The Reverse Charge Mechanism (RCM) is a unique concept in the Goods and Services Tax (GST) system in India. Under RCM, the liability to pay tax is shifted from the supplier to the recipient. This blog explores the intricacies of RCM, including its applicability, time of supply, registration rules, liability, input tax credit (ITC), self-invoicing, and answers to commonly asked questions.
What is Reverse Charge Mechanism (RCM)?
The Reverse Charge Mechanism (RCM) under GST is a process where the recipient of goods or services is required to pay the tax directly to the government, instead of the supplier. Typically, the supplier collects GST from the buyer, but under RCM, this responsibility shifts. RCM is implemented to streamline tax collection and minimize evasion, especially in cases where the suppliers are unregistered or operate in the unorganized sector.
When is Reverse Charge Applicable?
RCM is applicable under specific conditions defined by the GST law. Here are common instances where RCM applies:
- Supply from an Unregistered Supplier
If a registered person receives goods or services from an unregistered supplier, RCM applies, requiring the recipient to pay GST on the transaction. - Specified Goods and Services
Certain goods and services specified by the government are liable to RCM, regardless of the supplier’s registration status. Examples include legal services, transport of goods by road, sponsorship services, etc. - Import of Services
GST on imported services is always paid by the recipient, regardless of whether the supplier is registered or located in India.
Time of Supply Under RCM
The time of supply under RCM determines when the liability to pay GST arises. For goods, the time of supply is the earliest of:
- The date of receipt of goods
- The date of payment
- 30 days from the date of issue of the supplier’s invoice
For services, the time of supply is the earlier of:
- The date of payment
- 60 days from the date of issue of the supplier’s invoice
Understanding these timelines is essential for timely compliance and avoiding penalties.
Registration Rules Under RCM
Any person liable to pay tax under RCM must register for GST, irrespective of the ₹20/40 lakh turnover threshold. This rule applies even if the business operates below the standard threshold but falls under RCM obligations. Thus, entities receiving specified goods or services under RCM must ensure they are GST-registered to comply with RCM provisions. For assistance with this process, consider utilizing GST registration services to ensure compliance and proper registration.
Who is Liable to Pay GST Under RCM?
In RCM transactions, the recipient of goods or services is liable to pay GST to the government. For example, if a registered company hires legal services from an unregistered lawyer, the company (recipient) will pay GST instead of the lawyer (supplier).
Input Tax Credit (ITC) Under RCM
Under RCM, the recipient can avail of Input Tax Credit (ITC) on the GST paid, provided the goods or services are used for business purposes. The ITC can be claimed in the same month in which the GST is paid under RCM, making it a seamless process for registered entities.
What is Self-Invoicing?
When receiving supplies from an unregistered vendor under RCM, the recipient must generate a self-invoice. Since the unregistered supplier cannot issue a GST-compliant invoice, the recipient creates a self-invoice to document the transaction and claim ITC. Self-invoicing is essential for record-keeping and ensures compliance under the GST framework.
10 Frequently Asked Questions (FAQs) on Reverse Charge Mechanism (RCM)
- Q: What is Reverse Charge Mechanism (RCM)?
A: RCM is a mechanism under GST where the liability to pay tax shifts from the supplier to the recipient of goods or services. - Q: When is RCM applicable?
A: RCM applies when receiving supplies from unregistered vendors, specified goods and services, and for imports of services. - Q: Can Input Tax Credit (ITC) be claimed on tax paid under RCM?
A: Yes, ITC can be claimed on GST paid under RCM if the goods or services are used for business purposes. - Q: Is RCM applicable if the supplier is registered?
A: Generally, RCM applies when the supplier is unregistered, but it also applies to specific services (like legal and sponsorship services) regardless of the supplier’s registration status. - Q: Who needs to register under GST due to RCM?
A: Any person or business liable to pay GST under RCM must register, even if their turnover is below the standard threshold. - Q: How is GST calculated under RCM?
A: GST under RCM is calculated on the value of goods or services received from the unregistered supplier. - Q: What is the time of supply under RCM for goods and services?
A: The time of supply for goods is the earliest of receipt of goods, payment date, or 30 days from the invoice date. For services, it’s the earliest of payment date or 60 days from the invoice date. - Q: Do individuals or unregistered persons need to comply with RCM?
