Reverse charge mechanism in GST

In the Goods & Service Tax (GST) regime, paying tax is not just the concern, as collecting is also a major concern. It's well known that the supplier must collect GST from the recipient of goods/services and deposit it to the department. However, the story does not end here as there are some cases where the said theory is reversed.

In certain cases, the recipient is liable to pay tax, and the concept is termed as Reverse Charge Mechanism (RCM). Synchronizing the RCM subject, the writer will give the background of this mechanism, referring to relevant provisions of Central/State/ Integrated GST Acts. Then, a brief about criteria where RCM is applicable along with major domains operating under this regime shall be penned down. Lastly, sum up this article with some personal comments reflecting the future of RCM under GST. 

Objective behind RCM

In some situations, creating liability on the supplier is not feasible; therefore, the government has reached to way out for this issue with the Reverse Charge (RC) tagline, which is often called 'RCM'. Using powers ‘Levy & Collection’ enumerated under section 9 of Central/State GST & 5 of Integrated GST Acts, depart frame the technique. The said provision Central Board of Indirect Taxes and Customs (CBIC) empowers to issue notification/circulars for clarification in the GST regime.

When RCM Operates

Mechanism of shifting forward charge to reverse charge works, where creating GST liability on recipients against any taxable services/goods is much easier than targeting the supplier. In such cases, RCM operates generally happened in two cases;

  • Unregistered Supplier: When the recipient is undertaking any taxable activity with a supplier who is not registered with the department. The best example of this is Import; where foreign supplier supplying services/goods to Indian recipient which comes under the taxable transaction;

  • Notified by Department: Besides, abovesaid basic reason department has authority to notify any goods/services or even activity giving clarity regarding its GST liability lies, to which party, i.e. Supplier (Forward Charge) and Recipient (Reverse Charge) like;

      1. Goods: Raw cotton, silk, cashew nuts, etc.;
      2. Service: Lottery, Goods Transport Agency and Legal Service, etc.; 
      3. Activity: The best example is e-commerce operators; as per the latest update, food delivery services rendered by e-commerce operators become liable to pay GST.


Compliance by Recipient in RCM

Under forward charge, the basic job of the recipient is to pay GST charged in the invoice issued by the supplier. However, when it comes to RCM, the recipient has to be on their toes in doing all the compliances the same as suppliers perform while paying GST. As a ready reckoner, the same is entailed as under:

1. Registration: If an entity is engaged in activity that falls under the frame of RCM then, the recipient has to take registration with the department and file returns duly;

2. Signifying GST Liability: As per the latest condition, every invoice should clarify its tax liability. Accordingly, if RC is applicable, then it has to be mentioned in the supplier’s invoice also;

3. Self-Invoicing: As explained in the case of an unregistered supplier, the recipient has to raise self-invoice reflecting details of the supplier’s invoice for depositing the applicable GST. 

4. Books of Accounts: Created GST liability simultaneously attracts department search or investigation chances. Thus, maintenance of electronic ledgers with all the requirements has to be fulfilled;


5. Paying RCM: While paying GST under RCM, the recipient has to pay in cash as it can’t use its Input Tax Credit (ITC) for paying that applicable GST. However, later on, the discharged amount can be claimed as ITC if eligible;


6. Advance Payment: Like forward charge, RC must be discharged if the recipient is paying advance to the supplier.

Conclusion

Summing up the article, it may be noted that RCM is an evolving subject as most of the CBIC notification/clarification comes with new techniques for fighting the knot of GST over all the goods and services. Thus, RCM can’t remain untouched from this fleece of the GST regime.