What is Reverse Charge Mechanism (RCM) in GST?

The Goods and Services Tax (GST) in India streamlined indirect taxation by consolidating multiple levies into a unified system. Among its key concepts is the Reverse Charge Mechanism (RCM), which shifts the tax liability from the supplier to the recipient.

Whether you are a business owner, a service provider, or an accountant, knowing when the reverse charge mechanism under GST applies and how to comply with it can help avoid penalties and optimise tax management. So, let's understand the concept and application of RCM under GST.

What is the reverse charge mechanism under GST?

Under standard GST rules, the supplier of goods or services is responsible for collecting and remitting GST to the government. However, in specific scenarios, the Reverse Charge Mechanism (RCM) shifts the tax liability to the recipient, making them accountable for tax payment instead of the supplier. So, instead of the supplier paying GST, the buyer or service recipient is required to pay it directly to the government.

The reverse charge mechanism under GST ensures tax collection even when the supplier is not registered under GST or is based outside India, making it a crucial tool for tax compliance. For businesses, understanding the implications of the Reverse Charge Mechanism under GST is crucial.

Reverse charge mechanism example

Here are some examples of GST RCM under different scenarios:

Example 1: Goods purchased from an unregistered supplier

A registered business purchases raw materials from a small-scale vendor who is not registered under GST. Since the vendor cannot charge GST, the buyer is liable to pay GST under RCM and report the transaction in GST returns.

Example 2: Legal services from an advocate

If a company avails of legal services from an independent advocate, GST is not charged on the invoice. Instead, the company must self-declare the tax liability and remit GST under RCM.

Example 3: Services via an e-commerce operator

A cab service booked via an app-based aggregator (such as Ola or Uber) falls under the reverse charge mechanism under GST. In such cases, the e-commerce platform is responsible for collecting and paying GST instead of the driver.

RCM provisions under GSTR forms – GSTR-1 and GSTR-2

The provisions for GST RCM are different in different forms. Here's a look at the same:

GSTR-1 (Sales Return)

If a business supplies goods or services under RCM, it does not collect GST but must declare the sales details in GSTR-1, ensuring transparency in its tax liability. This declaration is essential as it allows tax authorities to track transactions subject to reverse charge mechanism under GST and maintain records of tax-exempt supplies.

The recipient must then pay the GST directly, ensuring that the government receives the tax even when the supplier is not responsible for collecting it. The payment under RCM must be made in cash, as ITC cannot be used to offset this liability

GSTR-3B

Earlier, the recipient of RCM supplies was required to report the tax liability in GSTR-2. However, GSTR-2 is not applicable currently. Now, you have to summarise the eligible claims for Input Tax Credit and report the purchases under RCM in GSTR-3B. If not reported correctly, businesses may face compliance issues, leading to penalties and interest charges on unpaid tax amounts.

ITC can be claimed only if the tax has been paid under RCM and the goods or services are used for business purposes, ensuring that businesses do not misuse the ITC mechanism for personal or non-business expenses.

When is reverse charge applicable?

RCM in GST is applicable in the following instances -

1. Notified goods and services

The Central Board of Indirect Taxes and Customs (CBIC) specifies certain goods and services on which the reverse charge mechanism under GST is mandatory. Some examples include:

• Legal services (provided by individual advocates, which are subject to RCM)
• Transportation services (by Goods Transport Agencies (GTA), which are typically subject to RCM, but GTAs have the option to pay GST under the forward charge mechanism)

2. Purchases from unregistered suppliers

If a registered business buys goods or services from an unregistered dealer, the buyer must pay GST under RCM. The reverse charge mechanism under GST ensures tax collection even when small vendors are involved.

3. E-commerce transactions

As per Section 9(5) of the CGST Act, e-commerce platforms are liable to pay GST for services provided by unregistered suppliers, such as:

• Housekeeping services via Urban Company
• Hotel bookings via OYO and MakeMyTrip

Who should pay GST under RCM?

GST under RCM applies to the following entities:

• Companies procuring from unregistered suppliers: If a registered company purchases goods or services from an unregistered vendor, it becomes responsible for paying GST under RCM, ensuring tax compliance for transactions involving smaller, unregistered businesses.
• Businesses receiving specified services: Certain notified services, such as legal services, goods transport services, and security services, require the recipient to pay GST under RCM, even if the supplier is registered under GST.
• E-commerce aggregators collecting tax on behalf of suppliers: Online platforms like Ola, Urban Company, and Swiggy must pay GST under RCM for specific services, ensuring tax accountability for vendors operating through digital platforms.

