Reverse Charge Mechanism under GST- The Working & Guidelines
Reverse Charge Mechanism is a frequently occurring but complex provision of GST. Many businesses come across this situation at one point in time or the other. Which makes it important for you to be familiar with the concept, and understand how RCM really works. So, to make the job simpler for you we have explained the working of RCM along with Guidelines for you to follow while dealing with supplies liable to RCM under GST.
What is Reverse Charge Mechanism or RCM under GST?
So, generally, while the transaction of buying and selling occurs, its the supplier that collects the GST from the buyer and deposits it to the Government.
However, within the Reverse Charge Mechanism, the recipient of the goods or services has to deposit the GST directly to the Government. In the case of RCM supplies, the recipient will not pay the GST to the supplier (exclusive of GST).
Let us take an example to understand this better-
Mr. A is a buyer who buys raw material for his manufacturing business from Mr. B, then under Reverse Charge Mechanism, Mr. A will pay the amount exclusive of GST to Mr. B.
Mr. A will then deposit the GST directly to the Government in his monthly return filings. Although, RCM applies to the following conditions only-
- Buying supplies from Unregistered Supplier
- Goods and Services Specified by the Government under Section 9(3) of the CGST Act
- Supplies from e-Commerce operators.
Working of RCM under GST explained with Examples!
So, how exactly does RCM work in the practical application?
Let us continue the example of Mr. A and Mr. B to understand this better. As stated above, Mr. being the buyer will pay a more significant role here.
Let’s say he bought Cashews (a good that is liable to RCM) from Mr. B in the month of March for his FMCG business. Now since Cashews are liable to RCM, Mr. A will have to pay the GST directly to the Government when he files his returns for March in April 2020.
He will have to create a self tax invoice for the supply that will contain the details of the supplier and the supplies.
The details of supplies liable to RCM and the supporting invoices need to be declared by Mr. A in Forms GSTR-1 and GSTR-3B in the following tables-
- Table 4B of GSTR-1
- Table 3.1 (d) of GSTR-3B
- Table 4A (3) of GSTR-3B for claiming ITC on supplies liable to RCM.
Taxpayers will have to release the payment of such transactions through Electronic Cash Ledger only. You can claim the ITC on supplies liable to RCM in the same month as the supply, which will be credited in your Electronic Credit Ledger.
You can use this credit to release other tax liabilities, but while accounting and paying, you must pay the GST on RCM supplies first and then claim the ITC on the same.
Guidelines to Follow while dealing with supplies liable to RCM under GST!
We have listed down a few guidelines for you to comply better and effectively with the provisions of RCM under GST-
1. Self Invoices Creation- As a recipient of goods/services liable to RCM, you will have to create the self invoice of the supply and include the supplier and supply details in the same. These invoices can be made in general format by the taxpayers via their billing systems.
2. Reporting of RCM Invoices- The invoices as made by the taxpayers above, shall be accounted for in GSTR-1 and GSTR-3B, by the recipient. Later, you will have to declare the details of supplies under RCM in the annual GST returns as well.
3. Payment of RCM supplies- The payment for any supply that is liable to RCM shall be made by the taxpayer by debiting the electronic Cash Ledger only. You cannot utilize any ITC to pay the RCM liabilities.
4. Claiming the Input Tax Credit on supplies liable to RCM- As the recipient is the taxpayer in the case of RCM, he will be allowed to claim ITC on such supplies. However, you will first have to pay the taxes under RCM and then claim the ITC for the same. Note- the ITC claimed on RCM supplies cannot be used to release the RCM liabilities. But you can use such credits to release other Tax liabilities.
5. Accounting Ledger for RCM Supplies- You must always prepare a separate accounting ledger for the accounting of supplies liable to RCM. This ledger should contain the tax details of Input and Output Tax liabilities that fall under RCM.
6. RCM on Real-Estate Sector- As per Notification No. 7/2019-C.T. (Rate), dated 29th March, 2019, the builder of the a project will have to pay 80% of the taxes @18% on RCM Basis.
7. Time of Supply for RCM supplies (goods)- The time of supply shall be considered any 1 of the following three (whichever is the earliest)-
- Date of receipt of goods
- Date of payment as entered in the books of account by the recipient or the date on which the payment is debited from his bank account, whichever is earlier
- The date immediately following 30 days from the date of issue of invoice or any other, similar document given by the supplier.
8. Time of Supply for RCM supplies (services)- The time of supply shall be considered any 1 of the following three (whichever is the earliest)-
- The date of payment entered in the books of account by the recipient, or the date on which the payment is debited from his bank account, whichever is earlier
- The date immediately following 60 days from the date of issue of invoice or any other similar document provided by the supplier
9. Payment of Inter-state transactions under RCM- CGST and SGST applicable in Inter State Transaction or payment in another State
10. Payment against the RCM invoices- The payments for RCM supplies needs to be made by the recipient within 20 days of the following month from the date of the invoice.
RCM is a complicated provision of GST having a mixed impact on businesses. However, especially for small businesses, RCM is not a friendly provision of GST.
The small companies that serve large enterprises are either forced to get GST registration and file their own taxes or, businesses are cutting off the deals with smaller enterprises. The same has increased the compliance burden and more loss rate amongst smaller businesses.
Although it is good to get GST registration done, for a small business having a very low turnover and having a low literacy rate, it may not be possible to comply with GST on their own.
The will have to take help from tax consultants who will charge a lot of money for the job.