Reverse Charge Mechanism

Reverse Charge Mechanism (RCM) is a mechanism under the Goods and Services Tax (GST) system, where the recipient of goods or services is liable to pay the tax instead of the supplier. In other words, the tax liability is reversed from the supplier to the recipient. RCM is applicable when the supplier is not registered under GST or is registered but not liable to pay tax. This mechanism is applicable to both goods and services.

Laws Governing Reverse Charge Mechanism (RCM)

Section 9(3) of the Central Goods and Services Tax Act, 2017 (CGST Act) provides the legal provisions for the reverse charge mechanism. The relevant section states that the government may notify certain goods and services where the tax liability will be on the recipient of goods or services instead of the supplier. The government has notified a list of goods and services where RCM is applicable, which is updated from time to time.

Reverse Charge Mechanism (RCM) Applicability

The RCM is applicable in the following cases:

• Goods and Services purchased from Unregistered Dealers: When a registered person purchases goods or services from an unregistered dealer, the registered person is required to pay the tax liability under RCM. This means that the registered person will have to pay the tax amount applicable on the goods or services purchased from the unregistered dealer.
• Goods and Services notified under RCM: The government has notified certain goods and services where RCM is applicable. These include legal services, goods transport agency services, services provided by an advocate, etc. In these cases, the tax liability is reversed from the supplier to the recipient.
• Import of Services: When a registered person imports services from outside India, the tax liability under RCM will be on the recipient of services. This means that the recipient of the services will have to pay the applicable tax liability.

Reverse Charge Mechanism (RCM) in case of Import of Services

In case of import of services, the recipient of the services is liable to pay the tax under RCM. The procedure for payment of tax under RCM for import of services is as follows:

• Obtaining GSTIN: The recipient of the services must first obtain a GSTIN (Goods and Services Tax Identification Number) from the GST portal.
• Payment of Tax: The recipient of the services must pay the applicable tax on the imported services under RCM. The tax must be paid using Form GSTR-3B.
• Claiming Input Tax Credit: The recipient of the services can claim input tax credit on the tax paid under RCM.

Reverse Charge Mechanism (RCM) in case of Purchase from Unregistered Dealers

In case of purchase of goods or services from unregistered dealers, the recipient of the goods or services is liable to pay the tax under RCM. The procedure for payment of tax under RCM in this case is as follows:

• Obtaining GSTIN: The recipient of the goods or services must first obtain a GSTIN (Goods and Services Tax Identification Number) from the GST portal.
• Payment of Tax: The recipient of the goods or services must pay the applicable tax under RCM. The tax must be paid using Form GSTR-3B.
• Claiming Input Tax Credit: The recipient of the goods or services can claim input tax credit on the tax paid under RCM.

Reverse Charge Mechanism (RCM) in case of Goods and Services notified under RCM

Under the GST regime, certain goods and services are notified under the reverse charge mechanism (RCM). This means that the recipient of goods or services is liable to pay the tax instead of the supplier. Let’s take a look at some of the goods and services notified under RCM:

Goods under RCM:

• Cashew nuts, not shelled or peeled
• Bidi wrapper leaves
• Tobacco leaves
• Silk yarn
• Raw cotton
• Lottery
• Some precious stones and metals
• Goods transported by a vessel from a place outside India up to the customs station of clearance in India.

Services under RCM:

• Legal services provided by an advocate or a firm of advocates
• Services provided by an arbitral tribunal
• Services provided by the director of a company or a body corporate to the said company or body corporate
• Services provided by a person located in a non-taxable territory to a person located in the taxable territory
• Supply of services by a goods transport agency to a registered person
• Services provided by an individual advocate or firm of advocates to any business entity located in the taxable territory
• Services provided by an insurance agent to any person carrying on insurance business
• Services provided by a recovery agent to a banking company or a financial institution or a non-banking financial company

In the case of goods and services notified under RCM, the recipient of goods or services is required to pay the tax to the government instead of the supplier. The recipient is also required to register under GST if they are not already registered. The supplier of goods or services notified under RCM is not required to pay tax on such supplies.

Advantages of Reverse Charge Mechanism:

Increases Tax Compliance:

Reverse Charge Mechanism increases tax compliance as it forces the recipient to register themselves under GST and report the tax liability. This reduces the chances of tax evasion as the recipient will be liable to pay tax to the government.

Encourages Formalization:

Reverse Charge Mechanism encourages formalization of the economy as it mandates the unorganized sector to register themselves under GST and report their transactions.

Reduces the Burden on Small Businesses:

Small businesses with a turnover of less than Rs. 20 lakhs (Rs. 10 lakhs for special category states) are not required to register under GST. The reverse charge mechanism reduces the burden on such small businesses as they need not register themselves under GST and can avail input tax credit on purchases made from registered taxpayers.

Ensures Transparency:

Reverse Charge Mechanism ensures transparency in the tax system as it eliminates the possibility of under-reporting of transactions by the supplier. The recipient is required to report the tax liability on behalf of the supplier, thereby ensuring that the tax is paid to the government.

Disadvantages of Reverse Charge Mechanism:

Administrative Burden:

Reverse Charge Mechanism increases the administrative burden on the recipient as they are required to register themselves under GST and report the tax liability. This can be a burden on small businesses and may deter them from doing business with registered taxpayers.

Cash Flow Issues:

Reverse Charge Mechanism can cause cash flow issues for the recipient as they are required to pay the tax liability upfront and claim the input tax credit later. This can be a burden on small businesses and can affect their working capital.

Compliance Challenges:

Reverse Charge Mechanism can create compliance challenges for the recipient as they are required to report the tax liability on behalf of the supplier. This can be a challenge for businesses that deal with a large number of suppliers.

Increases Transaction Cost:

Reverse Charge Mechanism can increase the transaction cost for businesses as they are required to pay tax on behalf of the supplier. This can increase the cost of doing business and can affect the competitiveness of small businesses.