Introduction
The Goods and Services Tax (GST) framework in India typically mandates that the seller of goods or services is responsible for collecting and remitting tax. However, under the Reverse Charge Mechanism (RCM), this responsibility shifts to the recipient of the goods or services for specific categories. The primary objective of RCM is to expand the tax net to include unorganized sectors and offer exemptions to certain suppliers and importers of services.
What is the Reverse Charge Mechanism ?
RCM is a concept under GST where the liability to pay tax is on the recipient of goods or services instead of the supplier. This mechanism applies to specific categories to ensure broader tax coverage and provide exemptions to certain sectors.
Time of Supply for Goods
The time of supply for goods under RCM is the earliest of the following:
- The date of receipt of goods
- The date of payment recorded in the recipient’s books or when debited from their bank account, whichever is earlier
- The date immediately following 30 days from the invoice date or any similar document issued by the supplier
If these dates cannot be determined, the time of supply will be the date of entry in the recipient’s books.
Time of Supply for Services under RCM
For services under RCM, the time of supply is the earliest of:
- The date of payment recorded in the recipient’s books or the date when debited from their bank account, whichever is earlier
- The date immediately following 60 days from the invoice date or any similar document issued by the supplier
If these methods cannot determine the time of supply, it will be the date of entry in the recipient’s books.
Mandatory GST Registration under RCM
Entities required to pay tax under RCM must register for GST regardless of the threshold limit. This ensures compliance and proper tax accounting.
Applicable GST Rates
The GST rates under RCM are the same as those for the applicable goods or services. Composition dealers must pay RCM at normal rates (5%, 12%, 18%, 28%) rather than at composition rates (1% or 5%). The type of tax (CGST-SGST or IGST) is based on the place of supply.
Input Tax Credit (ITC) under RCM
Recipients can claim ITC on GST paid under RCM if the goods or services are used for business purposes. However, suppliers cannot use ITC to offset the GST payable under RCM. Instead, recipients must pay the GST first and then claim ITC.
Compliance Requirements for RCM
- Invoice and Vouchers: Tax invoices must indicate if the tax is payable under RCM. Similarly, this must be mentioned in receipt vouchers if applicable.
- Payment Vouchers and Record Keeping: Recipients must prepare payment vouchers and maintain records for RCM transactions.
- Advance Payments: Advance payments for supplies under RCM are also subject to GST, and the payer must remit the tax accordingly.
Mandatory Disclosures in GST Returns
- GSTR-3B: Details of supplies under RCM must be reported.
- GSTR-1: Recipients paying GST under RCM must report the serial numbers of payment vouchers.
- ITC Reporting: ITC claimed on GST paid under RCM must be reported in GSTR-3B. GST on imported services under RCM should be reported separately.
Categories Subject to RCM
Goods
- Cashew nuts (unshelled or peeled)
- Bidi wrapper leaves (tendu)
- Tobacco leaves
- Silk yarn
- Raw cotton
- Lottery supply
- Specified essential oils
Services
- Import of services
- Goods Transport Agency (GTA) services
- Legal services by advocates
- Services by an arbitral tribunal
- Sponsorship services
- Services by government entities (specified categories)
- Renting residential dwellings to registered persons
- Director services to companies
- Insurance agent services
- Recovery agent services
- Copyright services
- Security services
Importance of Compliance
Proper compliance with rules is critical. Non-compliance can lead to interest and penalties during assessments by GST authorities. Incorrect determination or reporting of liability can also result in the loss of ITC due to missed deadlines. Therefore, it is essential to regularly review and ensure compliance with provisions to avoid financial burdens.
Conclusion
By staying informed and compliant, businesses can efficiently manage their tax liabilities and benefit from the provisions of the GST framework. Understanding and implementing correctly is crucial for seamless operations and avoiding unnecessary penalties.
LinkedIn Link : RMPS Profile
This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.
