If you're a taxpayer under the Goods and Services Tax (GST) regime, you might have come across the term Reverse Charge Mechanism (RCM).
But what exactly does it mean, and how does it impact you?
In this blog post, we’ll break down RCM, explain its scope, the list of services and goods it covers, and its implications for both suppliers and recipients.
By the end of this guide, you'll have a clearer understanding of RCM and its relevance for your business.
What is Reverse Charge Mechanism (RCM)?
Reverse Charge Mechanism, or RCM, is a unique concept under the GST law. In a typical GST setup, the supplier is responsible for collecting and paying the tax to the government.
However, under RCM, the recipient of the goods or services is responsible for paying the tax, rather than the supplier. This mechanism is applicable under specific conditions, and it primarily serves two purposes:
- Preventing Tax Evasion: RCM helps ensure that taxes are paid, even when the supplier is not registered under GST or is operating in the unorganized sector.
- Shifting the Tax Burden: It shifts the tax collection responsibility from smaller, unregistered suppliers to larger, organized businesses, ensuring better compliance.
When Does RCM Apply?
RCM applies in various situations, including:
- Specified Goods and Services: The Central Board of Indirect Taxes and Customs (CBIC) specifies certain goods and services that come under RCM, such as goods transport agency services, legal services, and services from directors of a company.
- Transactions Between Registered and Unregistered Dealers: If an unregistered dealer supplies goods or services to a registered dealer, RCM applies, subject to certain conditions.
- Import of Services: RCM is applicable when services are imported from outside India, regardless of the registration status of the supplier or recipient.
What is the List of Services under RCM in GST 2022?
This section is dependent upon the type of supplier and/or type of supply. The following goods are listed in the notification:
| Sr No. | Supply of Goods | Supplier of Goods | Recipient of Goods |
|---|---|---|---|
| 1 | Cashew Nuts (unshelled/unpeeled) | Agriculturist | Any registered person |
| 2 | Bidi Leaves (Tendu) | Agriculturist | Any registered person |
| 3 | Tobacco Leaves | Agriculturist | Any registered person |
| 4 | Silk Yarn | Individuals or entities involved in silk yarn production from raw silk | Any registered person |
| 4A | Raw Cotton | Agriculturist | Any registered person |
| 5 | Lottery | State Government, Union Territory, or local authority | Lottery distributor/selling agent |
| 6 | Used vehicles, confiscated goods, old and used goods, waste, and scrap | Central Government, State Government, Union territory, or local authority | Any registered person |
The services listed in the notice include:
| Sr No. | Supply of Services | Supplier of Services | Recipient of Services |
|---|---|---|---|
| 1 | Taxable services rendered by a person located in a non-taxable territory, received by a person in a taxable territory other than a non-assessee online recipient | Individual or entity in a non-taxable country | Individual or entity in a taxable country |
| 2 | Services provided by a Goods Transport Agency (GTA) for road transportation of goods | Goods Transport Agency: a) Registered factory b) Registered society c) Cooperative society established by law d) Registered under CGST/SGST/UTGST Act e) Body-corporate f) Partnership firm g) Casual taxable person | Any entity availing transportation services |
| 3 | Legal services provided by an individual advocate or a firm of advocates | Individual advocate or firm of advocates | Any business entity |
| 4 | Services provided by an arbitral tribunal | Arbitral tribunal | Any business entity |
| 5 | Sponsorship services | Any individual or entity offering sponsorship | Any body-corporate or partnership firm |
| 6 | Services provided by government or local authority excluding specific categories | Government or local authority excluding: a) Renting immovable property b) Specific services such as those provided by the Department of Posts, aircraft/vessel services, transport of goods/passengers | Any business entity |
| 7 | Services provided by a director of a company or a body corporate | Director of a company or a body corporate | Company or body corporate |
| 8 | Services provided by an insurance agent to entities engaged in insurance business | Insurance agent | Entities engaged in insurance business |
| 9 | Services provided by a recovery agent to banking or non-banking financial entities | Recovery agent | Banking company, financial institution, or non-banking company |
| 10 | Transportation services of goods by ship/boat/vessel from a non-taxable territory to the customs station in India | Person in non-taxable territory | Customs station in India |
| 11 | Transfer or granting the use or enjoyment of copyrights related to music, authorship, photography, or artistic work | Copyright holder: Author, composer, photographer, etc. | Publisher, music company, producer |
| 12 | Radio taxi or passenger transport services facilitated by an E-commerce operator | Taxi driver or Rent-a-cab operator | Any individual or entity availing the service |
| 13 | Services provided by members of the Overseeing Committee to the Reserve Bank of India | Members of the Overseeing Committee established by RBI | Reserve Bank of India |
What are the Implications for the Taxpayers?
If you are a recipient who is liable to pay tax under RCM, there are several important points to keep in mind:
- GST Registration: You must register under GST, even if your turnover is below the threshold limit, as RCM offers no exemption.
- Self-Invoice: You need to issue a self-invoice for goods or services received under RCM and pay the tax to the government on or before the due date.
- GST Returns: RCM transactions must be reported in GST returns like GSTR-3B and GSTR-1.
- Input Tax Credit (ITC): You can claim ITC for the tax paid under RCM, subject to the conditions outlined under the GST law.
For suppliers who are not liable to pay tax under RCM, here’s what you need to know:
- GST Registration: No need to register unless you are involved in other taxable supplies.
- No Tax Invoice: Since the recipient issues a self-invoice, you don’t need to issue a tax invoice.
- GST Returns: You don’t need to report RCM transactions in your GST returns.
- Input Tax Credit: You cannot claim ITC on the tax paid by the recipient under RCM, as you’re not the person liable to pay the tax.
Reverse Charge Mechanism (RCM) in GST: Key Takeaways
Understanding Reverse Charge Mechanism (RCM) is essential for taxpayers in the GST regime, as it impacts both suppliers and recipients of goods and services in certain cases.
By familiarizing yourself with the list of services and goods covered under RCM, as well as the implications for GST registration, invoicing, and ITC, you can ensure compliance and avoid penalties.
If you're unsure about RCM’s impact on your business or need guidance on specific transactions, it’s always a good idea to consult a tax professional to navigate the complexities of GST.
Also Read: Forward Charge vs Reverse Charge in GST: What’s the Difference?
