Reverse Charge Mechanism or RCM, we often use these terms in GST but what does it mean and how it can be helpful to you. Read the entire article to know everything about RCM concept.
What is Reverse Charge Mechanism under GST?
Under Forward Charge Mechanism or FCM, supplier of goods or services, supplies to the receiver and then pays tax to the government.
Under Reverse Charge Mechanism the supplier of goods or services, supllies to the receiver and then receiver only pays tax to the government rather than supplier.
Reason behind concept of Reverse Charge Mechanism under GST (RCM)
In indirect taxes, the ultimate burden of paying tax is upon recipient only and the same is applicable in the RCM but under RCM the compliance burden is also shifted on recipient whereas under forward charge mechanism supplier take care of all the compliance procedure of paying tax to government, filing GST returns, etc.
There are following two main reason behind RCM such as;
1. To avoid tax evasion in case of transaction between registered dealer and unregistered dealer
2. To make unregistered person free from tax compliances.
When reverse charge mechanism under GST is applicable?
Section 9(3) & 9(4) of CGST Act, 2017 and section 5(3) & 5(4) of IGST Act, 2017 specifies the applicability of RCM.
Following are the circumstances where reverse charge mechanism will be applicable;
1. Supply from unregistered person to registered person [Section 9(4) and 5(4)]
If any supplier is not registered under GST and supplies goods or services to the registered person then reverse charge will be applicable. This means that registered person who is recipient is required to pay tax to the government.
For Inter-state purchases, the receiver requires to pay IGST and for Intra-state purchases, CGST and SGST needs to be paid by the recipient under RCM.
2. Supply of certain goods and services specified by CBIC
Following is the list of notified goods and services where GST is payable as per RCM basis. But this list can be amended by CBIC as per the requirement.
a) Notified Goods under RCM under GST
b) Notified services under RCM under GST
3. Time of Supply under Reverse Charge Mechanism under GST
A. Time Of Supply in case of Goods
In case of reverse charge mechanism, the time of supply shall be earliest of the following;
- the date of receipt of goods, Or
- the date of payment, Or
- 31st day from Date of Issue of Invoice
In case not able to determine time of supply, the time of supply shall be the Date of Entry in the Books of Accounts of the recipient.
B. Time Of Supply in case of Services
In case of reverse charge, the time of supply shall be the earliest of the following dates:
- The date of payment, Or
- 61st day from date of issue of invoice
In case not able to determine the time of supply, the time of supply shall be the Date of Entry in the Books of Account of the recipient.