Under the standard Goods and Services Tax (GST) system, the supplier is responsible for collecting and remitting tax to the government. However, in specific situations, this responsibility shifts to the recipient of goods or services. This shift is known as the Reverse Charge Mechanism (RCM). RCM ensures tax compliance in cases where the supplier is unregistered or the nature of the supply warrants such a shift.
When is Reverse Charge Applicable?
RCM applies in the following scenarios:
1. Supply from Unregistered Dealers
If a registered person purchases goods or services from an unregistered supplier, RCM becomes applicable. In such cases, the recipient must pay GST directly to the government and issue a self-invoice for the transaction.
2. Notified Goods and Services
The government has specified certain goods and services where RCM is mandatory. These include:
- Goods:
- Cashew nuts (not shelled or peeled)
- Bidi wrapper leaves
- Tobacco leaves
- Silk yarn
- Raw cotton
- Used vehicles, seized and confiscated goods, old and used goods, waste, and scrap
- Services:
- Legal services provided by an advocate or firm of advocates
- Services provided by a Goods Transport Agency (GTA)
- Sponsorship services
- Services supplied by the Central or State Government to business entities
- Services provided by a director to a company
- Services provided by an insurance agent to any person carrying on insurance business
- Services provided by a recovery agent to a banking company or financial institution
- Services provided by an author, music composer, photographer, artist, etc., by way of transfer or permitting the use or enjoyment of a copyright
- Services provided by members of an overseeing committee to the Reserve Bank of India
3. Import of Services
When services are imported into India, the recipient is liable to pay GST under RCM. This ensures that services received from foreign entities are taxed appropriately.
4. Services through E-commerce Operators
In cases where services are supplied through e-commerce platforms, the e-commerce operator is responsible for paying GST under RCM. For example, if a service provider uses an e-commerce platform to offer services like housekeeping or transportation, the platform operator must pay the tax.
Time of Supply under RCM
Determining the time of supply is crucial for tax compliance under RCM:
- For Goods:
- Date of receipt of goods
- Date of payment
- 30 days from the date of issue of invoice by the supplier
- If none of the above, the date of entry in the recipient’s books of account
- For Services:
- Date of payment
- 60 days from the date of issue of invoice by the supplier
- If none of the above, the date of entry in the recipient’s books of account
Compliance Requirements
Recipients liable under RCM must:
- Self-Invoicing: Issue an invoice for purchases from unregistered suppliers.
- Payment Vouchers: Issue payment vouchers at the time of making payment to the supplier.
- GST Payment: Pay the applicable GST directly to the government.
- Input Tax Credit (ITC): Claim ITC on the tax paid under RCM, provided the goods or services are used for business purposes.
- Registration: Obtain GST registration if liable under RCM, regardless of turnover thresholds.
Key Takeaways
- RCM shifts the tax liability from the supplier to the recipient in specified scenarios.
- It ensures tax compliance, especially in cases involving unregistered suppliers or specific notified goods and services.
- Proper understanding and adherence to RCM provisions are essential for businesses to remain compliant under GST law.
