Reverse Charge Mechanism (RCM) under GST- Hidden Liability in books

“Unlock the intricacies of Reverse Charge Mechanism (RCM) under GST in this comprehensive article. Delve into the legal aspects, key sections, and benefits of RCM, along with the consequences of non-payment. Understand registration criteria and considerations for RCM transactions, ensuring compliance with GST regulations. Explore a detailed list of goods and services subject to RCM, and grasp the benefits, consequences, and important considerations for businesses involved. Stay informed to navigate the complexities of RCM successfully.”

Article explains Reverse Charge Mechanism (RCM) under GST, which shifts the tax payment liability from the supplier to the recipient of goods or services. Article Explore the legal aspects, important sections, and benefits of RCM, along with the consequences of non-payment. Understand the registration criteria and considerations for RCM transactions to ensure compliance with GST regulations.

What is the Reverse Charge Mechanism (RCM) under GST?

Section 2(98) of the CGST ACT 2017 deals with Reverse Charge Mechanism, it says the liability to pay tax id borne by the recipient of the supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4)of section 9, or under subsection (3) or subsection (4) of section 5 of the IGST act.

Under normal circumstances the liability to pay tax is on supplier but under RCM the liability to pay tax is on recipient of goods and services instead of supplier of such goods and services.

RCM –Legal Aspects

1. Compulsory registration under GST (no basic exemption)

2. Not to be included in the computation of Aggregate Turnover.

3. RCM payment shall be compulsorily made in cash.

4. The amount paid under RCM is eligible for credit.

5. The recipient shall avail of input tax credit by generating a self–invoice.

Some important sections relating to RCM

Section 9(3) of CGST ACT and Section 5(3) if IGST act

This section empowers the government to notify categories of goods or services where the recipient of the supply is liable to pay tax under reverse charge. The government can specify goods or services for which RCM will be applicable.

Relevant notification-

• Goods – notification 4/2017- Central Tax(rate)- Tobacco Leaves, Raw cotton etc.
• Service-Notification13/2017-Central Tax (rate) – GTA, Advocate, Security service etc.

RCM –Section 9(4)

The government may, on the recommendations of the council, by notification specify a class of registered persons who shall in respect of the supply of specified categories of goods or services or both received from an unregistered supplier,  pay the tax on a reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both. Notification issued construction sector covered.

As per the Notification of GST council the following are the list of goods and services that attract RCM,

List of goods that attract RCM under GST

1. RCM for goods: certain specified goods are subject to RCM, where the recipient of the goods is liable to pay the tax directly to the government. The supplier does not charge GST on the invoice.

Description of Goods	Supplier of Goods	Recipient of Goods
Cashew nuts, not shelled or peeled	Agriculturist	Any registered person
Silk yarn	Agriculturist	Any registered person
Raw cotton	Agriculturist	Any registered person
Used vehicles, seized and confiscated goods, old and used goods, waste and scrap	Central Government, State Government, Union territory or a local authority	Any registered person

List of Services that attract RCM under GST

2. RCM for services: Certain specified services are subject to RCM, where the recipient of the services is liable to pay the tax directly to the government. The supplier does not charge GST on the invoice.

Description of service	Provider of service	Recipient of service	Tax liability to be borne by
Taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non-assessee online recipient (OIDAR)	Any person who is located in a non-taxable territory	Any person located in the taxable territory other than non-assessee online recipient (Business Recipient)	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Services provided or agreed to be provided by a goods transport agency (GTA) in respect of transportation of goods by road	Goods Transport Agency (GTA)	(a) any factory registered under or governed by the Factories Act, 1948; (b) any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India; (c) any co-operative society established by or under any law; (d) any person registered under CGST/SGST/UTGST Act; (e) any body corporate established, by or under any law; or (f) any partnership firm whether registered or not under any law including association of persons. (g) Casual taxable person	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly	Services provided or a greed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly	Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly	An arbitral tribunal	Any business entity.	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Sponsorship services	Any person	Anybody corporate or partnership firm.	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Services provided or agreed to be provided by Government or local authority excluding, – (1) renting of immovable property, and (2) services specified below “(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers.	Government or local authority	Government or local authority	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate;	A director of a company or a body corporate	A director of a company or a body corporate	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Services provided or agreed to be provided by an insurance agent to any person carrying on insurance business	An insurance agent	Any person carrying on insurance business.	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company	A recovery agent	A banking company or a financial institution or a nonbanking financial company.	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India	A person located in non-taxable territory to a person located in non-taxable territory	Importer as defined under clause (26) of section 2 of the Customs Act, 1962.	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works	Author or music composer, photographer, artist, etc	Publisher, Music company, Producer	100% 0F TAX LIABILITY IS BORNE BY RECEIPIENT OF SERVICE
Radio taxi or Passenger Transport Services provided through electronic commerce operator	Taxi driver or Rent a cab operator	Any person	100% by Electronic Commerce Operator

Benefits of RCM: –

• Easy Compliance by shifting tax payment responsibility to the recipient.
• Ensure a level playing field between registered and unregistered businesses.
• Allows recipients to claim Input Tax Credit for the tax paid under RCM.
• Simplifies documentation and record–keeping requirements for suppliers.

Consequences Of Non-Payment of RCM: –

Failing to RCM can have several consequences Including:

• Penalties and Interest: -Non-payment or delayed payment of RCM should pay penalties and interest charges as per the GST laws.
• Non-Compliance Issues: It lead to audits, scrutiny, and potential legal consequences, which may include fines and other penalties.
• Loss of Input Tax Credit: If RCM is not paid the recipient may not be eligible to claim Input Tax Credit for the tax amount that should have been paid under RCM. This can result in increased tax liability and impact the business
• Reputation Risk: Non-payment of RCM and Non –compliance with tax regulation reputation of a business. It may lead to a loss of trust among suppliers and customers.

Registration criteria for registering under RCM

If a person who engage in a business of goods or services which is partially or fully liable to tax but have not taken registered due to exemption limit. Need to take registration and pay tax under RCM if he receives service or good which is liable to RCM.

The supplier of above goods and services are assumed to be operation under RCM no special registration is required but if they are willing to charge GST under forward charge, where in they are willing to bare the tax liability they must file a declaration in prescribed form that he exercised the option to pay gst on said service under forward charge in accordance with  section 9(1) and comply to all the provisions of that.

For Goods Transport Agency to opt FCM they must make sure that Annexure 5 is filed within march 15^th of PY.

Important Things to be considered during RCM transactions.

• Supplier must make it clear in his invoice that particular goods or service is liable to RCM.
• If the composite dealer falls under reverse charge mechanism, then the dealer is ineligible to claim any credit of tax paid. The tax will be paid at the normal applicable rates and not at the composition rates.
• Tax under reverse charge can be paid through cash only without availing the benefit of ITC.
• If in case, a dealer is unregistered under GST, then he is not allowed to deal in any interstate transactions. For any reverse charge mechanism to applicable, there must be only intra-state transactions.

Conclusion:-

In conclusion, The RCM is an important aspect of the goods and services tax system. It shifts the responsibility of tax payment from the supplier to the recipient of goods or services. Both supplier and recipient must be aware and be updated with the rules and provisions governing the RCM transactions to make sure no benefits are missed out or no penalties are attracted for non-compliance.