Easy Guide to RCM (Reverse Charge Mechanism)

Under GST
blog.saginfotech.com/reverse-charge-mechanism-under-gst

Atul Mittal June 28, 2017

What is the Reverse Charge Mechanism(RCM) under GST?

The Reverse Charge Mechanism (RCM) is the process of GST Payment by the receiver
instead of the supplier. In this case, the liability of tax payment is transferred to the
recipient/receiver instead of the supplier.

Latest Update

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 54th GST Council Meeting – “To bring the renting of commercial property by an
unregistered person to a registered person under the Reverse Charge Mechanism
(RCM) to prevent revenue leakage.”
GST Portal has introduced a new statement for reporting Reverse Charge
Mechanism (RCM) transactions called RCM Liability/ITC Statement. View more
53rd GST Council Meeting Update: To simplify claiming ITC, the Council
recommends clarifying that purchases under the RCM from unregistered suppliers
follow a specific rule. When the recipient issues the invoice for such a purchase, the
relevant financial year for calculating the ITC time limit under section 16(4) of the
CGST Act will be the year the invoice is issued.

The Reverse Charge Mechanism is applicable in the case of :

Imports
Purchase from an unregistered dealer
Supply of notified goods and services

This reverses the scenario as the person who is receiving the goods and services needs
to pay the taxes. If the receiver is purchasing goods from unregistered providers, there
needs to be a GST paid on their behalf. A payment voucher needs to be issued from the
supplier to the recipient. The recipient must be a registered person as per Section 2(94)
of the CGST Act,2017.

As per section 2(98) of CGST Act 2017, “Reverse-Charge” means the liability to pay tax
by the recipient of the supply of goods or services or both instead of the supplier of such
goods or services or both

Under sub-section (3) or sub-section (4) of section 9, or

Under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and
Services Tax Act

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Current Situation in Reverse Charge Mechanism (RCM)

In the present scenario, the reverse charge mechanism is applicable in service tax for
services like Insurance Agent, Manpower Supply, Goods Transport Agencies, etc. Unlike
Service Tax, there is no concept of partial reverse charge. The recipient has to pay 100%
tax on the supply.

In the earlier government scenario, it was hard to collect service tax from the numerous
unorganized sectors just similar to goods transportation. The effort has been made to
place the services as per the existing regime and Compliances and tax collections will,
therefore, be increased through the reverse charge mechanism. Currently, there is no
reverse charge mechanism on the What is Mixed and Composite Supply Under GST?
The reverse charge may be applicable for both goods and services.

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RCM Provisions Under GSTR Forms – GSTR 1 – GSTR 2
This system is being carried forward from the VAT regime. In case the supplier is
registered, but the goods or services come under the reverse charge mechanism, the
input tax credit cannot be claimed by the supplier as the tax is not credited by him but the
receiver is paying the taxes.

In the case of importers of goods, taxes need to be paid under the reverse charge
mechanism to the Government on the import. This is in addition to the import duties.

The details of the charges pertaining to the inward supply of goods or services are to be
mentioned in GSTR 1. The details of inward supply are stated in the form GSTR 2.

A person who is liable to pay tax under the reverse charge mechanism needs to be
registered under GST irrespective of the turnover.

The goods/service supplier gets the input tax credit that is paid under the reverse charge.
The only condition is that the input tax credit is used only for the furtherance of business.

The list of services to be included under the reverse charge mechanism are:

Goods Transport Agency

Recovery Agent
Director of a company or body corporate
An individual advocate or firm of advocates.
An insurance agent

The Scenario Where Reverse Charge Will Be Applicable under

GST

Supply by Unregistered Dealer

In case an unregistered person is selling goods or providing any services to the

registered person, then the liability to pay tax shifts on the registered person i.e. the
recipient of goods/services, where such supply is of taxable supplies. No reverse charge
mechanism in the case of exempted supplies.

The tax will be paid by the registered dealer and all the provisions of the act will be
applicable to him as if he is the supplier of the goods or services The concept behind this
is to prevent tax evasion since it would be almost impossible to collect tax from the
unregistered dealer. It would increase tax compliance and promote transparency. Input
credit will be allowed to the registered dealer for the tax paid by him under the reverse
charge mechanism.

Recommended: What is Mixed and Composite Supply Under GST?

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This extra compliance under the Act will force all the registered persons to purchase
goods only from the registered dealers and this is what the new regime aims at.

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Under RCM, Who is Responsible for Paying GST?

RCM requires that the recipient pay GST on goods/services. Nonetheless, in order to
comply with GST law, the supplier of goods is required to indicate whether RCM tax is
due on the invoice.

RCM GST payments should be made keeping the following points in mind:

ITC on RCM tax amounts can only be claimed by recipients of goods or services if
they are used to conduct business or further that business.
If a composition dealer discharges liability under RCM, he should pay tax at the
normal rates, not the composition rates. Additionally, they are not eligible to claim
GST credit.
RCM tax payables or charges can be subject to GST compensation cess.

For Services Provided by E-commerce Operator

In the case of services provided by e-commerce operators, the liability to pay tax lies on
the recipient of services. If the assessee has no physical presence in the taxable area,
then the representative of such an e-commerce operator will be liable to pay tax. If there
is no representative, then the assessee has to appoint one who will be liable to pay GST.

For Services

CBEC has notified a list of services on which the reverse charge mechanism will be
applicable under the GST

Supply of Goods Under RCM

Supply of Services Under RCM

Points to be noted:

No partial reverse charge will be applicable under GST. 100% tax will be paid by the
recipient if the reverse charge mechanism applies.

In the case of B2B import of other services, the tax shall be payable by the recipient
of services
In the case of B2B import of goods, the tax shall be payable by the recipient of
goods

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Liability of Registration Under RCM (Reverse Charge Mechanism)
Under Reverse Charge Mechanism who is liable to register in the new tax regime?

