All About Reverse Charge Mechanism (RCM) in GST

11 Oct 2023
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Introduction to RCM in GST

The Goods and Services Tax (GST) has revolutionized India’s tax system, introducing several mechanisms, including the Reverse Charge Mechanism (RCM). RCM is a unique facet of GST that every SME owner should be aware of. It’s a mechanism where the responsibility of paying the tax shifts from the seller to the buyer. This article delves into what RCM is, its importance, and the latest updates relevant to SMEs.

What is Reverse Charge Mechanism(RCM)?

Under the standard GST model, the supplier of goods or services is responsible for collecting and remitting GST. RCM changes this dynamic. In specific scenarios, it’s the recipient or buyer of the goods or services who directly pays the GST to the government. This shift is crucial in cases involving unregistered suppliers or certain notified goods and services.

Why is RCM Important for SMEs?

  1. Widens Tax Base: RCM includes transactions with unregistered suppliers under the tax net, ensuring a broader tax base.
  2. Prevents Tax Evasion: By capturing transactions that might otherwise evade taxation, RCM strengthens the integrity of the tax system.
  3. Taxation of Imported Services: For services procured from foreign suppliers, RCM mandates Indian recipients to pay GST, ensuring these services don’t escape the local tax net.

When Does RCM Apply?

  • Goods and Services Imports: When services or goods are imported.
  • Transactions with Unregistered Suppliers: When a registered entity sources from an unregistered one.
  • Specific Goods and Services: Government listings detail goods and services where RCM is mandatory.

How to Pay Tax under RCM?

To comply, ensure GST under RCM is deposited by the 20th of the next month. Maintain separate RCM supply records. Though the Input Tax Credit (ITC) can offset regular GST dues, RCM payments are via the electronic cash ledger.

RCM & Input Tax Credit

Businesses can claim the Input Tax Credit (ITC) on GST paid under RCM, just like regular GST payments. However, claim ITC only after the RCM payment.

Documentation & Compliance

Compliance With RCM Involves:

  • Paying the GST under RCM by the 20th of the following month.
  • Maintaining separate records for RCM supplies.
  • Ensuring invoices indicate when RCM is applicable.
  • Detailing RCM supplies during GST return filings.

A Practical RCM Example

Consider an SME using a freelancer’s service who isn’t GST-registered. Though the freelancer doesn’t charge GST, the SME calculates and pays the GST on their behalf directly under RCM. This amount is then claimed as an Input Tax Credit in subsequent GST filings.

Why Embrace RCM? The Benefits

  1. Ensured Compliance: RCM ensures transactions, even with unregistered entities, contribute to tax revenue.
  2. Empowering Small Suppliers: Those under the GST threshold can cater to bigger, registered entities without registering for GST.
  3. Transparency & Monitoring: More transactions under tax scrutiny means reduced tax evasion, positively impacting supply chain and logistics in India.

Latest Update in RCM – 2024

Effective from October 1, 2023, Reverse Charge Mechanism (RCM) will not be applicable on any goods or services supplied by unregistered suppliers. This is a significant change as it will reduce the compliance burden on registered businesses. However, it is important to note that RCM will still be applicable on certain supplies made by registered suppliers to unregistered suppliers, such as supplies through an e-commerce platform.

Here is a table summarizing the changes in RCM in 2024:

RCM Changes Table
Before October 1, 2023 After October 1, 2023
RCM is applicable on certain goods and services supplied by unregistered suppliers to registered suppliers. RCM is not applicable on any goods or services supplied by unregistered suppliers to registered suppliers.
RCM is applicable on certain goods and services supplied by registered suppliers to unregistered suppliers. RCM is still applicable on certain goods and services supplied by registered suppliers to unregistered suppliers, such as supplies through an e-commerce platform.

Registered businesses should carefully review the changes in RCM to ensure that they are in compliance with the law.

Concluding Thoughts

For SME owners, understanding RCM nuances is more than compliance; it’s about leveraging them for operational and financial benefits. Regular consultations with tax experts and visiting the official GST portal can keep you updated and ensure you tap into RCM’s full potential within GST.

Related blog:-
Types of Services Under the GST Regime in India

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