GST was Introduced in India to make a convenient and simple indirect tax law for the taxpayers, but from the very beginning, some of such provisions were brought in this law, about which experts had warned in the beginning that these provisions will affect the simplification of GST Negatively and these provisions will make this tax as a very complex system of taxation. These provisions will not only make it a Complex system of taxation but these provisions will also create huge trouble for the taxpayers.
The Reverse Charge Mechanism, commonly known as RCM, is one such provision which has been a subject of controversy since its inception and that is why a very big part of it was withdrawn within four months of introduction of GST but the part of it which was still there was also not a logical or practical provision in itself and is becoming a cause of trouble for many dealers now.
See the problem is that GST is primarily a tax to be paid by a seller or a supplier hence it is mainly a Forward charge Tax. If the tax is to be paid by the recipient of goods or services on RCM basis instead of supplier then it is an exception and it is not unusual to follow such exceptions in a new tax Like GST by all the tax payers, and many dealers have made mistake in following this provision of the reverse charge mechanism- RCM. The mistakes have been made by lot of dealers and they failed to pay the RCM wherever it was required to pay as per the provisions of the GST Laws.
Let us see what are the financial effects of the RCM in most of the cases where provisions of reverse charge mechanism as mentioned in the GST Laws is applicable. In respect of services and goods for which payment of tax under reverse charge mechanism has been notified, the recipient of goods or services pays tax under reverse charge mechanism and after payment of the same takes input credit of it and hence the tax paid under such reverse charge mechanism does not have any financial implication in most of the cases.
What is written above let us try to understand it through an example
X and Company is a mineral trader and owns a mine. This company has made a sale of Rs. 10 lakhs in March 22 and Rs. 50000.00 tax is payable on it at the rate of 5 percent.
In the same month, X and Company paid Rs 2 lakh as Royalty to the state government, on which he had to pay a total of Rs 36000.00 at the rate of 18 percent under reverse charge mechanism i.e. RCM and if he paid this tax then in the same month, he would have got input credit of Rs.36,000 and would have to pay tax of Rs.50,000 as follows:-
- Rs 36000.00 under reverse charge mechanism (reverse charge is always to be paid in cash)
- Cash payment of balance tax Rs.14000.00
In this way the total cash payment made by X and Company is Rs. 50000.00.
Let us now see how X and Company will pay tax if it has not paid tax under RCM
If X and Company has not paid Rs.36000.00 under reverse charge mechanism, then it will not get its input credit and if input credit is not available then it will have to pay Rs.50000.00 which is his total output tax since No ITC is available.
In both the cases, X and Company has paid Rs.50,000.00 and the Government has also received tax of Rs.50,000.00 in this case, and thus in this situation reverse charge mechanism has no financial implication, and in most of the cases RCM has no financial effect.
If this reverse charge mechanism tax does not have financial effect and the Government is also getting full tax, then this mistake should be forgiven for not fulfilling this provision. There should be a simple rule: -
"If reverse charge mechanism tax is paid, then its input credit will be available and if it is not paid then its input credit will not be available, then if this provision is not followed where its input credit is to be available, then the government will lose nothing financially then it should not have any harsh adverse effect on the taxpayer."
Here you should keep in mind that "what should be" is the logical aspect of any taxation law but there is not much place of logic in many places in this GST Laws and especially in reverse charge mechanism which sometimes termed as illogical tax due to such type of harsh provisions hence X and Company have to bear the brunt of this mistake. Let us see the implications of this mistake.
X and Company has not paid the reverse charge mechanism tax and this amount was Rs.36000.00 and at present i.e. in the Month of December 2022 X and Company is ordered to deposit Rs.36000.00, then he will have to deposit Rs.36000.00 along with interest on it. Even here it can be ok for him, but the biggest problem is that now he will not even get input credit because the due date to take input credit for the year ending March 2022 was November 30 2022.
You should Observe here carefully that financially X and Company has not committed any big or even small financial crime, what it has done only is that it has deposited the tax which it had to deposit including RCM tax, that too honestly and on due time but it was not shown under reverse charge mechanism while filing the GST return, which you can call a technical mistake but just because of this mistake, Now he has to deposit this tax again under reverse charge mechanism without getting any input credit of the same.
Thus, it is a very harsh penalty with interest which was due to a technical mistake made by X and Company and it is the strictness of the GST law that makes this law impractical and a complex Law.
If this kind of mistake or mistake has happened since 2017, from the inception of GST and is still going on, then you can imagine what will be the extent of this loss or burden for such innocent defaulting dealers!!!!
This is just one example we have given of mining royalty on which RCM is to be paid. Similar mistakes or omissions have been made in respect of transport expenses, purchase of raw cotton and other goods or services on which tax is applicable under reverse charge mechanism and their consequences are also similarly harsh.
HOW LAWMAKER CAN GIVE RELIEF TO THESE INNOCENT DEALERS
If the taxpayer has paid his tax in full but failed to show the required tax under while filing the GST return, then recovery of such tax along with interest and then withholding of input credit will put an unnecessary burden on such dealers. It will be tantamount to be a very harsh penalty and impractical for a technical fault or blunder of an innocent taxpayer.
In fact, the tax received under the reverse charge mechanism can be a source of revenue to the Government when a dealer purchases goods or services which under the reverse charge mechanism and uses it to manufacture or supply goods or services that are exempt from tax.
The need of the hour is that the government should take care of this issue and give relief from this kind of financial effectless RCM tax so that the business world can be saved from this unnecessary burden.