Understanding Reverse Charge Mechanism Under GST

Understanding the complexities of Goods and Services Tax is crucial for every individual involved in the consumption or supply of goods and services. One such aspect of Goods and Services Tax is the Reverse Charge Mechanism or RCM. As the name suggests, under RCM, the liability to pay taxes for goods and services lies on the recipient rather than the supplier.

The Reverse Charge Mechanism has several other aspects that you must understand for efficient financial planning. Let’s discuss RCM under GST in detail. 

What is Reverse Charge Mechanism (RCM) in GST?

The Reverse Charge Mechanism talks about the tax liability of every recipient of goods and services under the GST. The general method of collecting taxes under GST says that the supplier is responsible for collecting taxes from the customer. However, under RCM the liability is shifted to the customer rather than the supplier. The concept of RCM was brought in by the Ministry of Finances to ensure enhanced efficiency and transparency in the tax collection system. 

Remember that RCM does not apply whenever a customer takes goods or services from the market, there specific cases. 

Current Scenario of Reverse Charge Mechanism (RCM) in GST

The reverse charge mechanism in GST was introduced to bring better accountability and transparency in the tax assessment and collection system. It ensures that every transaction for goods and services is aptly recorded for tax liabilities.

Recently, there have been changes made in the ways self-invoicing was required to be done. This was done to ensure that businesses are maintaining self-invoicing accurately to claim input tax credits. ¹

When is Reverse Charge Applicable?

As discussed above, the Reverse Charge Mechanism is not applicable for every transaction made by a recipient against goods and services. Let’s understand the applicability of reverse charge under GST in detail: 

• Relevant Sections under the GST Act

Sections 9(4) and 9(5) of the Central GST and State GST Acts deal with the reverse charge scenarios for intrastate transactions. In addition, sections 5(3), 5(4) and 5(5) of the Integrated GST Act deal with the reverse charge scenarios for inter-state transactions.

Remember that the CBIC issues the list of goods and services on which reverse charge is applicable, which you can check from the official CBIC website.

Time of Supply Under RCM

Now you need to understand the time of supply under RCM i.e. the date from which the tax liability arises. This is done to ensure that the tax is correctly collected from the end customer excluding middlemen or suppliers. Here’s everything you need to know about the time of supply under reverse charge mechanism:

For goods:

• The date of receipt of goods
• The date of payment
• 30 days immediately after the date of issue of an invoice by the supplier

For services:

• The date of payment of services
• 60 days from the date of issue of the invoice 

Note: Remember that determining the time of supply under RCM is not possible and therefore the entry date is referred to for calculation. 

Let’s take a look at this illustration for a better understanding of the time of supply under RCM:

Say that the date for receipt of goods is 15th May 2024, the date of invoice is 1st June 2024 and the date of entry in books is 18th May 2024, in this case, the time of supply of services under RCM will be 15th May. 

Registration Rules Under RCM

Now that you have understood that RCM raises tax liabilities under the GST Act, you must have also understood that getting a registration is mandatory if GST tax liabilities under RCM apply to you.

According to section 24 of the Central Goods and Services Tax Act,2017 it is mandatory for every individual liable to pay GST to get a GST registration number. In addition, remember that the threshold limits of ₹20 lakhs or ₹40 lakhs will not apply. This means that irrespective of the turnover amount, a GST registration is mandatory.

Who Should Pay GST Under RCM?

Reverse Charge Mechanism is a tax liability for recipients of goods and services under the GST Act. Does that mean every individual has to pay this tax? 

The liability to mention whether GST under RCM is applicable or not lies on the supplier of goods and services. 

Here’s a list of points to keep in mind when it comes to RCM under GST:

• Input Tax Credit: Any recipient of goods and services can claim the input tax credit on the RCM amount. This helps in strengthening the business in future. 

• Composition Dealers: Composition dealers are liable to pay normal rates under RCM. This means that they can not claim ITC on the RCM amount. 

• GST Compensation Cess: GST compensation cess may be applicable in addition to RCM. 

• Compulsory Registration: As discussed above, as per Section 24 of the Central Goods and Services Tax Act, 2017, every individual paying RCM must get a GST registration. 

Input Tax Credit (ITC) Under RCM

Before moving ahead with other aspects of RCM, let’s take a quick look at the role of input tax credit under RCM:

• Input tax credit (ITC) under RCM allows every recipient a claim to gain credit for GST paid under RCM. This means that if you are paying GST under RCM, you can claim credits that will help you offset or lower certain tax liabilities in future.

• However, remember that ITC can be claimed only when goods and services are used strictly for business purposes.

• To claim ITC for GST paid under RCM it is important to have updated documents and timely payments of GST.

Note: Composition dealers can not claim ITC for GST paid under the reverse charges mechanism. 

Types of Reverse Charges Under GST

There are two types of reverse charges under GST:

• Forward Reverse Charges

This type of reverse charge liability arises when the buyer has purchased goods or services from an unregistered dealer. In this case, the buyer pays GST directly without any involvement of the supplier.

• Backward Reverse Charges

This type of reverse charge is applicable only for specific services like manpower supply services, legal services, security services etc.  

Implications of Reverse Charge Mechanism on Businesses

Lastly, it is important to understand that the reverse charges mechanism has both positive and negative impacts on businesses. Let’s see how: 

• The Burden to Comply

As discussed above, the responsibility to mention whether GST under RCM applies or not on a recipient lies on the supplier that creates an additional burden for businesses. Every supplier now has to maintain records and submit documents showcasing GST liability under RCM on buyers.

• The Advantage of Cost Savings

Buyers who are purchasing their goods and services from an unregistered supplier or dealer can escape tax liabilities under RCM. Additionally, there is also the advantage of credits that businesses can enjoy by claiming ITC for GST paid under RCM. 

• Enhanced Compliance

The introduction of the reverse charge mechanism has ensured better compliance with GST and a more transparent and efficient tax collection under the Goods and Services Tax Act.

How Lendingkart Can Help With RCM and Self-Invoicing?

Now that you have reached here you must have understood that analysing the complexities of tax collection and assessment systems is extremely important for your business to have successful growth. While you are busy implementing expansion strategies you can rely on online platforms to ensure efficient financial planning for your business. Here’s how:

• Simplified Self-Invoicing

You can use online portals to easily generate self-invoices and claim ITC without manually keeping record of every goods and services transaction. 

• Calculating Time of Supply 

Calculating time of supply for RCM is crucial and now you can get notified about the due date through advance features on these portals.

• Working Capital

One of the biggest challenges that businesses face is the lack of working capital. With a business loan from Lendingkart, the much-needed working capital is taken care of.

• Equipment Investment

Opting for a business loan can help in expansion strategies by investing in upgraded equipment.

• Smooth Cash Flow Management

One thing that every business needs is smooth cash flow management to focus on expansion strategies. This is where a business loan comes into the picture to promise seamless cash flow management.