All About Reverse Charge Mechanism (RCM) in GST

11 Oct 2023
all-about-reverse-charge-mechanism-rcm-in-gst

The Goods and Services Tax (GST) has revolutionized the Indian taxation system. Among its many facets, the Reverse Charge Mechanism (RCM) stands out. For SME owners and stakeholders, understanding RCM is crucial. Here’s a comprehensive look:

What is Reverse Charge Mechanism(RCM)?

In the usual GST framework, the supplier of goods or services collects and remits GST. However, with the Reverse Charge Mechanism, this duty shifts. In some situations, the recipient or buyer pays the GST directly to the government.

Why RCM? The Objectives

  • Widening the Tax Base: RCM ensures unregistered suppliers and specific notified goods/services are taxed.
  • Preventing Tax Evasion: RCM makes tax evasion more challenging by capturing transactions with unregistered suppliers.
  • Taxation on Import Services: For foreign suppliers escaping local GST, RCM mandates their Indian clients to pay the tax.

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

Staying compliant is crucial. Invoices should state when RCM applies. During GST return filings, detail RCM supplies. Remember, non-compliance might lead to penalties.

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

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

Latest Update in RCM – 2023

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.

For example, RCM will still be applicable on supplies of goods or services through an e-commerce platform.

Here is a table summarizing the changes in RCM in 2023:

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.