The GST has simplified India’s indirect taxes. It introduced the Reverse Charge Mechanism (RCM) to boost tax compliance and widen the tax base. RCM shifts the responsibility of tax payment from the supplier to the recipient under specific circumstances.
What is Reverse Charge Mechanism (RCM)?
Under the Reverse Charge Mechanism (RCM), the recipient must pay the taxes on the supply of goods or services, not the supplier. Unlike the usual practice where suppliers handle tax payments, RCM makes the recipient accountable.
This approach aims to broaden the tax base by including unorganized sectors. It will exempt specific supplier categories and tax imported services where the supplier operates outside India. Not all businesses fall under RCM; it applies only to certain specified entities.
Different Types of Reverse Charges Under GST
1. Forward Charge
In a forward charge scenario, the supplier collects the tax from the customer and then pays it to the tax authorities.
For example, if a car manufacturing company sells auto parts worth ₹1,00,000 to a trader, it collects GST from the trader and later pays it to the government. This is the standard process for most transactions under GST.
2. Backward Charge
The reverse charge or backward charge method is less common but is used in specific situations to ensure tax compliance and increase tax revenues. Under the GST reverse charge, the recipient of the service becomes responsible for paying the tax directly to the government.
For example, if a chartered accountant bills a client ₹50,000 for services, the client must pay the GST.
When is RCM Applicable?
RCM applicability arises in several situations:
Supply of Notified Goods and Services: The government has specified certain goods and services where RCM applies. For instance:
Goods:
- Cashew nuts, not shelled or peeled, supplied by an agriculturist to a registered person.
- Bidi wrapper leaves (tendu) supplied by an agriculturist to a registered person.
- Tobacco leaves supplied by an agriculturist to a registered person.
- Silk yarn supplied by any person who manufactures silk yarn from raw silk or silk worm cocoons to a registered person.
Services:
- Services provided by a goods transport agency (GTA) to a registered person.
- Legal services provided by an individual advocate or firm of advocates to a business entity.
- Services provided by an arbitral tribunal to a business entity.
- Sponsorship services provided to a body corporate or partnership firm.
- Services supplied by a director of a company or a body corporate to the said company or body corporate.
- Services provided by an insurance agent to any person carrying on insurance business.
- Services provided by a recovery agent to a banking company or a financial institution.
- Supply of security services (services provided by way of supply of security personnel) provided to a registered person.
- Services provided by way of renting of motor vehicles to a body corporate.
Supply from Unregistered to Registered Persons: When a registered person procures taxable goods or services from an unregistered supplier, RCM becomes applicable. This ensures tax compliance even when the supplier is not registered under GST. However, certain exemptions may apply, such as a daily threshold limit for such purchases.
E-commerce Operators: If an e-commerce operator supplies certain services, they are liable to pay GST under RCM. For example, if the operator provides transportation services, they must pay GST on behalf of the service providers.
Import of Services: When a person located in India receives services from a person located outside India, RCM applies, and the recipient is liable to pay GST.
Businesses must find transactions where RCM applies to comply with GST rules.
GST Payment Under RCM
Under RCM, the recipient must calculate and deposit the applicable GST directly with the government. This is done by:
- Determining the applicable GST rate.
- Calculating the tax amount on the value of the goods or services received.
- Filing the tax under the respective heads—CGST, SGST, or IGST.
The recipient must pay GST under RCM in cash since Input Tax Credit (ITC) cannot be used to offset this liability.
Who is Liable Under RCM?
RCM applies to specific entities and transactions. It includes:
- Registered Businesses: Engaging in transactions with unregistered suppliers.
- Importers of Services: Responsible for paying GST on services procured from foreign suppliers.
- Entities in Special Sectors: Such as transport agencies or e-commerce operators.
Input Tax Credit (ITC) Under RCM
Recipients can claim ITC on GST paid under RCM, provided the procured goods or services are used for business purposes. However, the tax paid under RCM cannot be utilized for immediate payment; it must first be paid in cash and can be claimed as ITC in subsequent returns.
Time of Supply Under RCM
Determining the time of supply under RCM is essential for timely tax payment:
For Goods: The time of supply is the earliest of the following:
- Date of receipt of goods
- 30 days from the date of the supplier’s invoice.
- Date of payment as recorded in the recipient’s books.
For Services: The time of supply is the earliest of
- Date of payment
- 60 days from the date of the supplier’s invoice.
- Date of entry in the recipient’s books if the above are not determinable.
Registration Requirements Under RCM
Entities liable to pay tax under RCM must register under GST, regardless of the threshold limits. This compulsory registration ensures that all liable parties are within the GST framework, facilitating better compliance and tax collection.
Goods and Services Notified Under RCM
The government has specified certain goods and services subject to RCM to curb tax evasion and ensure compliance. Staying updated with these notifications is crucial for businesses to determine their tax liabilities accurately.
The Reverse Charge Mechanism under GST is a pivotal tool in ensuring tax compliance across various sectors. By knowing its rules, businesses can navigate GST regulations. This ensures smooth operations and compliance with tax laws.
Mehul