The reverse charge mechanism under GST is a system where the receiver or consumer of services and goods pays the needed taxes. It ensures tax compliance by requiring recipients to pay tax on behalf of suppliers who are not properly registered. Let’s explore the reverse charge mechanism under GST, reverse charge functions, along with presenting its actual usage scenarios and business applications.

What is RCM Under GST?

The reverse charge mechanism under GST is a system where the recipient is responsible for paying the tax on a specific transaction. The reverse charge mechanism (RCM) under GST applies in two main situations:

• Unregistered suppliers: When a registered business purchases goods or services from suppliers who are not registered under GST, it must pay GST on a reverse charge basis.
• Specified goods and services: The government has identified certain goods and services that are subject to GST under the reverse charge mechanism.

GST Reverse Charge Mechanism: Its Impact on Businesses

The GST reverse charge affects all businesses in the following manner:

• Impact on the cash flow: Since the recipient has to pay the GST reverse charge mechanism upfront, it can have an impact on the working capital.
• Compliance obligations: The new GST reverse charge mechanism system requires enterprises to manage and maintain their RCM invoice format and procedures.
• Complications in accounting: Businesses need a special system that helps in tracking their RCT (Recipient Created Tax).

List of Goods and Services Covered Under RCM in GST

Under the reverse charge mechanism under GST, you may find certain specified items, which are subject to taxes regardless of registration status.

1. Supply of the notified services and goods

Some services and goods are always taxed under the Reverse Charge Mechanism (RCM) as per the CGST Act. The tables below outline the key categories:

Goods Under RCM

Services Under RCM

You can find the above-mentioned examples all listed under Section 9(3) and 9(4) GST.

2. The import of services

All businesses must pay the reverse charge mechanism under GST when they purchase services from overseas providers. It’s primarily because international vendors don’t possess the Indian RCM registration requirements under GST.

Example:

An Indian IT company using the Adobe Cloud solutions (US-based) needs to remit and calculate the GST.

3. The reverse charge mechanism under GST in e-commerce transactions

The RCM in e-commerce (under Section 9(5) of the CGST Act) wants every e-commerce operator to pay the GST taxes for specified online transactions in place of the service provider. To have a good understanding, here are some examples:

• Zomato pays the GST on the delivery services offered by the eatery partners.
• Uber pays GST in place of its independent cab drivers.

4. Construction and real estate

The RCM on goods and services also applies heavily to the construction industry, particularly for the works contracts and subcontractors. For instance, a real estate firm hiring an unregistered plumber needs to pay GST under the RCM for unregistered dealers.

5. Manpower supply and security services

The manpower supply or the security services offered by unregistered providers require the recipient to pay the GST. For instance, a corporate company recruiting security guards from an unregistered and small agency needs to pay the GST to generate the self-invoicing under RCM.

6. Agricultural produce purchases

Since farmers are exempt from GST, businesses that purchase raw agricultural products must pay GST under the reverse charge mechanism (RCM). For example, food processing firms purchasing raw wheat from farmers have to pay GST under the reverse charge mechanism.

Time of Supply for Goods & Services Under Reverse Charge

The time of supply regulations for goods and services under the RCM varies greatly from those under the regular GST transactions.

1. Time of supply for the goods under RCM

For the goods bought under the RCM, the tax liability emerges earliest during the following events:

• Date of receipt of goods: The day when the recipient acquires the goods physically.
• Date of the payment: The day the recipient pays the supplier, whether in part or in full.
• 30 days from the supplier’s invoice: If an RCM invoice is issued under GST but the goods or payment are not received, the tax liability still arises on the 31st day from the invoice date. Usually, it’s 30 days from the invoice date if earlier than receipt/payment.

2. Time of supply for services under RCM

For services, the tax liability under RCM arises at the earliest of the following events:

• Payment date: The day when the recipient pays the supplier.
• 60 days from the date of the supplier’s invoice: When payment is not made in 60 days from the date of the invoice, tax liability can be triggered automatically.

ITC (Input Tax Credit) under RCM: Things to Know

The Input Tax Credit under RCM is an essential GST component that allows businesses to acquire tax credits from purchases they make. This allows them to offset their output tax obligations. Here, the conditions for claiming the ITC under the reverse charge mechanism under GST are:

• This benefit is only available for taxpayers registered under the GST.
• The purchased goods must support the business operations instead of individual use.
• You cannot claim input tax credit for RCM taxes paid on non-taxable or exempt supplies.
• You have to pay the tax upfront before using the input tax credit.
• With the help of RCM, buyers can pay taxes before claiming the tax credit, unlike the forward charge system, where the suppliers manage the ITC claim and tax collections together.
• The recipient needs to place the RCM tax amount into RCM reporting in GSTR-3B returns under the right tax category.

Read Related Link: Check out “Place of Supply in GST: Meaning, Importance, and Types”- for helpful insights on ITC and RCM that support GST-registered recipients.

Key Takeaways on Reverse Charge Mechanism under GST

The RCM under GST looks intimidating at first, but once you understand the reverse charge mechanism, it can provide you with a lot of balance and clarity to the tax system. Shifting the responsibility of tax payment to the recipient for URD (unregistered dealer) purchases under GST helps strengthen compliance, reduce leakages, and keep sectors prone to tax evasion in check.

Connect with Shriram Finance today and proceed forward with clarity. For more information, visit our official website.

FAQs

What is the 5000 limit for RCM under GST?

The ₹5000 limit is the total amount from all the unregistered suppliers and not for every individual supplier. RCM tax paid can be claimed as ITC (not used to pay the RCM liability itself).

Can GST under Reverse Charge Mechanism be paid through ITC?

ITC cannot be used for paying the output tax. This means you need to pay via cash under the reverse charge. Self-invoice is required for goods/services from unregistered suppliers.

Which services are covered under RCM in GST?

There are countless services covered under the RCM in GST, like goods transport agencies, sponsorship services, insurance agent services, legal services, etc.

Who is exempt from paying RCM?

RCM does not apply to a local authority, an establishment or department of the UT, SG, or CG, or government agencies.

What happens if RCM is not paid?

Recipients who are registered under the GST Act will face penalties for not making the payment on time.