Registration rules under RCM

Businesses liable to pay GST under the Reverse Charge Mechanism (RCM) must register under GST even if their annual turnover is below the usual threshold limits. This ensures that all businesses responsible for paying GST under RCM remain compliant, even if their turnover would otherwise fall below the standard exemption limits.

The key registration requirements for reverse charge under GST are as follows:

• If you purchase taxable goods or services under RCM, you must be GST-registered. This applies even if the total business turnover remains below the GST registration threshold, as the government mandates tax compliance for recipients of RCM supplies. Failure to register could result in penalties and non-compliance issues, making it essential for businesses to verify their tax obligations under RCM
• E-commerce operators collecting GST under RCM must be registered, regardless of their turnover. Online platforms that facilitate services from unregistered vendors are required to deduct and pay GST on behalf of their suppliers. This ensures tax is collected at the platform level, reducing the risk of revenue leakage and simplifying compliance for small service providers operating through e-commerce channels.

Time of supply under RCM in GST

Here's when RCM will apply under GST

For goods:

The time of supply for goods under the reverse charge mechanism (RCM) is determined by the earliest of the following events:

• Date of receipt of goods: This is the point in time when the recipient physically takes possession of the goods, marking the first possible point of tax liability.
• Date of payment: The day when payment is made to the supplier, regardless of when the invoice is issued. This ensures that GST is paid promptly upon a financial transaction.
• 30 days from the supplier’s invoice date: If neither of the above conditions is met, the tax liability arises 30 days after the supplier issues the invoice, preventing indefinite delays in tax payment.

For services:

The time of supply for services under RCM in GST follows a slightly different timeline and is determined by the earliest of:

• Date of payment: The day when the recipient processes payment to the supplier, making it a key point for GST liability under RCM.
• 60 days from the supplier’s invoice date: If payment has not been made within 60 days of invoice generation, GST must still be paid, ensuring that tax obligations are met even in the event of a payment delay.

How does the reverse charge mechanism affect businesses?

RCM has its share of merits and demerits for businesses. Here's how:

Challenges:

• Cash flow impact: Since GST must be paid upfront, businesses may face liquidity issues, especially for significantly smaller enterprises with limited working capital. This can impact daily operations and delay payments to suppliers, resulting in financial strain.
• Increased compliance burden: Businesses must ensure accurate self-invoicing, tax payments, and GST return filing, which adds to their administrative workload. Failure to comply can result in penalties, interest charges, and additional audits from tax authorities.

Advantages:

• Improved compliance: RCM ensures GST is paid even in unorganised sectors, thereby reducing tax evasion and increasing transparency in transactions. RCM under GST also helps bring unregistered vendors into the tax system, strengthening the overall economy.
• Input Tax Credit (ITC): Businesses can claim ITC, reducing overall tax liability and helping them offset tax paid under RCM against future GST dues. However, ITC can only be claimed if all compliance requirements, such as proper documentation and timely filing, are met.

What is self-invoicing?

Self-invoicing occurs when a registered business purchases goods or services from an unregistered supplier under the Reverse Charge Mechanism (RCM). Since the supplier does not issue a GST-compliant invoice, the recipient must generate a self-invoice and pay the tax accordingly to comply with RCM on GST regulations.

Here's how you can generate a self-invoice:

1. Create an invoice that includes the details of the purchase. Include key details, such as the supplier’s name, recipient’s GSTIN, description of goods or services, quantity, value, and applicable GST rates. The invoice should follow the standard format prescribed under GST rules.

2. Mention "Tax paid under RCM" on the invoice. Indicate on the invoice that GST has been paid under RCM, ensuring compliance and proper documentation for Input Tax Credit (ITC) claims. This prevents future disputes during GST audits.

3. Report it in GST returns and pay tax under RCM. The self-invoice details must be reported in GSTR-1 and GSTR-3B, with the corresponding tax paid to the government. This ensures transparency and proper reconciliation of Input Tax Credit (ITC) in the GST system.

Understanding the reverse charge mechanism under GST is essential for businesses to remain compliant and manage tax liabilities efficiently. Ensuring correct GST payment under RCM helps businesses avoid penalties and maintain smooth operations. Proper documentation, timely tax payments, and accurate GST return filing are necessary for compliance. To simplify GST payments and ensure hassle-free transactions, consider using Axis Bank’s GST Payment Services. Experience secure, fast, and seamless online GST payments, enabling you to stay compliant with reverse charge on GST.

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Tax and GST regulations are subject to change. The information in this article is based on applicable laws, rules, notifications, and interpretations in force as on the date of publication and may change due to amendments, judicial decisions, or regulatory updates.