Reverse Charge Mechanism (RCM) under GST A Complete Guide
The Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) is a concept where the recipient of goods or services is liable to pay tax instead of the supplier. This provision is designed to ensure tax compliance in cases where suppliers are unregistered or belong to specific categories.
1. What is Reverse Charge Mechanism (RCM)?
Under RCM, the liability to pay GST shifts from the supplier to the recipient. This mechanism applies in specific cases outlined by the GST law, primarily to plug tax evasion and bring unorganized sectors into the tax net.
Key Points:
- Applicable in cases where the supplier is unregistered and the recipient is a registered taxpayer.
- The recipient must self-invoice and pay GST directly to the government.
- ITC (Input Tax Credit) can be claimed on GST paid under RCM.
2. When is RCM Applicable?
RCM is applicable in two main scenarios:
- Supply of specific goods and services notified by the government.
- Purchases from unregistered suppliers by a registered business.
2.1 Notified Goods under RCM
The government has specified certain goods on which RCM applies, including:
- Cashew nuts (not shelled or peeled)
- Tobacco leaves
- Raw cotton
- Silk yarn
- Supply of lottery tickets
2.2 Notified Services under RCM
Certain services also attract RCM, such as:
- Legal services provided by an advocate.
- Security services provided by unregistered security agencies.
- Renting of motor vehicles if the supplier is unregistered.
- Services by a director to a company.
- Import of services, where the recipient must pay GST under RCM.
3. GST Registration Requirement under RCM
- Businesses liable to pay tax under RCM must register under GST, even if their turnover is below the threshold limit (Rs. 20 lakh for services, Rs. 40 lakh for goods).
- Composition scheme taxpayers cannot claim ITC on RCM payments.
4. How to Comply with RCM?
4.1 Self-Invoicing
Since the supplier does not charge GST, the recipient must generate a self-invoice with:
- Invoice date and number.
- GSTIN of the recipient.
- Details of goods/services received.
- Tax amount payable under RCM.
4.2 GST Payment and ITC Claim
- GST under RCM must be paid in cash (not via ITC).
- ITC can be claimed in the same tax period, provided the goods/services are used for business purposes.
5. GST Returns and RCM Reporting
- RCM liability must be reported in GSTR-3B under the ‘Reverse Charge’ section.
- Invoices for RCM transactions must be recorded and maintained for compliance.
- GST paid under RCM should also be reflected in GSTR-9 (Annual Return).
6. Implications and Penalties for Non-Compliance
- Interest: If RCM GST is not paid on time, interest at 18% per annum is applicable.
- Penalties: Non-compliance can lead to a penalty equal to the tax amount or Rs. 10,000, whichever is higher.
7. Conclusion
Reverse Charge Mechanism (RCM) is a crucial aspect of GST compliance for businesses dealing with unregistered suppliers or notified goods and services. Ensuring timely self-invoicing, tax payments, and proper reporting in GST returns will help businesses stay compliant and avoid penalties.
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