Understanding Reverse Charge Mechanism under GST
The Goods and Services Tax (GST) in India typically involves the supplier collecting and depositing tax with the government. However, under specific circumstances, the responsibility for GST payment falls on the recipient of the goods or services through the Reverse Charge Mechanism (RCM).
When Does Reverse Charge Apply?
There are three main scenarios where reverse charge comes into play:
- Purchases from Unregistered Vendors: When a registered business procures goods or services from an unregistered vendor, the recipient becomes liable to pay GST under RCM. This ensures that GST gets collected even when the seller is not registered under GST. An exemption applies to purchases less than ₹5,000 per day from unregistered vendors.
- Services by E-commerce Operators: E-commerce platforms that facilitate services like those provided by plumbers, electricians, or tutors may be subject to RCM. In such cases, the e-commerce operator, instead of the individual service providers, is responsible for collecting and depositing GST. This applies even if the service provider is unregistered under GST.
- CBEC-specified Supplies: The Central Board of Excise and Customs (CBEC) publishes a list of specific goods and services where the recipient is liable for GST payment under RCM. This list includes items like insurance provided by agents, manpower supply services, and transportation of goods.
Who Needs to Pay GST under RCM?
The recipient of the goods or services is responsible for paying GST under RCM if the transaction falls under any of the scenarios mentioned above. Here are some key points to remember for RCM transactions:
- Registration Requirement: Even if a business's turnover doesn't meet the GST registration threshold, they must register if they are liable to pay tax under RCM.
- Tax Deposit Timeline: The GST collected under RCM needs to be deposited with the government by the 20th of each month.
- Intra-state Applicability: RCM typically applies to intra-state transactions (within the same state).
- Tax on Advance Payments: Advance payments made for supplies subject to RCM also attract GST, payable by the party making the advance.
Important Considerations for RCM
- Claiming Input Tax Credit (ITC): The recipient paying GST under RCM can claim ITC on the tax paid only if the goods or services are used for business purposes.
- Composition Tax Scheme: Composition dealers paying tax under RCM need to pay tax at the regular rates, not the concessional composition rates. They are also not eligible to claim ITC for taxes paid under RCM.
- GST Compensation Cess: The GST compensation cess also applies to the tax payable or paid under RCM.
Current Landscape of RCM under GST
The RCM concept is not entirely new, however, under GST, RCM applies to a wider range of goods and services. The recipient pays the full amount of tax on the entire supply under GST.
The RCM provision aims to improve compliance and tax collection, especially in sectors with a large presence of unorganized markets, like goods transportation. It ensures that GST gets collected even when dealing with unregistered vendors.
Examples of Goods and Services under RCM
- Goods: Bidi wrappers, cashew nuts, tobacco leaves, lottery (supplied by government), silk yarn, priority sector lending certificates, raw cotton, used vehicles (confiscated by government).
- Services: Services by directors to the company, services by recovery agents for banks or financial institutions, goods transportation services, services by insurance agents, legal services by advocates or firms to businesses.
Self-Invoicing under RCM
When a registered business purchases from an unregistered vendor under RCM, the unregistered supplier cannot issue a GST invoice. In such cases, the recipient needs to create a self-invoice to claim ITC on the GST paid.