All About Reverse Charge Mechanism (RCM) Under GST

Transferring the burden of GST payment to receipt is done to tax service imports, exempt some categories of providers and tax more unorganized sectors of the economy. The reverse charge under GST method only applies to specific kinds of commercial enterprises.

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    Basics of GST

    When is Reverse Charge Applicable?

    Sections 9(3), 9(4), and 9(5) of the central GST acts govern the reverse charge scenario for an interstate scenario for inter-state transactions.

    • Supply of specific goods and services by the CBIC: The CBIC has produced a list of the items and services subject to the reverse charge under the power provided by section 9(3) of the CGST Acts.
    • Supply from an unregistered dealer to a registered dealer: According to Section 9(4) of the CGST Act, a reverse charge would be applied if a vendor is not registered for GST but delivers products to a person who is. This means GST will have to be directly paid by the receiver instead of the supplier. The registered bury who has to pay GST under reverse charge has to do self-invoicing for the purchases made.

    In intra-state purchases, the purchaser must pay CGST and SGST under RCM. Also, in inter-state purchases, the buyer has to pay the IGST. The government announces the list of items or services to which this clause draws attention.

    In the real-estate sector, the government has notified that the promoter should buy inward supplies to 80%, then the promoter should GST at 18% on a reverse charge to the extent short of 80% on inward supply. However, if the promoter purchases cement from an unregistered supplier, he must pay a tax of 28%. This calculation must be done irrespective of the 80% calculation.

    • Supply of services through an e-commerce operator: All businesses can use e-commerce operators as an aggregator to sell products or provide specified services. The e-commerce operator will be subject to the reverse charge and must pay GST. This section offers services such as:
    • Providing passengers with radio taxi, motor cab, maxi cab, and motorbike transportation services.
    • Providing lodging services in hotels, inns, guest houses, clubs, campgrounds, or other commercial establishments for residence or lodging, unless the person providing such services via an electronic commerce operator is responsible for the registration exceeding the threshold limit.
    • Services related to housekeeping, such as plumbing and carpets, are generally exempt from registration requirements unless they are provided through electronic commerce operators, and their turnover exceeds the registration level.

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    Time of Supply Under RCM

    Time of supply under the Reverse Charge Mechanism in GST refers to the point in time when a liability to pay tax arises for the recipient of goods or services instead of the supplier. It is important to correctly determine the time of supply under RCM as it determines when the recipient is liable to pay the tax and helps avoid any penalties or interest charges.

    • Time of Supply in Case of Goods: The earliest of the following dates must be used as the time of supply for items in a reverse charge scenario.
    • The date of receipt of goods
    • The date of payment
    • The date is immediately after 30 days from the date of issue of the invoice by the supplier.
    • Time of Supply in Case of Services: The earliest of the following dates must be used as the time of supply in a reverse charge scenario.
    • The date is immediately after 60 days from the date of issue of the invoice by the supplier.

    The date of entry in the recipient’s books of accounts shall serve as the time of supply if it is impossible to ascertain the delivery time.

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    Registration Rules Under RCM

    A person who is subject to the reverse charge mechanism and is required to pay GST is required to register for GST, according to Section 24 of the CGST Act, 2017. They are exempt from the threshold limit of Rs. 20 lakhs or Rs. 40 lakhs, as applicable.

    Also Check-Out Insights on – Transitioning To GST

    Who Should Pay GST Under Reverse Charge Mechanism?

    The recipient of the goods or services covered by RCM is responsible for paying GST. However, according to the GST law, the person providing the products must indicate on the tax invoice if tax is due under RCM. When making payments under RCM, keep the following items in mind.

    • The recipient of goods and services can avail of the ITC on the tax amount paid under RCM only if such goods and services are used for business or furtherance.
    • When discharging liability under the Reverse Charge Mechanism, a composition dealer should pay tax at the standard rates rather than the composition rates. They are also not qualified to claim input tax credits for taxes paid.
    • GST compensation cess can apply to the tax payable or paid under the RCM.

    What is Input Tax Credit (ITC) Under RCM?

    A supplier is not permitted to claim ITC for GST paid under RCM. Only if the beneficiary of the goods or services uses or intends to use them for business purposes may they claim an ITC on the GST amount paid under RCM on their behalf. The only acceptable form of payment should be cash, and the recipient cannot use the ITC to cover the output GST on products or services that are subject to reverse charge.

    Discover Here About – E-way Bill Under GST

    What is Self Invoicing?

    Self-invoicing is required when purchasing products and services from an unregistered source because a reverse charge applies. The supplier cannot issue a GST-compliant invoice, so you become liable to pay taxes on their behalf. Self-invoicing becomes necessary. According to section 31(3)(g), a recipient who is required to pay tax under sections 9(3) and 9(4) must submit a payment voucher when paying the supplier.

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    Current Scenario in Reverse Charge Mechanism

    The Reverse Charge Mechanism (RCM) shifts the tax liability from the supplier to the recipient of goods or services. This mechanism applies in specific situations, such as when goods or services are received from unregistered dealers or in cases specified by the government. Currently, many businesses face challenges with compliance, as they must ensure proper documentation and timely payment of taxes.

    The RCM in accounting is crucial in promoting tax compliance among buyers and helps in widening the tax base. However, it can create cash flow issues for businesses that must pay taxes upfront before claiming Input Tax Credit (ITC). RCM plays a vital role in the GST framework, but businesses must stay informed to manage their obligations effectively.

    Also Know About – GST Composition Scheme

    RCM Provisions under GSTR Forms

    Under the Goods and Services Tax (GST) framework, specific provisions govern reporting transactions under RCM in GSTR forms. Registered dealers must declare purchases made under RCM in their GSTR-1 and GSTR-3B forms. These forms require details of the inward supplies liable to RCM and the corresponding tax amount paid. The recipient is responsible for self-invoicing and ensuring the applicable tax is correctly reported and paid. Failure to comply can lead to penalties and interest on unpaid taxes. Therefore, businesses must understand the provisions and maintain accurate records to ensure compliance with GST regulations.

    Conclusion

    The Reverse Charge Mechanism (RCM) under GST is an important provision that shifts the liability to pay tax from the supplier to the recipient of goods or services. RCM applies to specific goods and services notified by the government, and it is important to determine its applicability correctly.

    Frequently Asked Questions

    • What happens if the receiver of goods or services is required to pay tax under reverse charge but is not a registered dealer?
      If the receiver is not a registered dealer, they must still pay the tax under reverse charge but cannot claim input tax credit (ITC) since they are not registered. They may need to apply for registration to avail themselves of ITC for future transactions.
    • Is Input Tax Credit (ITC) allowed under reverse charge?
      Yes, Input Tax Credit (ITC) is allowed on taxes paid under reverse charge, provided the recipient is a registered dealer and has received the goods or services.
    • What if an Input Service Distributor (ISD) receives supplies liable to reverse charge?
      An Input Service Distributor (ISD) cannot claim ITC on supplies liable to reverse charge, as ISDs only distribute credit related to input services, not goods or services received directly.
    • When can one claim ITC of tax paid under RCM?
      You can claim ITC of tax paid under RCM when you have received the goods or services, paid the tax, and are a registered dealer. Ensure proper documentation is maintained for claiming ITC.
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