Introduction
Generally, under GST, the responsibility to pay tax lies with the supplier of goods or services. However, in certain cases, this responsibility is shifted to the recipient. This is known as the Reverse Charge Mechanism, or RCM.
Under RCM, instead of the supplier being responsible for paying the GST to the Government, the recipient becomes legally responsible for paying the tax.
So, how does this actually work?
Let’s first understand the difference between the Forward Charge Mechanism and the Reverse Charge Mechanism.
Under the Forward Charge Mechanism, the supplier charges GST from the recipient through the invoice and is responsible for depositing that GST with the Government. In this way, the supplier collects the tax from the recipient and pays it to the Government.
Under the Reverse Charge Mechanism, however, the statutory responsibility to pay the GST and comply with the applicable GST provisions is placed on the recipient of the goods or services. Now, there is an important point to understand here.
GST is an indirect tax, and the basic principle of an indirect tax is that its economic burden is ultimately borne by the recipient. Therefore, even under the Reverse Charge Mechanism, the ultimate burden remains with the recipient.
What changes under RCM is not the ultimate burden of the tax, but the person who is legally responsible for paying the tax to the Government.
Types of Reverse Charge Mechanism
The GST law provides for RCM under different provisions.
The first is Section 9(3) of the CGST Act. Under this provision, the Government may notify specific categories of goods or services on which the recipient is required to pay GST under reverse charge. A corresponding provision for inter-State supplies is contained in Section 5(3) of the IGST Act.
The second provision is Section 9(4) of the CGST Act. It deals with supplies received from an unregistered supplier, but the provision operates only for the specified classes of registered persons and specified categories of goods or services notified by the Government. Therefore, it should not be understood as a blanket RCM on every purchase made by a registered person from an unregistered supplier.
Similar provisions exist under the SGST and UTGST Acts, as applicable. Further, Section 9(4) is not applicable in the case of certain specified registered persons, including persons registered under Section 51 as TDS deductors, subject to the applicable provisions and notifications.
Therefore, such TDS-deducting entities are not required to pay GST under Section 9(4) merely because they procure taxable goods or services from an unregistered supplier.
How Does the Mechanism Work?
Now, let’s understand what happens when a person becomes liable to pay GST under RCM.
A person who is required to pay tax under the Reverse Charge Mechanism has to compulsorily register under GST, and the threshold limits of ₹20 lakhs and ₹10 lakhs are not applicable to them.
Another important point relates to Input Tax Credit.
A supplier cannot claim ITC of GST paid on inputs or input services merely because those inputs or services are used in making a supply on which the recipient is liable to pay tax under RCM. At the same time, the recipient who pays GST under RCM may claim ITC of that tax, provided all the conditions for claiming ITC are satisfied.
Time of Supply under RCM
Here, the time of supply under RCM is different from the normal Forward Charge Mechanism.
For a supply of goods, the time of supply is the earliest of the following:
- The date on which the goods are received;
- The date on which the payment is entered in the recipient's books of account or the date on which the payment is debited from the recipient's bank account, whichever is earlier; or
- The date immediately following thirty days from the date of issue of the invoice or similar other document by the supplier.
If the time of supply cannot be determined using these three criteria, it will be the date on which the supply is entered in the books of account of the recipient.
For a supply of services, the time of supply is the earlier of:
- The date on which the payment is entered in the recipient's books of account or the date on which the payment is debited from the recipient's bank account, whichever is earlier; or
- The date immediately following sixty days from the date of issue of the invoice or similar other
document by the supplier.
Where the time of supply cannot be determined using these provisions, it will be the date of entry of the supply in the recipient's books of account.
Mention of Reverse Charge on Documents
The relevant GST documents also need to indicate whether the tax on the particular supply is payable under the Reverse Charge Mechanism.
This helps identify that the liability to pay GST has been placed on the recipient rather than the supplier.
Payment of RCM Liability
One of the most important practical points is that the RCM liability has to be discharged through the Electronic Cash Ledger and cannot be paid by utilising the Electronic Credit Ledger.
Once the recipient has paid the GST under RCM, the tax may become available as Input Tax Credit, subject to the applicable conditions and restrictions.
Conclusion
So, that was all about the Reverse Charge Mechanism under GST — from understanding the concept and its applicability to the time of supply, registration, ITC, and payment of tax. I hope this makes the concept of RCM simple and easy to understand.
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