Generally, the GST is paid by the Supplier of Goods/Services. However, in certain cases like imports & other notified supplies, the GST is paid by the recipient under the Reverse Charge Mechanism.
What is RCM?
Generally, the supplier of goods & services pays the tax on supply. But in case of Reverse Charge Mechanism (RCM), the recipient of goods or services becomes liable to pay the tax, i.e., the liability of tax gets reversed.
There are 2 types of reverse charge structure provided under the law. First one depends upon the nature of supply, which is covered under Section 9(3) of the CGST/SGST (UTGST) Act & Section 5(3) of the IGST Act, 2017. Second structure is covered under Section 9(4) of the CGST/SGST (UTGST) Act & Section 5(4) of the IGST Act, 2017, where taxable supplies by an unregistered person to a registered person is covered.
As per the provision of Section 9(3) of the CGST/SGST (UTGST) Act & Section 5(3) of the IGST Act, 2017, ‘reverse charge’ means the recipient of Goods/Services or both will have to pay tax instead of the supplier of Goods/Services or both.
When is RCM Applicable?
RCM is applicable under the following cases
- Supply from an Unregistered dealer to a Registered dealer (Section 9(4)) **
As per Section 9(4) of the CGST/SGST (UTGST) Act & Section 5(4) of the IGST Act, 2017, supplier who is not registered under GST, supplies goods/services to a person who is registered under GST, then the mechanism of reverse charge would apply. Thus, GST will be directly paid by the recipient to the Government instead of the supplier. The registered dealer who has to pay tax under RCM has to do self-invoicing for the purchases made.
- Services provided through an E-Commerce Operator
If services are supplied through an E-Commerce Operator, then the mechanism of reverse charge will be applicable to the e-commerce operator. For example, UrbanClap provides services of beauticians, teachers, electricians, plumbers, etc., here UrbanClap is liable to pay GST & collect it from customers instead of the registered service provider.
- Supply of Goods/Services specified by CBIC
CBIC has issued a list of goods & services on which mechanism of reverse charge is applicable.
Section 9(4) is presently under Suspension. It mandates that the registered recipient shall pay the tax on reverse charge basis on the purchases made from unregistered supplier. This is being omitted for trade facilitation.
What is Self-Invoicing?
Self-Invoicing is done when a business owner purchases Goods/Services from an unregistered supplier & such purchases of goods or services falls under the mechanism of Reverse Charge. This is done, as the unregistered supplier cannot issue a GST Invoice.
What are the requirements under RCM?
Following are the requirements under RCM
- The recipient of Goods/Services shall be registered under GST
- Accurate records of supplies (that would incur reverse charge) shall be maintained by every registered business owner.
- The supplier shall clearly mention on the Invoices that the tax payable for that particular transaction is through Reverse Charge. Similarly, the same shall be mentioned on receipt vouchers & refund vouchers.
- Advance tax paid on supplies that incur RCM is taxable under GST. The taxpayer making advance payment shall pay tax on reverse charge basis.
What is the Time of Supply of Goods/Services under RCM?
Time of Supply for Goods
Under reverse charge, the time of supply for goods shall be earlier of the following dates:
- The date of receipt of Goods
- The date immediately after 30 days from the date of Issue of an Invoice by the supplier of Goods.
- Entry Date in the Books of account of the recipient of Goods (in case, if it is not possible to determine the time of supply of Goods)
- Receipt of Goods on 15-04-2021
- Invoice issued by supplier on 01-05-2021 (date immediately after 30 days i.e., 31-05-2021)
- Entry in the Books of account of the recipient on 18-04-2021
In above case, the Time of Supply of Goods will be 15-04-2021.
Time of Supply for Services
Under reverse charge, the time of supply for services shall be earlier of the following dates:
- The date of Payment
- The date immediately after 60 days from the date of issue of an Invoice by the supplier of Services.
- Entry Date in the Books of account of the recipient (in case, if it is not possible to determine the time of supply of services)
- Date of Payment on 01-07-2021
- Invoice issued by supplier on 15-04-2021 (date immediately after 60 days.i.e 14-06-2021)
- Entry in the Books of account of the recipient on 05-07-2021
In above case, the Time of Supply of Services will be 14-06-2021.
Is Input Tax Credit (ITC) allowed under Reverse Charge Mechanism?
Supplier cannot claim Input Tax Credit (ITC) of GST paid on goods or services that were used to make supplies on which the recipient is liable to pay tax under RCM. However, ITC can be claimed by the recipient only if goods and/or services are used, or will be used, for business purpose only.
Is there any Exemption under Reverse Charge Mechanism?
Intra-State supplies of Goods/Services received from an unregistered supplier by a registered person is exempted from payment of tax under RCM, provided that the total value of such supplies received per day is less than or equal to Rs. 5000.
In case of any Query related to Reverse Charge Mechanism under GST, then contact Manthan Experts for immediate relief.