The implementation of the Goods and Services Tax (GST) in India brought significant changes to the taxation system, including the introduction of the Reverse Charge Mechanism (RCM). RCM is a unique concept that shifts the responsibility of tax payment from the supplier to the recipient of goods or services. In this article, we will explore the concept of RCM in GST, its applicability, different types of RCM, the limit of RCM under GST, the step-by-step process, major components, and the entities that come under RCM.
Reverse Charge Mechanism (RCM) is a provision under GST where the liability to pay taxes is reversed from the supplier to the recipient of goods or services. In a normal scenario, the supplier collects and pays the applicable taxes. However, under RCM, the recipient becomes responsible for paying the tax directly to the government.
To understand RCM better, let’s consider an example: ABC Enterprises, a registered business, hires the services of XYZ Consultancy, which is an unregistered service provider. In this case, under RCM, ABC Enterprises will be liable to pay the GST on the services received from XYZ Consultancy directly to the government, instead of XYZ Consultancy being responsible for collecting and remitting the tax.
Yes, RCM is applicable on the reverse charge principle. The reverse charge mechanism applies when the recipient of goods or services is required to pay the tax directly to the government, instead of the supplier.
RCM is applicable in the following cases: Goods or Services Covered under Section 9(3): RCM is applicable when specified goods or services are procured from unregistered dealers or specific registered dealers as notified by the government.
Import of Services: RCM applies to services imported from a foreign country, where the recipient of services is liable to pay the GST.
Notified Supplies: The government has the power to notify certain supplies on which RCM is applicable. These supplies are specified in the notification, and the recipient of goods or services is responsible for paying the tax.
There are two types of Reverse Charge Mechanism under GST:
RCM for Goods: Under this type, the recipient of goods is liable to pay the GST directly to the government. RCM for goods is applicable when goods are procured from an unregistered supplier or from a supplier registered under the Composition Scheme.
RCM for Services: RCM for services applies when specific services are received from an unregistered service provider. The recipient of services is responsible for paying the GST on such services.
The threshold limit for RCM under GST was revised in the 32nd GST Council Meeting held on 10th January 2019. As per the revised provisions, RCM is not applicable if the total value of goods or services received by a registered person from an unregistered supplier does not exceed INR 5,000 in a day. However, it is important to note that this threshold is not applicable for specific notified supplies.
The reverse charge mechanism involves the following three steps:
Identification of Goods or Services: The first step is to identify the goods or services that fall under the reverse charge mechanism. This can be done by referring to the notifications issued by the government or the provisions mentioned in the GST law.
Record Keeping: The recipient of goods or services should maintain proper records of the invoices or other relevant documents to determine the tax liability under RCM. These records are crucial for GST compliance and audit purposes.
Payment of Tax: Once the liability under RCM is determined, the recipient needs to calculate the tax amount and pay it to the government. The payment should be made within the specified time frame as per the GST rules.
The four major components of Reverse Charge Mechanism (RCM) under GST are as follows:
Liability: RCM shifts the liability to pay tax from the supplier to the recipient of goods or services. The recipient becomes responsible for paying the tax directly to the government.
Registration: The recipient of goods or services needs to be registered under GST to avail the benefits of input tax credit and fulfill the compliance requirements.
Record Keeping: Proper maintenance of invoices, documents, and records is essential for determining the tax liability under RCM and ensuring compliance with GST regulations.
Payment of Tax: The recipient of goods or services is required to calculate the tax amount under RCM and pay it to the government within the specified time frame.
Under the Reverse Charge Mechanism (RCM), registered taxpayers who receive goods or services from unregistered dealers, composition scheme dealers, or specific notified supplies come under RCM. Additionally, importers of services are also covered under RCM.
The Reverse Charge Mechanism (RCM) under GST is a significant shift in the tax liability from the supplier to the recipient of goods or services. It is crucial for businesses and individuals to understand the concept of RCM, its applicability, and the procedures involved. By being aware of the types of RCM, the threshold limits, and the steps for compliance, businesses can ensure accurate tax payment and fulfill their obligations under GST. It is advisable to consult professional experts or refer to the official GST guidelines for specific cases to ensure compliance with the RCM provisions.