Reverse Charge Mechanism (RCM) Under GST: A Detailed Guide
1. Introduction to Reverse Charge Mechanism (RCM)
* Meaning of RCM in GST.
* Difference between Forward Charge and Reverse Charge.
* Why is Reverse Charge required?
* Applicability of RCM under GST.
* Who is liable to pay tax under RCM?
2. Legal Provisions of RCM
* Section 9(3) of CGST Act: Specific goods and services notified by the government.
* Section 9(4) of CGST Act: RCM on purchases from unregistered suppliers.
* Time of Supply Rules:
* Goods: Earliest of receipt of goods, payment, or 30 days from invoice.
* Services: Earliest of payment or 60 days from invoice.
* Mandatory Registration under RCM: No threshold exemption for RCM payers.
3. List of Goods Covered Under RCM
| Goods | Supplier | Recipient |
|---|---|---|
| Cashew Nuts (Not Shelled) | Agriculturist | Registered Buyer |
| Bidi Wrapper Leaves | Agriculturist | Registered Buyer |
| Tobacco Leaves | Agriculturist | Registered Buyer |
| Silk Yarn | Manufacturer | Registered Buyer |
| Raw Cotton | Agriculturist | Registered Buyer |
| Used Vehicles & Metal Scrap | Government/Local Authority | Registered Buyer |
4. List of Services Covered Under RCM
| Services | Supplier | Recipient |
|---|---|---|
| Goods Transport Agency (GTA) | GTA (Unregistered) | Business Entity |
| Advocate Services | Advocate/Firm | Business Entity |
| Arbitral Tribunal Services | Tribunal | Business Entity |
| Sponsorship Services | Sponsor | Registered Business |
| Government Services | Government | Business Entity |
| Security Services | Security Firm | Registered Business |
| Renting of Passenger Vehicles | Transporter | Registered Business |
| Import of Services | Foreign Service Provider | Indian Business |
5. GST Compliance & Accounting Under RCM
5.1 Invoicing & Payment
Self-Invoicing: Recipient must generate an invoice in case the supplier does not.
Tax Payment: GST must be paid in cash, ITC cannot be used for RCM payments.
Input Tax Credit (ITC): ITC can be claimed after payment of RCM tax.
Reporting in GST Returns:
GSTR-1: Table 4B for outward supplies liable to RCM.
GSTR-3B: Table 3.1(d) for tax payable under RCM.
5.2 Accounting Entries for RCM Transactions
Recording RCM Purchase: Expense A/c Dr. 100
To Creditor A/c 100
Recording GST Liability under RCM: Input CGST RCM Dr. 9
Input SGST RCM Dr. 9
To Output CGST RCM 9
To Output SGST RCM 9
Payment of RCM Liability: Output CGST RCM Dr. 9
Output SGST RCM Dr. 9
To Bank A/c 18
6. Case Studies & Practical Scenarios
6.1 Example 1: Goods Transport Agency (GTA)
* ABC Ltd. hires a GTA for goods transport.
* GTA does not charge GST.
* ABC Ltd. must self-invoice and pay GST at 5% under RCM.
* ABC Ltd. can claim ITC if used for business purposes.
6.2 Example 2: Import of Services
* XYZ Pvt. Ltd. purchases consulting services from a US firm.
* No GST charged by the US firm.
* XYZ Pvt. Ltd. must pay IGST under RCM and claim ITC.
7. Common Mistakes to Avoid in RCM Compliance
✅ Missing RCM tax payment → Leads to penalties and interest.
✅ Incorrect time of supply application → May result in late payments.
✅ Failure to self-invoice → Non-compliance with GST laws.
✅ Not claiming ITC properly → Results in loss of credit.
8. Conclusion: How RCM Affects Businesses?
- Increases compliance requirements: Businesses need to maintain accurate records.
- Cash flow impact: RCM tax must be paid in cash before claiming ITC.
- Impact on pricing: Additional GST cost on services like security, renting, and logistics.
By understanding Reverse Charge Mechanism (RCM) and implementing proper compliance strategies, businesses can avoid penalties, ensure smooth GST filing, and optimize input tax credit benefits.