Guide to Reverse Charge Mechanism (RCM) in GST

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RCM is also known as Reverse Charge Mechanism. RCM under GST is a mechanism under which the tax liability is to be borne by recipients of the supply of goods and services and not the the supplier of such goods and services.

In the case of the RCM under GST, the tax liability is reversed from the regular norm of the GST process. The supplier who sells the goods and services is absolved from paying the tax while the recipient or the buyer becomes liable for paying the tax. This payment includes the GST amount which is later paid to the government by the supplier.

As per the Reverse Charge Mechanism in GST, the tax is paid by the recipient of the goods and services to the government. The Reverse Charge Mechanism in GST is applicable to under select conditions and on specified goods and services.

When is Reverse Charge Applicable?

There are certain conditions under which various goods and services are liable for reverse charges. The conditions in which a Reverse Charge under GST is applicable include:

Unregistered seller to Registered buyer:If the seller is not registered under GST but the recipient who is getting the goods or services is, then the RCM under GST is applicable. The recipient needs to pay the GST directly. They make the invoice for the goods and services bought. If there is an interstate transaction, then the buyer pays IGST, while the buyer pays SGST and CGST as per the rules of reverse charge mechanism in case of intrastate transaction.
E-commerce: When the e-commerce company provides services, then the Reverse Charge Mechanism applies to that particular e-commerce operator. Since in Ecommerce, many operators do not have an office in the territory, they appoint a representative who becomes the person responsible for paying the GST. Transportation services provided to the passengers like online cab booking companies are taxable, and accommodation services like hotels, clubs, guest houses, inns, etc. also come under this category. Apart from all of these, housekeeping services like plumbing and carpentry are also included.

Specific Goods: According to the CBIC (Central Board of Indirect Taxes and Customs), the RCM GST can also be applicable for certain goods and services. You can find a long list of those goods online. Some of the most common items it contains are cashew nuts, tobacco leaves, bidi wrappers, lottery, raw cotton, etc.

Time of Supply Under RCM

Talking about the time of supply under RCM, these dates are crucial to know:

1. Payment date

2. Date of receiving the goods

3. On the supplier invoice, the 30th day from the date of issue

When the supply date is not available, the time of supply can be used as the date of entry as mentioned in the book of the recipient.

In the case of time of supply for services, it is important to know about

Payment date:

On the supplier invoice, the 60th day from the date of issue. When the supply date is not available, the time of supply can be used as the date of entry as mentioned in the book of the recipient.

Let's understand this with the help of an illustration:

For goods, the time of supply under RCM is as follows:

Date of receipt of goods A is 15th June 2022.
Date of the invoice is 1st July 2022.
Date of entry in books of the receiver is July 30th 2022.

As per the above illustration, the supply time of goods will be 15th June 2022.

Registration Rules Under RCM

According to the CGST Act Section 24, if you pay tax under the RCM you must get registered. The same must be done even if your turnover is under the threshold limit.

Input Tax Credit Under RCM

The receiver can use ITC or Input Tax credit on the amount paid under the reverse charge mechanism. The only condition is that the goods and services must be used for business. If the dealer is under RCM, then he is not eligible to claim the tax credit.

Who Should Pay GST Under RCM?

The person receiving the goods and services needs to pay GST under RCM. This must be mentioned by the supplier in the tax invoice.

Supplies of Goods as per Reverse Charge Mechanism

Sr.no	Description of Supply of Goods	Supplier	Receiver
1	Cashew nuts	Agriculturist	A Registered person
2	Tendu or Bidi wrapper leaves	Agriculturist	A Registered person
3	Tobacco leaves	Agriculturist	A Registered person
4	Silk yarn	The person producing silk yarn uses the raw silk or silkworm cocoons to make Silk Yarn	A Registered person
5	Raw cotton	Agriculturist	A Registered person
6	Lottery	Local authority, State Government, UT or Union Territory	Lottery selling agent or distributor
7	Confiscated goods, Used vehicles, Used or old goods, Scrap materials	Local authority, State Government, Central Government, UT or Union Territory	Any registered person

