REVERSE CHARGE MECHANISM (RCM)

RCM implementation has been deferred to 01 Apr 2018

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Reverse charge means the liability to pay tax is on the recipient of supply of goods or services, instead of the supplier of such goods or services in respect of notified categories of supply.


There are two type of reverse charge scenarios provided in law.

  • First is dependent on the nature of supply and/or nature of supplier. This scenario is covered by section 9 (3) of the CGST/SGST (UTGST) Act and section 5 (3) of the IGST Act.
  • Second scenario is covered by section 9 (4) of the CGST/SGST (UTGST) Act and section 5 (4) of the IGST Act where taxable supplies by any unregistered person to a registered person is covered.



RCM in simple terms

The tax (charge) is usually paid by the Seller. In RCM cases, the tax is paid by the Buyer (However on behalf of the Seller) i.e. The person liable to pay the tax is reversed.

Consider the example : Say an Un-registered supplier sells goods for Rs 10,000. Being unregistered, he does not levy any GST. If this was sold by a Registered dealer, then the invoice amount would be Rs 11,800 (Rs 10,000 + 1,800 GST) In the case of RCM (Reverse Charge Mechanism), we will create a liability on behalf of the seller. i.e. GST payable to Government -- Rs 1,800 on behalf of the Seller. However the exact same amount is available as an input credit (ITC) to us. So NET EFFECT is 0.00

RCM comes into play on Purchases i.e. GSTR2. So input tax credit (ITC) is applicable and simultaneously tax liability of same value is also levied.

It is a common misconception that RCM will lead to an increased payout or will block working capital.
The revenue secretary has explicitly confirmed that this is not the case. ITC can be availed as a set off in the same month as that in which the tax liability is being raised. Do note : Separate voucher wise details are not required. A consolidated single voucher may be passed for all the RCM purchases totaled up for the month.


Registration

  • A person who is required to pay tax under reverse charge has to compulsorily register under GST and the threshold limit of Rs. 20 lakhs (Rs. 10 lakhs for special category states except J & K) is not applicable to him.
A supplier cannot take ITC of GST paid on goods or services used to make supplies on which the recipient is liable to pay tax.



Time of Supply

The Time of Supply is the point when the supply is liable to GST. One of the factors relevant for determining time of supply is the person who is liable to pay tax. In reverse charge, the recipient is liable to pay GST.
Thus, Time of Supply for supplies under reverse charge is different from supplies which are under forward charge.

In case of supply of goods under RCM , Time of Supply is the earliest of :

  • date of receipt of goods; or
  • date of payment as per books of account or date of debit in bank account, whichever is earlier; or
  • the date immediately following thirty days from the date of issue of invoice or similar other document..

In case of supply of services, Time of Supply is earliest of :

  • the date of payment as per books of account or date of debit in bank account, whichever is earlier;
  • the date immediately following sixty days from the date of issue of invoice or similar other document:
  • the date immediately following thirty days from the date of issue of invoice or similar other document..



Services on which RCM is applicable are :

CBEC has notified a list of 12 services on which tax shall be paid by the recipient on 100 % reverse charge basis.

  • Non-resident service provider
  • Goods Transport Agencies
  • Legal service by an Advocate/ Firm of Advocates
  • Arbitral Tribunal
  • Sponsorship Services
  • Specified Services provided by Government or Local Authority to Business entity
  • Services of a director to a company
  • Insurance agent
  • Recovery Agent of Bank/FI/ NBFC
  • Transportation Services on Import
  • Permitting use of Copyright
  • Radio Taxi services to E-commerce aggregator (eg: Ola, Uber, etc.)