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All about Reverse Charge Mechanism Under GST

You have surely heard about GST (Goods and Services Tax) and paid it too. However, what makes GST difficult to understand as a concept is its complexity and depth. There are a lot of terms associated with GST that you must comprehend to be able to find your way around it. One of the important terms is the RCM under GST (Reverse Charge Mechanism under GST). Let’s find out what it’s all about. 

What is Reverse Charge Mechanism Under GST?

Usually, GST is paid by the supplier of goods and services upon supply. When it comes to Reverse Charge Mechanism, the receiver of goods and services has to pay the tax, which means that the tax liability is reversed.

The normal GST procedure is as follows:

  • Supplier sells goods/services to the receiver, and the receiver pays the supplier for the same.
  • This payment also includes GST, which the supplier then has to pay to the government.

In case of the Reverse Charge Mechanism in GST, GST is paid by the receiver directly to the government, it does not go through the supplier and is not part of the exchange of goods/services.

Time of Supply Under Reverse Charge Mechanism (RCM)

1. Time of Supply for Goods

For reverse charge against goods, the time of supply will be the earliest of the following dates:

  • Date of payment

  • Date of receipt of goods

  • Date on the 30th day from the date of issue on the supplier invoice

In case where the supply date for goods cannot be determined, the time of supply will be the date of entry as stated in the books of the recipient.

2. Time of Supply for Services

For reverse charge against services, the time of supply will be the earliest of the following dates:

  • Date of payment

  • Date on the 60th day from the date of issue on the supplier invoice

In case where the supply date for services cannot be determined, the time of supply will be the date of entry as stated in the books of the recipient.

What Does Self-invoicing Mean?

When you purchase from an unregistered supplier and the purchase is applicable for the Reverse Charge Mechanism under GST, you will have to make a self-invoice. This is because the supplier can’t issue you aGST-compliant invoice, passing the burden of tax payment to you. You can easily find self-invoice formats online and use them for submission.

Whether you are a supplier, receiver, or a business person of any kind, it is important to make note of these details so that you are prepared for any financial transactions you would make.

Another important thing to note for businessmen is the availability of loans with flexible repayment tenures, low interest rates, and amazing deals on Finserv MARKETS. Such loans, available through simple, online, hassle-free processes, will help your business scale quickly.

What are the conditions for application of Reverse Charge under GST?

Here are the situations in which a Reverse Charge Mechanism under GST is applied.

1. Supply to dealer who is registered from a dealer who is unregistered

If the vendor in a transaction isn’t registered under GST, while the person they’re selling goods/services to is, the reverse charge will apply in this situation. The receiver of goods/services will pay GST directly and make a self-invoice for the purchase.  In case of inter-state transactions, the buyer will pay IGST, while for inta-state transactions, the buyer will pay SGST and CGST under RCM.

2. Ecommerce services

If an ecommerce operator is supplying services, RCM under GST will be apply to

the concerned ecommerce operator. It might happen that the operator has no physical office in the territory where tax is levied. In such a case, a representative of the operator or a person appointed to represent the operator would be liable for paying GST.

3. Supply of specific goods

As per the CBEC’s (Central Board of Indirect Taxes and Customs) rules, Reverse Charge Mechanism under GST is applicable on a specific set of goods and services. It is a long list, which you can easily find online. Some of the items in the list are:

  • Cashew nuts
  • Bidi wrapper
  • Tobacco leaves
  • Raw cotton
  • Lottery

What does self-invoicing mean?

When you make a purchase from a supplier who is unregistered and the purchase is applicable for Reverse Charge Mechanism in GST, you will have to make a self-invoice.  This is because the supplier can’t issue you GST-compliant invoices, which is what passes the burden of tax payment to you. You can easily find self-invoice formats online and use them for submission.

FAQs about Reverse Charge under GST

  • ✔️What happens if the recipient needs to pay GST via Reverse Charge Mechanism but isn’t a registered dealer?

    Taxpayers who need to pay via RCM under GST must be registered in the system. The important thing to note here is that the limit of ₹20 Lakhs on the annual turnover isn’t applicable to these taxpayers.

  • ✔️Is there a provision for Input Tax Credit under the Reverse Charge Mechanism?

    Tax which is paid on via RCM can be applicable for Input Tax Credit in the event that the goods/services involved are being used for a business. In this case, the receiver, or the one who pays via the Reverse Charge Mechanism under GST, is eligible to avail the Input Tax Credit (ITC).

  • ✔️What happens when an Input Service Distributor receives a supply liable for Reverse Charge Mechanism under GST?

    An ISD (Input Service Distributor) is not allowed to make purchases that are applicable for Reverse Charge Mechanism. If they want to acquire these supplies and gain credit of the Reverse Charge paid, they must register themselves as a regular taxpayer.

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