Reverse Charge Mechanism under GST: RCM under GST

This article aims to provide explanation of Reverse Charge Mechanism under GST , its applicability, and its implications for businesses. The Goods and Services Tax (GST) system, introduced in India on July 1, 2017, has brought about significant changes in the way businesses operate. One such change is the Reverse Charge Mechanism (RCM), a concept that shifts the responsibility of tax payment from the supplier to the recipient.  

What is Reverse Charge Mechanism under GST?

Under the regular GST mechanism, the supplier of goods or services is liable to pay GST. However, under RCM, the liability to pay tax is shifted from the supplier to the recipient of goods or services. This means the recipient must pay the GST directly to the government instead of to the supplier. 

The terminology associated with RCM is as follows:  

• Supplier: The person who supplies goods or services.  
• Recipient: The person who receives goods or services and is liable to pay GST under RCM.  
• Notified Goods and Services: Categories of goods and services specified by the government where RCM is applicable. 

To illustrate how RCM works, let’s consider an example: 

Scenario: A registered dealer (recipient) purchases legal services worth INR 10,000 from an advocate (supplier). 

• GST Rate: 18% 
• Value of Service: INR 10,000 
• GST Payable under RCM: 0,000 * 18% = INR 1,800 

In this case, the recipient needs to pay INR 1,800 as GST under RCM to the government and report this in the GST return. 

Why was RCM under GST introduced?

RCM was introduced to cover certain categories of supplies that were prone to tax evasion or where the government felt it was more practical to collect tax from the recipient. This mechanism helps in: 

• Widening the tax base 
• Ensuring tax compliance 
• Reducing tax evasion 

RCM Applicability under GST

RCM is applicable in specific situations as notified by the government. These include: 

• Supply of Specified Goods and Services:
  • The government has notified specific categories of goods and services where RCM is applicable.
  • For example, services provided by a goods transport agency (GTA), legal services by an advocate, and certain supplies from an unregistered dealer to a registered dealer. 
• Purchases from Unregistered dealers under GST:
  • If a registered dealer buys goods or services from an unregistered dealer, the registered dealer must pay GST under the Reverse Charge Mechanism.
  • This means that the registered dealer is responsible for paying the GST directly to the government instead of the unregistered dealer. However, this provision is currently suspended. 
• Imports of services:
  • Import of services is also subject to RCM. The recipient of the imported service is liable to pay GST under RCM. 

List of services under RCM in GST

The government has specified a list of services where RCM is applicable. The services under RCM in GST are listed below: 

Service	Description
Goods Transport Agency (GTA)	Transportation of goods by road
Legal Services	Services provided by advocates or law firms
Sponsorship Services	Services provided to anybody corporate or partnership firm
Government or Local Authority	Specific services excluding certain exclusions
Renting of Motor Vehicle	Renting services provided to a body corporate
Security Services	Services provided by individuals or firms (excluding companies)
Arbitral Tribunal Services	Services provided to business entities
Director Services	Services provided by a director to their company
Import of Services	Any service imported from outside India

Compliance requirements under RCM

Businesses need to adhere to certain compliance requirements under RCM: 

• Invoice Issuance:
  • The recipient must issue a self-invoice for the supplies received from an unregistered dealer. This invoice should mention that tax is payable on a reverse charge basis. 
• Payment of Tax:
  • The recipient must pay GST under RCM through cash ledger only and cannot use input tax credit (ITC) for this payment. 
• Reporting on GST Returns:
  • The recipient needs to report the details of RCM transactions in their GST returns (GSTR-1 and GSTR-3B). 
• Record Maintenance:
  • Proper records of transactions under RCM should be maintained for audit and compliance purposes. 

What are the advantages of Reverse Charge Mechanism?

• Wider Tax Base:
  • RCM helps in bringing unregistered dealers into the tax net, thereby widening the tax base. 
• Reduction in Tax Evasion:
  • By shifting the tax liability to the recipient, RCM reduces the chances of tax evasion. 
• Enhanced Compliance:
  • RCM ensures that the recipient of goods or services complies with GST laws, leading to better tax collection. 

Challenges of Reverse Charge Mechanism

• Compliance Burden:
  • RCM increases the compliance burden on businesses as they need to issue self-invoices, pay tax, and maintain records. 
• Cash Flow Issues:
  • Since the tax under RCM must be paid in cash and cannot be set off against ITC, it may lead to cash flow issues for businesses. 
• Complexity:
  • Understanding and implementing RCM can be complex, especially for small businesses. 

Conclusion

In conclusion, the Reverse Charge Mechanism under GST is a critical component of the Indian taxation system. While it brings several benefits like widening the tax base and reducing tax evasion, it also poses compliance challenges for businesses.  

For any business, GST laws, including RCM provisions, are essential. Consulte with 24eFiling, a tax expert will be beneficial in managing obligations on Reverse Charge Mechanism under GST. 

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