Reverse Charge Mechanism (RCM) under GST: Tax Concept Behind RCM

 

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Understanding (RCM) Reverse Charge Mechanism under GST: Tax Concept Behind RCM

The Tax concept of Reverse Charge Mechanism (RCM) under GST is crucial for businesses to understand, as it reverses the usual flow of tax liabilities. Normally, the supplier of goods or services is responsible for collecting and paying GST to the government. However, under RCM, this responsibility shifts to the recipient of the goods or services. Let's understand more of RCM, its applicability, and why it's important for compliance under the tax system.

What is RCM (Reverse Charge Mechanism)?

The Reverse Charge Mechanism is a unique tax concept of a tax payment where the liability to pay GST rests with the recipient rather than the supplier. It plays a vital role in cases where the supplier is not registered under GST or falls under special categories outlined by the government.

When Does RCM Apply?

RCM tax concept is applicable in a variety of scenarios, the most common being when a registered person purchases goods or services from an unregistered supplier. This is done to ensure that the government doesn't lose out on tax revenue in cases where the supplier might not be registered for GST. Under such circumstances, the buyer, if registered, becomes liable to pay the GST.

 

Additionally, RCM is applied in certain specific transactions and industries where compliance is traditionally challenging. This includes cases like services provided by e-commerce operators or specific goods like bidi wrappers and cashew nuts sourced directly from agriculturists.

Where Reverse Charge is Applicable?

• Unregistered Supplier Transactions: When a registered buyer purchases from an unregistered seller, the buyer pays the tax directly to the government.
• Specified Goods and Services: Certain goods like raw cotton, tobacco leaves, and silk yarn, as well as services like transportation by goods agencies, fall under RCM.
• E-commerce Services: In the case of platforms like UrbanClap (now called Urban Company), which provide services from plumbers, electricians, etc., the platform is responsible for paying the GST rather than the service provider.

How RCM Works in Real Life?

Let’s say you're a registered business purchasing tobacco leaves from an agriculturist who isn’t registered under GST. Under RCM, you, the buyer, must pay the GST directly to the government. This ensures that tax is collected even though the supplier doesn't have a GST registration.

Who Needs to Pay GST Under RCM?

RCM isn’t just for large corporations; this kind of tax concept affects any business that engages in transactions where the reverse charge applies. Some key businesses and individuals who need to be aware of RCM include:

• Registered Buyers: Engaging with unregistered suppliers makes you liable to pay GST under RCM.
• E-commerce Operators: Operators that facilitate transactions between service providers and customers are required to collect and remit GST.
• Industries like Banking & Insurance: Specific services such as those provided by insurance agents or recovery agents also trigger RCM.

How RCM Affects Your GST Compliance

• Self-Invoicing: One important aspect of RCM is the concept of self-invoicing. When you purchase goods or services under RCM, you’re required to generate a self-invoice, since the supplier doesn’t provide a GST-compliant invoice. Self-invoicing can be easily done using formats available online.
• Input Tax Credit (ITC): As a recipient, you can claim Input Tax Credit (ITC) on the tax paid under RCM, provided the goods or services are used for your business. This is a significant benefit that allows businesses to minimize their tax liabilities.
• Regular Rates, Not Composition Rates: Businesses under the composition scheme cannot use the composition rates for taxes paid under RCM. They must pay the regular GST rates and are ineligible for ITC for RCM-related payments.
• Tax Concept Reminder: Remember that RCM applies even to advance payments, meaning GST must be paid as soon as the advance is made for any reverse charge supply. This makes cash flow planning crucial for businesses that frequently deal with reverse charge transactions.

RCM Applicability on Goods and Services (As of 2024):

For Goods:

• Bidi Wrapper: When supplied by agriculturists to registered persons.
• Cashew Nuts: Supplied by agriculturists to registered persons.
• Tobacco Leaves: Sourced from agriculturists and supplied to registered individuals.
• Raw Cotton: Supplied by agriculturists to registered entities. 
• Supply of Lottery: State Government, Union Territory or any local authority to Lottery distributor or selling agent
• Silk Yarn: A person who manufactures silk yarn to any registered person
• Used vehicles, seized & Confiscated goods: Central Govt or State Govt. Union Territory or the  local Authority to registered person
• GST On Metal Scrap.
  

For Services:

• Directors of Companies: Services provided by company directors is paid by the Receipent of service.
• Goods Transport Agencies (GTA): Persons who receive a GTA services must pay GST.
• Insurance Agents: Businesses carrying out insurance must pay the GST for services provided by agents. 
• Recovery Agent: Services received by Banking Company, NBFC or financial institutions pay RCM
• Individual advocate or firm of advocates: Any business entity who receive this services pay RCM

Conclusion

Understanding and complying with the Reverse Charge Mechanism is essential for businesses under GST.

 

tags: Reverse charge mechanism, RCM under GST, tax concept, GST compliance, self-invoicing, Input Tax Credit, RCM goods and services, e-commerce operators