A: RCM typically applies to registered entities. However, individuals or businesses receiving certain specified services may need to comply under specific circumstances. - Q: Is self-invoicing necessary under RCM?
A: Yes, self-invoicing is required when receiving supplies from an unregistered person, as they cannot issue GST invoices. - Q: Does RCM apply to inter-state transactions?
A: Yes, RCM applies to both intra-state and inter-state transactions for specified goods and services, and for unregistered suppliers in inter-state supply cases.
Key Benefits of Reverse Charge Mechanism (RCM)
The RCM ensures better tax compliance, especially for industries dealing with unorganized sectors. It minimizes tax evasion by placing the onus on registered entities and encourages them to transact with GST-compliant businesses.
- Enhanced Tax Compliance: RCM encourages registered businesses to report accurate transactions and comply with GST regulations.
- Reduces Tax Evasion: Since the recipient pays GST, it reduces the risk of evasion from unorganized sectors.
- Transparency in Transactions: RCM mandates businesses to maintain proper records, enhancing transparency in their supply chain.
Normal GST Payment Process
Reverse Charge on Goods under Section 9(3)
| Sr No | Description of Goods | Supplier of Goods | Recipient of Supply |
| 1 | Cashew Nuts, not shelled or peeled | Agriculturist | Any Registered Person |
| 2 | Bidi Wrapper Leaves (Tendu) | Agriculturist | Any Registered Person |
| 3 | Tobacco Leaves | Agriculturist | Any Registered Person |
| 4 | Silk Yarn | Manufacturer of Silk Yarn from Silk Cocoons for supply of Silk Yarn | Any Registered Person |
| 5 | Supply of Lottery | State Government, Local Authority | Lottery Distributor or Selling Agent |
Reverse Charge on Services under Section 9(3)
| Sr No | Description of Services | Supplier of Services | Recipient of Services |
| 1 | Goods Transport Agency (GTA) services for goods transport | Goods Transport Agency (GTA) | Registered person, Corporate body, Partnership firm, Casual Taxable Person, Cooperative Society, or Factory |
| 2 | Legal services from individual advocate/firm | Individual Advocate or Firm of Advocates | Any Business Entity in the Taxable Territory |
| 3 | Services by Arbitral Tribunal | Arbitral Tribunal | Any Business Entity in the Taxable Territory |
| 4 | Sponsorship Services | Any Person | Any Body Corporate or Partnership Firm in the Taxable Territory |
| 5 | Director’s services to company/body corporate | Director of a Company or Body Corporate | The Company or Body Corporate in the Taxable Territory |
| 6 | Insurance agent services | Insurance Agent | Any Person carrying on insurance business |
| 7 | Recovery agent services | Recovery Agent | Banking Company, Financial Institution, or Non-Banking Financial Company |
| 8 | Copyright services (transfer of copyright) | Author, Music Composer, Photographer, Artist, etc. | Publisher, Music Company, Producer, or similar entity in the Taxable Territory |
| 9 | Services by members of Overseeing Committee to RBI | Members of Overseeing Committee by RBI | Reserve Bank of India |
| 10 | Direct Selling Agents (DSAs) services (non-corporate) | Individual DSAs (not body corporate, partnership, or LLP) | Banking Company or Non-Banking Financial Company (NBFC) in the Taxable Territory |
| 11 | Business facilitator (BF) services | Business Facilitator (BF) | Banking Company in the Taxable Territory |
| 12 | Agent of Business Correspondent (BC) services | Agent of Business Correspondent (BC) | Business Correspondent (BC) in the Taxable Territory |
| 13 | Security services (supply of security personnel) | Any Person other than a Body Corporate | Registered Person in the Taxable Territory |
| 14 | Property on Rent (Commercial & Residential) | Unregistered Person | Registered Person |
Conclusion
The Reverse Charge Mechanism (RCM) is a critical component of GST, especially for transactions involving unregistered suppliers or specific goods and services. With clear rules on applicability, time of supply, registration, ITC, and self-invoicing, RCM promotes transparency and accountability in business transactions. Proper understanding and timely compliance with RCM can ensure smooth GST operations and avoid potential penalties.
For more assistance on GST compliance, RCM rules, and managing self-invoicing, contact us at ApkiReturn at 7665156000 or email us at info@apkireturn.com. We’re here to help with all your GST needs, ensuring your business remains compliant and efficient.
