What is Reverse Charge Mechanism?
When is Reverse Charge Applicable?
- Services provided by an unregistered person to a registered person: When an unregistered service provider offers services to a registered entity, the recipient must pay the GST.
- Purchase of specified goods or services: Certain goods and services, as determined by the government, fall under the purview of RCM. These may include legal services, director’s services, etc.
- Imported services: GST under RCM is levied when services are imported from outside India, placing the onus of tax payment on the recipient.
Registration Rules Under RCM
- Registered taxpayers receiving services from an unregistered supplier
- Individuals responsible for purchasing specific goods or services
- Importers availing services from foreign entities
Requirements under the Reverse Charge Mechanism
- Maintain records of all transactions subject to RCM
- Ensure the correct payment of tax to the government within the stipulated time frames
- Accurately report the transactions in their GST returns
- Reconcile their books of accounts with the GST returns to avoid any discrepancies
Time of Supply Under Reverse Charge Mechanism (RCM)
- Time of Supply for Goods When it comes to reverse charge, determining the time of supply for goods is based on the earliest of the following dates:
- The day you receive the goods.
- The day you make the payment.
- The day right after 30 days from when the supplier issued the invoice.
- If it’s not feasible to pinpoint the exact time of supply, it defaults to the day you record the transaction in your books.
- You received the goods on May 15, 2021.
- The invoice from the supplier was dated June 1, 2021.
- You recorded the transaction in your books on May 18, 2021.
- The day you make the payment.
- The day immediately after 60 days from when the supplier issued the invoice.
- If it’s not possible to establish the time of supply, it defaults to the day you record the transaction in your books.
- You made the payment on July 15, 2021.
- Considering the supplier’s invoice date as May 15, 2021, the day right after 60 days from this date would be July 14, 2021.
- You recorded the transaction in your books on July 18, 2021.
Under RCM, recipients must self-invoice the supplies they receive and maintain detailed records of these self-invoices. Self-invoicing helps in accurate tax reporting and claiming ITC.
Input Tax Credit (ITC) Under RCM
Registered recipients who pay GST under RCM are eligible to claim Input Tax Credit. This credit can be utilized to offset the GST liability on their output supplies. ITC is a crucial aspect of RCM, as it ensures that the tax paid on inward supplies does not become an additional financial burden.
Exemptions under Reverse Charge
While RCM is generally applicable in specific scenarios, there are exemptions, and the government has the authority to specify categories of goods or services that are exempt from RCM. As per GST rules, the Central Board of Indirect Taxes and Customs (CBIC) releases a notification to specify the goods or services that qualify for RCM exemptions.
The Reverse Charge Mechanism (RCM) provisions, initially applicable to a specific group to be determined later, were eventually made permanent by extending the blanket exemption for purchases from unregistered persons.
The Reverse Charge Mechanism in GST is a mechanism designed to shift the tax liability from the supplier to the recipient under certain circumstances. Understanding the applicability, time of supply, registration requirements, and implications of RCM is essential for businesses to ensure proper compliance with GST laws.
As the GST framework continues to evolve, staying informed and up-to-date on provisions like RCM is vital for businesses operating in the Indian tax landscape. Advanced GST software solutions like LogiTax help you to navigate the complexities of the Reverse Charge Mechanism seamlessly and ensure compliance with GST regulations.
The information provided in this presentation does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This presentation is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi-judicial authorities may not take a position contrary to the views mentioned herein.
Reverse Charge is a tax mechanism where the responsibility for paying taxes on specific categories of supplied goods or services shifts from the supplier to the recipient.
RCM applies to specific items such as Cashew Nuts (unshelled or unpeeled), Bidi Leaves (Tendu), Tobacco Leaves, Silk Yarn, Raw Cotton, Supply of lottery, and Used vehicles, seized and confiscated goods, old and used goods, waste, and scrap. It involves various combinations of agriculturists, registered persons, and government entities.
Reverse Charge Mechanism (RCM) in GST is a system where the individual receiving goods or services becomes responsible for paying the Goods and Services Tax, as opposed to the usual scenario where the supplier is accountable. For example, the supply of raw cotton by farmers to cooperatives, including kala cotton, is subject to RCM.
Reverse charge applies to GST on residential rent when the monthly rent from the tenant to the landlord exceeds Rs. 50,000. If the rent is below this amount, the reverse charge provision does not come into play.
Under GST, when services are imported with or without consideration, they are considered supplies, regardless of whether they are in the course of business. Import of services typically falls under GST reverse charge for most businesses.