Reverse Charge Mechanism Rcm Under GST Example

 Reverse Charge Mechanism Rcm Under GST Example 

The Goods and Services Tax (GST) system in India has been designed to simplify taxation, reduce cascading effects, and bring uniformity across the nation. One of the unique features under GST is the Reverse Charge Mechanism (RCM). Unlike the regular process where the supplier of goods or services collects and pays tax, under RCM, the recipient or buyer of goods/services becomes responsible for paying GST directly to the government. This shift of liability ensures that certain types of transactions are captured within the tax net, even when the supplier may not be registered under GST.

Forward Charge vs. Reverse Charge

• Forward Charge (Normal Mechanism):
  In most transactions, GST is collected by the seller (supplier) and deposited with the government. For example, if a manufacturer sells goods worth ₹1,00,000 plus 18% GST, the manufacturer collects ₹18,000 as GST and pays it to the government after adjusting input tax credits.
• Reverse Charge (Special Mechanism):
  In certain cases, the law shifts this liability to the buyer or service recipient. For instance, if a business avails legal services from an advocate, the advocate issues an invoice without charging GST. Instead, the business (recipient) pays GST directly to the government under RCM. This ensures compliance even when the supplier is unregistered or exempt from GST registration.

This distinction between forward charge and reverse charge is crucial to avoid confusion in compliance and proper filing of returns.

Legal Framework of RCM

The concept of RCM is laid down in the CGST Act, 2017 and IGST Act, 2017. The relevant sections are:

• Section 9(3), 9(4), 9(5) of CGST Act
• Section 5(3), 5(4), 5(5) of IGST Act

These provisions empower the government to notify certain categories of goods, services, or persons where tax is payable under reverse charge.

• Section 9(3): The government specifies particular goods/services where RCM applies.
• Section 9(4): When a registered person procures goods or services from an unregistered supplier, the liability shifts to the registered recipient.
• Section 9(5): In case of e-commerce operators (like Ola, Uber, Zomato, Swiggy), the operator is treated as the supplier for tax purposes, and GST liability falls on them instead of the actual supplier.

This legal framework ensures flexibility, allowing the government to expand or restrict RCM coverage as required.

When Does RCM Apply?

RCM is not universal; it applies only in notified cases. Broadly, it comes into play under the following circumstances:

1. Notified Goods and Services
   The CBIC (Central Board of Indirect Taxes and Customs) regularly issues notifications listing goods and services covered under RCM. These notifications ensure clarity for businesses about when they need to pay GST under reverse charge.
2. Specified Categories of Recipients
   Certain entities, by their very nature, are mandated to discharge GST under RCM when they receive taxable supplies. These include:
• Factories under the Factories Act
• Societies and cooperative societies
• Registered partnership firms
• Casual taxable persons
• Body corporates and directors of companies
3. Transactions with Unregistered Suppliers
   If a registered business procures taxable goods or services from an unregistered supplier, the buyer has to pay GST under RCM. For example, if a GST-registered company hires an unregistered transporter, the company is liable to pay GST on that service.
4. E-Commerce Transactions
   If a supply is made through an e-commerce platform, liability may fall on the e-commerce operator instead of the supplier or recipient. For example, if a driver provides cab services via Ola or Uber, the e-commerce operator collects and pays GST to the government.

These scenarios prevent revenue leakage and bring informal sector transactions under the GST framework.

Goods Covered under RCM

The government has notified several goods where RCM is applicable. Some examples include:

• Cashew nuts, not shelled or peeled – usually supplied by farmers who are not registered under GST.
• Bidi wrapper leaves (Tendu leaves) – commonly used in bidi manufacturing, often supplied by tribal collectors.
• Tobacco leaves – sourced from farmers.
• Raw cotton – procured by registered dealers from unregistered agriculturists.
• Silk yarn – where suppliers are not registered.
• Lottery supplied by state/local authorities.
• Used vehicles, seized or confiscated goods, and scrap – often disposed of by government departments.

These goods generally originate from unregistered persons like agriculturists or government bodies, making RCM necessary to capture tax.

Services Covered under RCM

A wide range of services also fall under reverse charge, including:

• Goods Transport Agency (GTA) services – where the recipient is a factory, company, or registered society.
• Legal services – services provided by advocates or law firms.
• Arbitral tribunal services.
• Sponsorship services – where companies sponsor events, sports, or cultural programs.
• Government services – such as renting immovable property (except residential purposes).
• Director services – fees paid by a company to its directors.
• Insurance agent services – commission received by agents.
• Recovery agent services – when provided to banks or financial institutions.

For example, if a bank hires a recovery agent to collect overdue loans, the bank has to discharge GST under RCM on the agent’s services.

Time of Supply under RCM

Determining the time of supply is essential as it decides when GST is payable.

For Goods

The earliest of the following dates is considered:

1. Date of receipt of goods
2. Date of payment (as recorded in books or debited from bank)
3. 30 days from the date of supplier’s invoice
   If none of these can be determined, the date of entry in recipient’s books is used.

Example: A company receives raw cotton on 5th June, records payment on 15th June, and the supplier issued invoice on 1st June. The time of supply = 5th June (earliest event).

For Services

The earliest of the following applies:

1. Date of payment
2. 60 days from the supplier’s invoice date
   If not determinable, the date of entry in books is considered.

Example: A company avails legal services on 1st July. The advocate issues invoice on 10th July, and payment is made on 25th August. The time of supply will be 10th September (60 days from invoice).

Compliance Requirements under RCM

Businesses dealing with RCM must follow certain compliance obligations:

• Registration is mandatory if liable to pay tax under RCM, even if turnover is below the threshold.
• Self-invoicing must be done by the recipient if the supplier is unregistered.
• Payment voucher should be issued at the time of making payment to the supplier.
• GST under RCM must be paid only in cash (from electronic cash ledger), not by using input tax credit.
• Once paid, input tax credit (ITC) can be claimed (subject to eligibility).
• RCM supplies must be reported separately in GSTR-1, GSTR-3B, and other returns.

Failure to comply may result in penalties, interest, and loss of ITC.

Why RCM is Important

The reverse charge mechanism plays a critical role in GST administration because it:

• Brings unorganized sectors (like agriculture, legal, and small service providers) under the tax net.
• Ensures that the government does not lose tax revenue due to unregistered suppliers.
• Encourages businesses to deal with registered suppliers, thereby promoting formalization of the economy.
• Improves compliance monitoring and transparency in transactions.

Conclusion

The Reverse Charge Mechanism (RCM) under GST is more than just a tax compliance measure – it is a strategic tool to strengthen India’s indirect tax system. While it may add some extra compliance burden on businesses, it ensures fairness and widens the tax base. Businesses must understand its applicability, maintain proper records, and comply with invoicing and payment rules to avoid penalties.

By keeping updated with notifications and circulars issued by the government, taxpayers can smoothly manage RCM transactions and also benefit from claiming input tax credit. In the long run, RCM contributes to a cleaner, more transparent, and accountable GST framework.

 More Read: List of Exempted Goods and Services under GST