Introduction

The Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) framework is a taxation concept where the liability to pay tax shifts from the supplier to the recipient of goods or services. Unlike the regular GST system, where the supplier collects and remits tax, RCM ensures tax compliance in specific cases to prevent tax evasion and broaden the tax base.

When is Reverse Charge Mechanism (RCM) Applicable?

RCM applies in the following scenarios:

1. Notified Goods and Services

The government prescribed certain goods or services where Reverse Charge Mechanism applies. Some key examples include:

Goods:

• Cashew nuts (not shelled or peeled)
• Bidi wrapper leaves (tendu leaves)
• Raw cotton
• Supply of lottery, betting, and gambling
• Silk yarn

Services:

• Legal services provided by an advocate
• Supply of Services by a Goods Transport Agency (GTA)
• Director’s remuneration (if not on payroll)
• Services by an insurance agent
• Recovery agent services

2. Supply from Unregistered Dealers

If any registered person under GST procures any goods or avail any services from an unregistered persons or suppliers, RCM applies on that transactions. This ensures tax compliance on transactions where suppliers of goods or services were not registered under GST.

3. E-Commerce Transactions

For certain services provided through e-commerce platforms, the responsibility to pay GST falls on the e-commerce operator instead of the supplier. Examples include:

• Ride-hailing services (Uber, Ola)
• Housekeeping services (Urban Clap)
• Food delivery services (Zomato, Swiggy) for certain restaurant supplies

What is Self-Invoicing?

Self-billing, also known as self-generated invoicing, is a process where a customer, rather than the supplier, creates and provides an invoice for the goods or services they received. This typically happens when the customer is buying from an unregistered supplier, especially in situations where the Reverse Charge Mechanism (RCM) applies, means the customer is responsible for the payments of GST on behalf of the supplier.

Self generated invoices are required when a registered persons procures any goods or avail any services from any unregistered persons under the RCM . Since the supplier cannot raised a GST invoice, the recipient must generate a self-invoice to document the transaction and comply with tax regulations.

Example:

ABC Ltd. (a registered company) hires a freelance consultant who is not registered under GST. In this case ABC Ltd. In this case, ABC Limited generate self Invoice for Payment of Gst and Claim ITC on this Transactions.

Conditions Required under the Reverse Charge Mechanism?

Businesses subject to RCM must follow these compliance requirements:

1. Compulsory GST Registration: Any person liable to pay GST under RCM must register under GST, even if their turnover is below the threshold limit.
2. Self Generated Invoices: If any purchases are made from any unregistered suppliers, the recipient must prepare a self generated invoice.
3. Payment in Cash: GST under RCM must be paid from electronic cash ledger as available tax credit cannot be used for the payment of tax liabilities.
4. Proper Documentation: Businesses must maintain the records of invoices, Receipt or Challan Copy of tax payment, and related documents for the requirements of compliance and audit purposes.

Time limit for Supply of Goods or Services under the GST of RCM?

The Time of Supply determines when the GST liability arises under RCM:

For Goods

Earliest of the following:

• The date of receipt of goods
• The date of payment (if recorded in books within 30 days)
• The date immediately following 30th days from the date of Invoices.

For Services

Earliest of the following:

• The date of payment
• The date immediately following 60th days from the date of Invoices.
• If none of the above apply, the date of entry in the recipient’s books of accounts is considered.

Is Input Tax Credit Allowed under RCM?

Yes, Input Tax Credit (ITC) is allowed on GST paid under RCM, subject to the following conditions:

• The goods or services must be used only for the business purposes and if availed for any other purposes must return the ITC
• The recipient must first pay GST from electronic cash ledger under RCM before claiming ITC.
• Input Tax Credit available for the Tax payment under RCM can be can used to discharges future Tax liabilities.

Is there any Exemption under Reverse Charge Mechanism?

Yes, there are certain exemptions under RCM:

• Small Businesses & Composition Dealers: Businesses registered under the Composition Scheme are not required to pay tax under RCM.
• Exempted Goods & Services: Some supplies, such as agricultural produce, healthcare services, and public transportation, are exempt from GST, meaning RCM does not apply.

Latest Amendments in Reverse Charge Mechanism

1. Time of Supply Rules (Effective from November 1, 2024)

An amendment to Section 13 of the CGST Act, 2017 was introduced by the GST Council to clarify the time limit for supply of services under RCM. Registered recipients must issue self-invoices within 30 days of receiving goods or services from unregistered persons to claim ITC. Non – fulfilment of conditions for RCM will result in loss of Input Tax Credit.

2. Inclusion of New Services Under RCM (September 9, 2024)

The 54th GST Council Meeting held on 09/09/2024 introduced updates to RCM, including:

• Inclusions of renting of commercial property by an unregistered person to a registered person under RCM to prevent revenue leakage.
• Expanding e-commerce-related services under RCM.

Practical Examples of RCM Application

1. Services by a Director

Mr. Sharma, a director of XYZ Pvt. Ltd., receives a sitting fee of ₹50,000. Under RCM, XYZ Pvt. Ltd. is liable to pay GST on this amount since services provided by a director (not on payroll) are covered under RCM.

2. Goods Transport Agency (GTA) Services

A registered trader avails transportation services from a GTA for ₹10,000. Since GTA services are notified under RCM, the trader must pay GST on ₹10,000 under RCM and can later claim ITC.

Conclusion

The Reverse Charge Mechanism (RCM) is a crucial component of the GST framework, ensuring tax compliance and preventing revenue leakage. Businesses must stay updated with the latest amendments and ensure proper documentation, timely GST payment, and ITC claims to remain compliant with GST laws. manage their tax obligations and avoid penalties.

If you require assistance on Reverse Charge Mechanism (RCM ), Manthan Experts can be your trusted advisor. Contact them at info@manthanexperts.com.to discuss your specific needs and explore how their expertise can benefit your business.