Reverse Charge Under GST

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Introduction

The Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) regime shifts the responsibility of paying GST from the seller (supplier) to the buyer (recipient). In a typical GST scenario, the supplier collects and remits the tax. However, under RCM, the recipient of goods or services is liable to pay the GST directly to the government, making it an important provision for both registered taxpayers and businesses.

oWhat is Reverse Charge under GST?

Reverse Charge refers to the mechanism where the recipient of goods or services is responsible for paying GST instead of the supplier. It is typically applied in cases where the supplier is unregistered, and in certain specified transactions as determined by the GST law.

In essence:

The recipient must issue a self-invoice if the supplier is unregistered.
The recipient is responsible for paying both Central GST (CGST) and State GST (SGST) for intra-state transactions, or Integrated GST (IGST) for inter-state transactions.

When is Reverse Charge under GST Applicable?

RCM is applicable in two primary cases:

Unregistered Supplier to Registered Recipient:

When a registered individual receives goods or services from an unregistered supplier.
The recipient must directly pay the GST to the government.

E-commerce Operators:

If an e-commerce operator provides certain services, they are liable to pay GST under reverse charge.
For example, if UrbanClap facilitates services like plumbing or beauty treatments, it must collect and remit GST on behalf of the service providers.

Key Applicability Points of Reverse Charge under GST

If a registered recipient purchases goods or services from an unregistered supplier, the recipient is liable to pay GST under RCM.
For inter-state transactions, the recipient pays IGST, while for intra-state transactions, they pay CGST and SGST.
E-commerce operators are also subject to reverse charge on specified services.
The registered recipient must generate a self-invoice and remit the applicable GST.

Who Needs to Pay GST Under Reverse Charge Mechanism?

Several goods and services fall under the RCM, as notified by the government. For instance:

Goods like tobacco leaves, cashew nuts, and silk yarn supplied by agriculturists to registered persons.
Services such as directors’ services to a company, recovery agent services to banks or NBFCs, and insurance agents’ services to insurance companies.

You may also want to know about E-Invoicing Under GST

Goods Supplied Under Reverse Charge Mechanism

Goods	Supplier	Recipient
Bidi wrapper	Agriculturist	Any registered person
Cashew nuts	Agriculturist	Any registered person
Silk yarn	Manufacturer of silk yarn	Any registered person
Raw cotton	Agriculturist	Any registered person

Services Supplied Under Reverse Charge Mechanism

Service	Supplier	Recipient
Director of a company	Company director	Company or body corporate
Goods Transport Agency (GTA)	GTA	Registered person under CGST Act
Advocate services	Individual advocate or firm	Any business entity
Insurance agent	Insurance agent	Person carrying on insurance business

Self-Invoicing Under RCM

In cases where the recipient purchases goods or services from an unregistered supplier, the recipient must issue a self-invoice to comply with GST laws. The recipient documents and pays the GST amount through the concept of self-invoicing when dealing with unregistered suppliers.

For instance, if a registered business receives supplies from an unregistered supplier under RCM, it must generate and pay tax through self-invoicing, ensuring compliance with GST.

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Considerations of RCM

GST Registration: Businesses paying taxes under RCM must register for GST, even if their annual turnover is below the prescribed threshold.
GST Payment Timeline: GST under RCM must be deposited by the 20th of the succeeding month.
Input Tax Credit (ITC): The recipient can claim ITC on the tax they pay under RCM if they use the goods or services for business purposes.
GST on Advances: GST is also applicable on advance payments made under RCM for the purchase of goods or services.
GST Compensation Cess: It can be applied to the RCM tax payable.

Major Differences between Regular GST and Reverse Charge

In regular GST transactions, the supplier is responsible for collecting and paying the tax.
Under RCM, the recipient (buyer) must pay the GST directly to the government.
Businesses typically apply RCM in specific scenarios, such as transactions with unregistered suppliers or certain notified goods and services.

Conclusion

The Reverse Charge Mechanism under GST plays a vital role in ensuring tax compliance, especially in cases involving unregistered suppliers or specific services. Businesses need to understand when RCM applies, comply with self-invoicing requirements, and be mindful of the goods and services covered under RCM. Failure to adhere to RCM requirements can result in penalties and non-compliance issues. Proper understanding and implementation of RCM can aid in smooth GST compliance and avoid any tax-related complications.

Frequently Asked Questions

What is the Reverse Charge Mechanism in GST?

Reverse Charge Mechanism (RCM) is a system under GST where the recipient, instead of the supplier, is liable to pay the GST on goods or services.

When is RCM applicable?

RCM is applicable when a registered recipient receives goods or services from an unregistered supplier, or for certain notified goods and services.

Can I claim Input Tax Credit (ITC) on tax paid under RCM?

Yes, the recipient can claim ITC on the tax paid under RCM, provided the goods or services are used for business purposes.

What is self-invoicing in RCM?

Self-invoicing is required when a registered recipient receives supplies from an unregistered supplier under RCM, as the supplier cannot issue a GST-compliant invoice.

Who is liable to pay GST under RCM for e-commerce services?

The e-commerce operator is liable to pay GST under RCM for specific services such as plumbing, beautician, etc., facilitated by them.

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