In the realm of taxation, the Reverse Charge Mechanism (RCM) is a concept that can significantly impact the way goods and services are taxed. This mechanism shifts the responsibility of paying the Goods and Services Tax (GST) from the supplier to the recipient. In this blog, we will delve into the intricacies of RCM, when it applies, and the key aspects you need to know.
What is RCM?
Typically, the supplier of goods or services bears the responsibility of paying the GST on the supply. However, under RCM, this chargeability gets reversed, making the recipient of goods or services liable for paying the tax. The key objectives behind this mechanism include widening the tax base, exempting certain suppliers, and taxing the import of services from foreign suppliers.
When Does RCM Apply?
RCM does not apply to all transactions but is specific to certain scenarios. Here are the situations in which RCM comes into play:
Supply of Specified Goods and Services:
Section 9(3) of the CGST Act empowers the Central Board of Indirect Taxes and Customs (CBIC) to specify the goods and services on which RCM is applicable.
Supply from Unregistered Dealer to Registered Dealer:
Section 9(4) of the CGST Act states that if an unregistered supplier provides goods to a registered recipient, RCM is triggered. The registered buyer is then responsible for paying the GST directly, necessitating self-invoicing for the purchases made. In intra-state purchases, CGST and SGST are levied under RCM, while for inter-state purchases, IGST is applicable.
Supply of Services through E-commerce Operators:
Section 9(5) of the CGST Act mandates that if a service provider utilises an e-commerce operator to offer specific services, the e-commerce operator is liable for GST payment under RCM.
Time of Supply Under RCM
The time at which GST becomes payable is crucial. For goods, the time of supply is the earliest of the following:
– Date of receiving goods
– Date of payment
– Date immediately after 30 days from the date of the supplier’s invoice.
For services under RCM, the time of supply is determined as the earliest of the following:
– Date of payment
– Date immediately after 60 days from the date of the supplier’s invoice
Registration Rules Under RCM
Individuals liable to pay GST under RCM are required to register under GST. The usual threshold limits do not apply to them.
Who Pays GST Under RCM?
The recipient of goods or services is responsible for paying GST under RCM. It’s essential for the supplier to specify in the tax invoice whether tax is payable under RCM.
Input Tax Credit (ITC) Under RCM
The supplier cannot claim Input Tax Credit (ITC) on GST paid under RCM. However, the recipient can avail of ITC on goods or services used for business purposes. Notably, this ITC cannot be used to offset output GST under RCM; it must be paid in cash.
When procuring goods or services from an unregistered supplier, self-invoicing becomes necessary. This is because the unregistered supplier cannot issue a GST-compliant invoice, making it the recipient’s responsibility to fulfil tax obligations on their behalf.
The Bottom Line
The Reverse Charge Mechanism (RCM) in GST is a crucial concept that shifts the responsibility of paying GST from the supplier to the recipient in specific scenarios. It aims to broaden the tax base, exempt some suppliers, and tax imported services. RCM applies to certain goods and services specified by the CBIC, transactions from unregistered dealers to registered ones, and services provided through e-commerce operators. The time of supply is vital, and individuals under RCM must register for GST with no threshold limits. Recipients bear the GST liability under RCM, and Input Tax Credit is available for business use. Self-invoicing is essential for unregistered suppliers, and staying informed about RCM is crucial for GST compliance.
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Frequently Asked Questions
Non-registered recipients required to pay tax under RCM must register for GST.
Non-registered recipients who are required to pay tax under the Reverse Charge Mechanism (RCM) must register for GST. This registration is mandatory to ensure compliance with GST laws and fulfill their tax obligations under RCM.
ITC is allowed under RCM if the goods or services are used for business.
Input Tax Credit (ITC) is permitted under the Reverse Charge Mechanism (RCM) if the goods or services subject to RCM are used for business purposes. This means recipients can claim ITC for the GST paid under RCM, provided that the goods or services are utilised in their business operations.
An Input Service Distributor (ISD) cannot procure supplies liable to reverse charge unless registered as a regular taxpayer.
An Input Service Distributor (ISD) cannot procure supplies that are liable to reverse charge unless they are registered as regular taxpayers. ISDs are entities that distribute the credit of input services to other units of the same company, and they cannot avail supplies under reverse charge unless they have registered as regular taxpayers in the GST system.
ITC of tax paid under RCM can be claimed in the subsequent month.
Input Tax Credit (ITC) of the tax paid under the Reverse Charge Mechanism (RCM) can be claimed in the subsequent month. Recipients who have paid GST under RCM in one month can avail of the ITC for this tax in the following month, subject to compliance with GST regulations.