All About Reverse Charge Mechanism (RCM) Under GST

The concept of the reverse charge mechanism was introduced in erstwhile service tax laws. Generally, the supply of goods or services pays the tax on supply; under Reverse Charge Mechanism (RCM), the recipient of goods and services becomes liable to pay tax, i.e., the changeability gets reversed. The idea of a reverse charge system is included in the GST, but under the GST regime; the government has additionally notified specific goods and services that can be supplied under CM.

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

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.

Time of Supply Under RCM

Time of supply under the Reverse Charge Mechanism (RCM) 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.

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.

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.

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.

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 the applicability of RCM correctly.

The recipient is required to maintain proper records and comply with all the provisions of GST related to RCM. While RCM has made the tax system more efficient and transparent, it also requires careful consideration and business compliance to avoid any penalties or interest charges.