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.
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.
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.
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.
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.
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.
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.
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.
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.
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.