Reverse Charge Mechanism in GST is yet another name for RCM. RCM is a GST method that shifts tax responsibility from the supplier of the goods and services to the people who actually receive them.
The tax burden in the case of the Reverse Charge Mechanism under GST is unlikely to happen under the GST process. The seller of the products and services is exempt from paying the tax, but the buyer or recipient is now responsible for doing so.
The GST sum, which is additionally paid by the provider to the Government, is included in this payment. According to the Reverse Charge in GST, the Government imposes tax on the recipient of the goods and services. GST’s Reverse Charge Mechanism only applies in certain situations and for a limited range of products and services.
In this article, learn what is reverse charge mechanism in GST with examples to understand this tax concept better.
What is the Reverse Charge in GST?
Normally, business owners collect taxes from clients on their behalf, and the Government receives the money. When the purchaser pays the tax to the Government directly, it is known as a reverse charge. So, again, what is a reverse charge in GST?
It is the liability that may be entirely carried by the buyer or, in some exceptional circumstances, may be partially or jointly borne by the buyer and seller.
Note: Up to June 30, 2018, the reverse charge under GST imposed on purchases made by unregistered sellers from their registered clients was suspended.
Reverse Charge Mechanism In GST: When Is It Applicable?
Let’s explore the circumstances in which the reverse charge mechanism in GST is applicable now that you are aware of what it is. A Reverse Charge under GST gets applied when the recipient is liable for taxes instead of the supplier.
The full list of scenarios in which the RCM in GST is applicable is provided below:
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Particular Products and Services
The reverse charge mechanism under the GST is already applicable for a few specific services and goods that the Indian Government has identified and notified. Some include legal services offered by an advocate, companies that carry commodities, services offered by an individual advocate to a company, etc.
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Acquire from an Unauthorised Dealer
A registered individual must pay taxes under the reverse charge mechanism in GST when they buy goods from an unregistered merchant.
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Export of Services
The recipient of services from a registered person outside of India must pay taxes under reverse charge in GST.
It’s important to remember that the reverse charge method only works when the recipient is a registered GST recipient. If the recipient lacks a registration for GST, the RCM isn’t applicable. The beneficiary must also self-invoice their purchases and pay taxes to the Government as needed. Learn about self-invoicing in the later section.
Time of Supply Under Reverse Charge Mechanism
The term “Time of Supply” refers to when tax payment obligations become due. The GST reverse charge method transfers tax responsibility from the provider to the recipient.
In the reverse charge mechanism under GST, the time of supply is crucial because it establishes the time frame for tax payment by the recipient. However, in the case of commodities, the date on which the recipient gets the products is the time of supply under RCM.
Similar to goods, the time of supply for services under reverse charge in GST is earlier than the moment of payment or receipt of the invoice. There are, however, several situations in which the timing of supply under RCM varies for various circumstances.
For instance, under RCM, the time of supply for services provided to a corporate entity by a director or someone else is the moment of payment. Even so, it might also be the earlier debit date in the books of accounts.
Registration Rules For Reverse Charge Mechanism Under GST
According to CGST Act Section 24, GST registration is mandatory for anyone subject to the reverse charge mechanism and must pay GST. They are exempt from the threshold limitations of INR 20 lakh or INR 40 lakh, as applicable.
Reverse Charge Under GST: Who Needs To Pay It?
GST must be paid by the recipient of the services or products under RCM. However, to comply with GST regulations, the person providing the products must indicate whether RCM tax is due on the tax invoice. When paying GST under RCM, consider the following:
- One can only claim an ITC on the tax paid under the reverse charge mechanism if they use the goods or services for their business.
- Instead of paying tax at the composition rate, the composition dealer must do it under standard rates when discharging duty under reverse charge in GST.
- The GST compensation cess may be applicable on the tax paid or due in accordance with the reverse charge mechanism in GST.
Input Tax Credit Under Reverse Charge Mechanism
On the sum paid using the reverse charge mechanism, the recipient may claim ITC or Input Tax Credit. The only criterion is to use the products and services for commercial purposes. The dealer is ineligible to obtain the tax credit if he is under the reverse charge mechanism in GST. Here are some crucial concepts to keep a note of in this regard.
1. Self-Invoicing
A buyer who self-invoices for purchases from unregistered suppliers does so to bill themselves directly. Additionally, it is applicable when a reverse charge under GST is in effect. This aids the buyer in maintaining accurate records of their transactions and claiming the input tax credit.
On the internet, self-invoicing forms are simple to find. As a result, you must always be ready for any financial transactions, whether you serve as the recipient, the supplier, or another type of businessperson.
2. Invoicing Rules
In accordance with RCM, the buyer or recipient of the products or services disseminates an invoice after receiving them from the supplier.
Additionally, they must issue a payment voucher when paying the supplier. If the total cost of these goods surpasses Rs 5,000 per day at the end of the month, a registered recipient or buyer may issue a combined invoice.
Exemptions Under Reverse Charge Mechanism
In the event that the goods and services are GST-exempt, the Reverse Charge shall not be applied. Further, such transactions shall be free from the provisions of reverse charges provided that the total value of the products and services does not exceed INR 5000 daily.
Conclusion
Under the GST, a reverse charge mechanism, or RCM, means that the recipient of the products or services bears the tax burden, not the provider. The kind of reverse charge circumstances depends on both the supply’s character and the supplier’s nature.
FAQs on Reverse Charge Mechanism in GST
1. Is ITC permitted when charging in reverse?
When it comes to ITC, there will be an availability of the tax paid on a reverse charge basis only if the items or services are used in or for commercial purposes. The beneficiary, who is responsible for paying the reverse tax, can claim it as an ITC.
2. What happens if an input service distributor gets supplies that can be reversed charged?
An ISD may not hold buyers accountable for the reverse charge in GST. If the ISD wants to purchase these materials and claim the reverse charge as an ITC, he must register as a normal taxpayer.
3. When is the ITC for taxes paid via RCM admissible?
The person who paid tax under RCM in a specific month may claim it as ITC the month after.
4. Can you explain how the GST applies to RCM?
Reverse charge in GST applies in several circumstances where the supplier is unregistered, as well as to a list of supplies of goods and services listed by CBIC. Supplies impacted by e-commerce are likewise subject to RCM.
5. What is the cutoff point for the application of RCM?
For commodities, the RCM application threshold restriction does not apply. Although products are not subject to the RCM application threshold limit, it is important to note that services are and have an everyday threshold of INR 5,000.