RCM- Reverse Charge Mechanism

RCM - REVERSE CHARGE MECHANISM

Under normal circumstances, the supplier of goods or services collects the tax and pays it to the Govt. But in case of Reverse Charge, the receiver becomes liable to pay the tax to the Govt., which means the chargeability gets reversed.

Reverse charge is a mechanism where the recipient of the goods and/or services who is a registered dealer is liable to pay GST instead of the supplier.

Normal GST Transaction Flow

 

RCM Transaction

When is Reverse Charge Applicable

A. Supply from an Unregistered dealer to a Registered dealer

If a vendor who is not registered under GST, supplies goods to a person who is registered under GST, then Reverse Charge would apply. This means that the GST will have to be paid directly by the receiver to the Government instead of the supplier.

The registered dealer who has to pay GST under reverse charge has to do self-invoicing for the purchases made.

For Inter-state purchases the buyer has to pay IGST. For Intra-state purchased CGST and SGST has to be paid under RCM by the purchaser.

B. Services through an e-commerce operator

If an e-commerce operator supplies services then reverse charge will be applicable to the e-commerce operator. He will be liable to pay GST.

For example, Zomato provides food services. So Zomato is liable to pay GST and collect it from the customers instead of the registered service providers.

If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST.

C. Supply of certain goods and services specified by CBEC

CBEC has issued a list of goods and a list of services on which reverse charge is applicable.

Exemption Limit

The government has given an exemption limit of Rs. 5,000 per day. If a total purchase is of less than Rs. 5,000 in one day from unregistered person then there is no requirement to pay tax on RCM.

Time of Supply under Reverse Charge

A. Time Of Supply in case of Goods

In case of reverse charge, the time of supply shall be the earliest of the following dates:

• the date of receipt of goods
• the date of payment
• the date immediately after 30 days from the date of issue of an invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

B. Time Of Supply in case of Services

In case of reverse charge, the time of supply shall be the earliest of the following dates:

• The date of payment
• The date immediately after 60 days from the date of issue of invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

Self Invoicing

Self-invoicing means raising a purchase invoice, which is to be done when you have purchased goods / services from an unregistered dealer AND such purchase of goods or services falls under reverse charge.

Since supplier is unregistered person hance cannot issue a GST-compliant invoice to you, thus you become liable to pay taxes on the supplier's behalf. Hence, self-invoicing, in this case, becomes necessary.

All taxpayers required to pay tax under reverse charge have to register for GST and the threshold of Rs 20 Lakhs is not applicable to them.

Is Input Tax Credit allowed under Reverse Charge?

Tax paid on reverse charge basis will be available for input tax credit if such goods and/or services are used, or will be used, for business. The recipient (i.e., who pays reverse tax) can avail input tax credit.