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What is the use of Reverse Charge Mechanism?

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Aniket Kumar

98 Points Posted on 09 January 2022

What is the benefit of Reverse Charge Mechanism for GTA when on one hand tax is charged in cash and on other hand ITC is provided for the same amount?

Replies (2)

Quick Summary

The Reverse Charge Mechanism (RCM) is a tax system where the recipient of goods or services pays the tax, rather than the supplier. While it simplifies tax collection for the government by targeting organised businesses, it can lead to cash flow issues for recipients if they have unutilised input tax credits. In some cases, like renting motor vehicles, RCM can represent a direct cost to the taxpayer if input tax credits are not eligible.

CA Akshay Hiregange

Partner - Audit & Assistance

3708 Points Posted on 10 January 2022

RCM has come about where recipient category are mostly organised class and would pay the tax without any issues. This reduces collection and recovery costs for the govt.

In a situation that an entity already has credit balance, and RCM credit further accumulates the same, such taxes is paid in cash and credit remains unutilised, this helps govt. is increasing their funds.

Also, in a situation where RCM credit is not eligible, it is a direct cost to the taxpayer - Ex: RCM on renting of motor vehicle.