduction of the reverse charge mechanism under GST was to increase compliance. Another goal of RCM in GST is to prevent tax evasion. So, the recipient of commodities needs to be registered under GST to become liable for reverse charge.
Please note that RCM in GST is applicable for specific goods and services as predetermined by the government. Here, the recipient needs to self-invoice the transaction and pay taxes to the government.
 

When Does Reverse Charge Apply under GST

Now that you know ‘what is reverse charge in GST’, let’s find out when it’s applicable.

A Reverse Charge under GST is applicable when the recipient is accountable for taxes in place of the supplier. Here is a comprehensive list of the instances when the RCM in GST is applicable:

●    Specific Goods and Services

The Government of India has already determined and notified certain goods and services where the reverse charge mechanism under GST is applicable. Some include legal services by an advocate, goods transportation agencies, services provided by an individual advocate to a business entity, etc.

●    Purchase from an Unregistered Dealer

When a registered person purchases commodities from an unregistered dealer, then the registered person should pay taxes under RCM in GST.

●    Import of Services

When a registered person in India receives services from someone outside India, the recipient must pay taxes under RCM in GST.

You should note that the reverse charge mechanism is applicable only when the recipient is registered under GST. The RCM in GST does not apply if the recipient is not registered. Additionally, the recipient must self-invoice their transactions and pay taxes to the government as and when required.
 

Time of Supply Under RCM

Time of Supply basically refers to the time when the accountability of paying taxes arises. Under the reverse charge mechanism under GST, the tax liability is shifted from the supplier to the recipient. The time of supply under RCM plays a pivotal role as it determines the period when the recipient should pay taxes.
But in the case of goods, the time of supply under RCM is the date when the recipient receives goods. Likewise, in the case of services, the time of supply under RCM is when the payment or receipt of the invoice is made, whichever is earlier.
However, there are some instances when the time of supply under RCM is different for different scenarios. For instance, in cases of services offered by a director or somebody else to a corporate body, the time of supply under RCM is when the payment is made. Nevertheless, it might also be the date of debit in the books of accounts, whichever is earlier.
 

Who Requires GST in RCM

You will already know that in the RCM, under GST, the receiver of commodities is required to pay GST. So, the GST-registered businesses that purchase products and services from notified or unregistered suppliers must pay GST under RCM.

Current RCM under GST

The current RCM under GST registered businesses need to pay GST on purchases made from notified goods and services. They also need to pay GST when they purchase from unregistered or any specified category of registered suppliers.
However, the applicability of RCM on certain categories of goods and services has been deferred until 30th September 2021. And there is no significant update about the same.
 

Registration Rules Under RCM

In RCM, under GST, businesses must register themselves and obtain a GSTIN. Additionally, they must also maintain accurate records of all RCM transactions. They must also file monthly returns and pay GST on time. 
If businesses fail to comply with the above-stated rules, then they might encounter penalties and legal action.
 

Who Needs to Pay GST in RCM?

According to the rules of GST, an individual supplying goods should indicate whether tax is payable under the RCM or not. They must clearly mention the same on the tax invoice.
So, while making GST payments under RCM, you should keep certain things in mind:
●    While discharging duty under RCM, a composition dealer must pay taxes at regular rates and not on composition rates. Besides, they are ineligible to claim any input tax credit for the already paid taxes.
●    The recipient of commodities can claim the ITC on the taxes paid under RCM. This remains applicable only when such commodities are for any business purposes.
●    The GST compensation can be applied to the payable or already paid RCM tax.
 

Input Tax Credit (ITC) Under RCM

Input Tax Credit (ITC) can be claimed by registered businesses on GST paid on purchases of commodities used for business purposes. However, in RCM, under GST, the GST is paid by the recipient of the commodities. So, in this scenario, the recipient can claim the Input Tax Credit (ITC) on the GST paid under RCM.
But to claim ITC under RCM, the recipient should have all the necessary documents, including the invoice or bill of supply. They must also ensure that the supplier is registered under GST. Additionally, ITC on RCM cannot be used to offset the output GST liability but can only be used to offset the GST liability on future RCM transactions.
 

Goods supplied under the Reverse Charge Mechanism

Here, we have listed down a few goods that are supplied under the RCM under GST:

GST RCM List For Services

Here is a list of service recipient and service provider for RCM:

Self-Invoicing

Self-invoicing is the process of issuing an invoice by the buyer to themselves for the purchases made from unregistered suppliers. It is also valid in cases where RCM in GST applies. This helps the buyer claim the input tax credit and maintain accurate records of their transactions.
You will easily find formats for self-invoicing across the internet. So whether you are a recipient, supplier, or any business person, you must always be prepared for all financial transactions.