A person who pays taxes under reverse charge is required to register under GST
irrespective of the threshold and the annual threshold Limit is 20 lakhs (10 lakhs in
the case of Hill states and North Eastern State)

Note: In the GST council meeting, states were given the liberty to impose a double
threshold limit for registration i.e. 40 lakh up from the earlier INR 20 lakh.

Unlimited Invoice for RCM Dealers

Time of Supply

Under GST, time of supply means a particular point in time when the goods or services
are rendered or supplied. It allows us to find out the tax rate, value and due dates for filing
returns. Under the Reverse Charge Mechanism, the receiver is entitled to pay GST.
However, the time of supply for supplying goods and services under reverse charge
varies from the supplies which are under forwarding charge.

How do Find Out the Time of Supply under the Reverse Charge
Mechanism (RCM)?
In the case of Goods: Time of supply in case of supplying goods when tax payable
under Reverse Charge, whichever is earliest from the following dates:-

the date of the receipt of goods;

the date of payment as entered in the books of account of the recipient;
the date on which the payment is debited in his bank account, whichever is earlier;
the date immediately following thirty days from the date of issue of invoice or any
other document, by whatever name called, in lieu thereof by the supplier

Note: However, if it is not possible to find out the time of supply in the above-mentioned
cases than the time of supply will be considered the date of entry in the books of account
of the recipient of the supply.

Let us understand by an example given below:-

Date of Payment – 18th June 2023

Date of Invoice – 1st July 2023
Date of Entry in books by the recipient – 19th June 2023

In this case, the time of supply will be 18th June 2023

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If the supplier is located outside India, then the time of supply shall be the earliest of:
‘When the amount is paid i.e. the date of payment’

OR

‘When the recipient records the payment in his books of account’.

In the case of services: Time of supply in case of supplying services when taxes are
payable under reverse charge mechanism, whichever is earliest from the following dates:-

The date of payment; or

The date immediately following after sixty days from the date of issue of the invoice
by the supplier; whichever is earlier

However, if it is not possible to find out the time of supply in the aforementioned cases,
the time of supply will be considered the date of entry in the books of account of the
recipient of the supply.

Let us understand by an example given below:-

Date of Payment – 18th August 2023

Date of Invoice – 1st September 2023
Date of Entry in books by the recipient – 19th August 2023

Note: In this case, the time of supply will be 18th August 2017, Due to some reasons if
the time of supply can’t be ascertained under 1 or 2 heads, in this case, it will be 19th
August i.e., the date of entry in books by the recipient.

There are two types of reverse charge scenarios mentioned in the law. The first one is
dependent on the nature of the supply and the nature of the supplier. This is covered
under section 9 (3) of the CGST/ SGST (UTGST) Act and section 5 (3) of the IGST Act.
The second one taxable supply made by the unregistered person to a registered person
covered under section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the
IGST Act.

The Manner of Payment of GST under the Reverse Charge Mechanism

As per section 49(4) of CGST Act’2017, ITC can be used for payment of output tax only.
Therefore tax under reverse charge can be paid through cash only without availing the
benefit of ITC. The supplier must mention in his tax invoice whether the tax is payable on
reverse charge.

Input Tax Credit:

The service recipient can avail of Input Tax credit on the Tax amount that is paid under
reverse charge on goods and services. The only condition is that the goods and services
are used or will be used for business or furtherance of business.

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If the composite dealer falls under the reverse charge mechanism then the dealer is
ineligible to claim any credit of tax paid. The tax will be paid at the normal applicable rates
and not at the composition rates.

Registration Requirement under Reverse Charge Mechanism (RCM):

As per Section 24 of CGST Act 2017, A person paying tax under the reverse charge
mechanism has to compulsorily get registered even if the turnover is below the threshold
limit.

Applicability of GST Compensation Cess:

GST Compensation Cess will be applicable on tax paid under the reverse charge
mechanism also. The purpose is to compensate States for loss of revenue on the
implementation of GST. This will be applicable for 5 years from the date GST gets
implemented.

Important Points to be Taken Care Under RCM :

Goods and services notified under section 9(3) or section 9(4) must have a person
registered under GST.
Under the reverse charge mechanism, the GST applicable must be submitted to the
government on every 20th of next month
The input tax credit will be available for all the RCM goods and services used for the
furtherance of business according to the GST paid. And the service-acquiring
individual, who is also paying the reverse charge can take the benefits of an input
tax credit.
There will be no auto-population of details of the GST paid under the RCM in GSTR
2, but it will be subjected to the manual furnishing of details.
Wherever the RCM is applicable the invoice must be arranged by the recipient on
itself while the invoices along with the consolidated purchases should be issued on
a daily basis. on all the GST applicable who are under section 31(3).
A payment voucher must be issued by the recipient during the period of supplier
payment.
The ITC is not available for the reverse charge payment to the authority.
The composition scheme registered individuals also come under the reverse
charge, well there will be no credit of RCM availed.
The reverse charge mechanism applies to payments made in advance also.

Note: If in case, a dealer is unregistered under GST, then he is not allowed to deal in any
interstate transactions. For any reverse charge mechanism to be applicable, there must
be only intra-state transactions.

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Conclusion: With the biggest tax reform ready to be implemented, the Reverse charge
mechanism is not a new concept as we are already dealing with this in the service tax.
But imposing a 100% reverse charge is definitely a big change. There are both pros and
cons of this reverse charge mechanism but then no accurate conclusion can be drawn
currently as to how society will be impacted by its imposition. On one hand, it will
definitely be burdensome for the small supply receivers, but on the other hand, it will
increase tax compliance for the country as a whole and would increase transparency.

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