Introduction

The web of indirect taxes in Goods and Services Tax (GST) is very complex, to change this complexity an integrated tax structure was introduced. This introduction has fundamentally revolutionized the Indian tax system. There are many provisions of GST, one of these provisions is the reverse charge mechanism which comes with a very unique feature. The reverse charge mechanism basically has a significant impact on businesses, especially those dealing with unregistered sellers. The main objective of this article is to provide a thorough understanding of the reverse charge mechanism under GST.

What is Reverse Charge Mechanism

Reverse charge mechanism in the Goods and Services Tax system (GST) is basically a concept where the tax is paid by the recipient of goods or services, rather than the supplier. Basically this mechanism is used to shift the payment obligation from the supplier to the recipient. If we understand it in simple words, it means that, when RCM is applicable, the buyer has to pay the tax directly to the government instead of the seller collecting it and paying it to the government. It is commonly used to ensure tax compliance. The reverse charge mechanism is basically responsible for equitably distributing the tax compliance responsibility between suppliers and recipients.

Who should pay GST under RCM?

Under RCM basically the recipient of goods/services has to pay GST. However if we talk about the legal provisions of GST, the person supplying the goods has to mention in the invoice whether tax is payable under RCM or not. There are some important points that you should keep in mind while making GST payment under RCM, such as -

• The recipient of goods or services can avail ITC on the tax amount paid under RCM only if such goods or services are used for furtherance of a business or trade.

• A composition dealer while discharging the liability under RCM should basically pay tax at normal rates and not at composition rates. Additionally, they are basically ineligible to claim any input tax credit of the tax paid.

• GST Compensation Cess may be applicable substantively on tax paid under RCM

Self-Invoicing under RCM

Section 31 of the Central Goods and Services Tax Act, 2017 (CGST Act) allows issuance of invoice to any registered recipient, essentially subject to the reverse charge mechanism. This is what we know as Self-Invoicing .

For regular GST challan, it is mandatory to contain all the required details in the self-challan, like

• GSTIN of seller and buyer

• The date of the invoice

• Invoice number

• Description of services or goods

• The quantity, The rate and

• GST amount

It is very important to note that a self-invoice is not a legal document. Self-invoicing does not create any liability for the unregistered seller. The liability to pay GST lies only with the registered buyer under RCM.

Time Of Supply Under RCM

Time of Supply under RCM for Goods

The time of supply of goods will be determined originally based on the earliest of the following dates, where reverse charge is applicable:

1. The date of receipt of goods: This is the date when the recipient physically receives the goods.

2. The date immediately after 30 days from the date of issue of an invoice by the supplier: If the supplier has issued an invoice, the time of supply can be 30 days after the invoice date.

3. If it is not possible to determine the time of supply using the methods mentioned above, the time of supply is taken to be the date of entry in the books of account of the recipient.

Time of Supply under RCM for Services

The time of supply of services will be determined on the basis of earliest of the following dates, in case of reverse charge:

1. The date of payment: This is the date when the recipient makes the payment for the services.

2. The date immediately after 60 days from the date of issue of the invoice by the supplier: If the supplier has issued an invoice, the time of supply can be 60 days after the invoice date.
3. If it is not possible to determine the time of supply using the methods mentioned above, the time of supply is taken to be the date of entry in the books of account of the recipient.

Accounting of GST under RCM

The reverse charge mechanism in accounting for GST involves the following considerations:

• Under RCM, the liability to pay GST is shifted from the supplier to the recipient.

• The supplier has to basically issue a tax invoice showing that tax is payable under RCM in case of goods or services on which the reverse charge mechanism is applicable.

• The recipient must mandatorily prepare a self-invoice for the goods or services received. Which will include the following details such as GSTIN of the recipient and supplier, invoice number, full details of goods or services etc.

• The recipient should record the self-invoiced transaction in his books on the date of supply.

• Another entry should be passed on the date on which the tax is deposited

• The recipient will need to book both inward tax and outward tax on the same entry as GST paid under RCM.

Conclusion

In conclusion, the reverse charge mechanism basically acts as an important tool for tax compliance under the Goods and Services Tax (GST) regime. By shifting the tax liability from the supplier to the recipient in specific circumstances, RCM aims to fundamentally curb tax evasion. This proves to be very useful in broadening the tax base. However, its implementation has posed huge challenges for businesses. Despite these obstacles, RCM remains an integral part of GST, and continues to contribute to a strong tax administration system. Navigating the RCM provisions is essential for growing businesses to ensure compliance with tax law.

FAQs

Q.1) Who is responsible for paying tax under RCM?

Ans. Under RCM, the recipient of goods or services is responsible for paying the tax to the government, instead of the supplier.

Q.2) Is RCM applicable to all goods and services?

Ans. No, RCM is not applicable to all goods and services. It is applicable to specific goods and services as notified by the government.

Q.3) Can small businesses avail input tax credit under RCM?

Ans. Yes, registered businesses can avail input tax credit for the tax paid under RCM, subject to compliance with GST rules.

Q.4) Is there any threshold limit for RCM?

Ans. There is no threshold limit for RCM; it applies irrespective of the turnover of the business