Supplies of Services as per Reverse Charge Mechanism

Sr. no	Supply of Services	Supplier	Recipient
1	The service which is supplied by a person who is a resident of the non-taxable territory to the person who is not the non-taxable receiver.	The person who lives in a non-taxable territory	The person who is based in the taxable territory and is not a non-taxable receiver
2	GTA Services	Goods Transport Agency that did not pay tax at the rate of 12%	A factory or a society or a body corporate or a cooperative society or a registered person or a partnership firm or a casual taxable person who is present in the taxable region
3	Legal Services provided by the advocate	Any advocate such as a senior advocate or a big firm of advocates	A business located in the taxable territory
4	Services provided by the arbitral tribunal to the business firm	An arbitral tribunal	A business company in the taxable territory
5	Services rendered as sponsorship to a corporate firm or a partnership firm	Anyone	A corporate firm or a partnership firm which is located in the taxable region
6	Services offered by the State Government, UT, Central Government, local authority to a business entity	State Government, Central Government, UT, Local authority	Business located in the taxable region
6	Not including: renting the immovable property, services provided by the Department of Posts using the express parcel post, speed post, life insurance, agency, which is not provided to State Government, UT, Central Government, and local authority. The services of aircraft, vessels, precincts of a port, airport, goods and passengers transport.	State Government, Central Government, UT, Local authority	Business located in the taxable region
7	Services offered by a company director or corporate body to a company or corporate body	Company director or corporate body	The company or corporate body in taxable region
8	Services offered by the insurance agent to a person into insurance	An Insurance Agent	A person into the insurance business in the taxable region
9	Services offered by a recovery agent to a banking firm, financial institution, NBFC	A recovery agent	A banking company, financial institution, NBFC in the taxable region
10	Services offered by someone from a non- taxable territory through goods transportation using vessel from out of India till customs station	A person from non-taxable territory	Importer from a taxable territory
11	The services offered by an author, photographer, artist music composer, through the transfer or enjoyment copyright	Author, photographer, music composer, artist, etc.	Publisher, producer, music company, from a taxable territory
12	Services by the members of Overseeing Committee to RBI	Members of Overseeing Committee	RBI

What is Self Invoicing?

Self-invoicing is stated in Section 31(3)(G) of the Income Tax Act. All those goods that fall under reverse charge mechanism in GST and are purchased from unregistered suppliers are applicable for self-invoicing. The purpose of self-invoicing is introduced because the unregistered suppliers cannot issue GST invoice and so, you have to pay the taxes on their behalf. This voucher is issued at the time of making the payment to the receipt.

Conclusion

Reverse Charge Mechanism or RCM under GST means the liability to pay the tax is on the recipient and not the supplier of goods and services. The type of reverse charge conditions is based on the nature of the supply as well as the nature of the supplier.

Quick Links

Types of GST Returns

GST Articles

What will happen if the receiver has to pay the GST through RCM but is not a registered person?

The taxpayers who pay through RCM need to be registered. The limit of Rs. 20 Lakhs on the annual turnover is not applicable for these taxpayers.

What will happen when the Input Service Distributor gets a supply for RCM?

The Input Service Distributor cannot purchase which is applicable for RCM. To get the supplies and credit of Reverse Charge, they need to register as a normal taxpayer.

In which GSTR form RCM sales can be shown when filing GST returns?

Reverse Charges cannot be claimed and can be paid as per RCM rules. The supplies liable to RCM can be declared in GSTR-3B and claim ITC.

Can ITC on RCM be claimed in the same month?

Yes. The same can be claimed in the same month.

Who is eligible for RCM in GST?

All the registered buyers have to pay GST and they are also eligible to pay RCM GST as per the criteria specified.

In which case RCM is applicable?

Under three specified conditions, reverse charge mechanism is applicable:

Specific goods and services as mentioned by CBIC
Supply of goods and services from unregistered to registered dealer
E-commerce goods and services

When can one claim ITC of tax paid under RCM?

The RCM under GST is paid in a month and can be claimed as ITC in the next month.

Can we make a 5% claim under RCM ?

An ITC can be claimed on the GST amount that is paid under the RCM on receipt of services and goods, provided these are used for the purpose of the business alone.