🔄 Reverse Charge Mechanism (RCM) under GST – Explained

In India’s Goods and Services Tax (GST) system, the Reverse Charge Mechanism (RCM) is a special mechanism where the responsibility of paying the GST shifts from the supplier to the recipient of the goods or services. Unlike the regular forward charge mechanism, where the supplier collects GST from the buyer and pays it to the government, under RCM, the buyer directly pays the GST to the government.

In this blog, we will explain what RCM under GST is, when it applies, the process involved, and other key details you need to know.

1. What is Reverse Charge Mechanism (RCM)?

In the regular forward charge mechanism, the supplier is responsible for charging and collecting GST from the recipient of goods or services. However, under the Reverse Charge Mechanism (RCM), the recipient of the goods or services is responsible for paying the GST directly to the Government instead of the supplier. This mechanism is usually applicable in specific cases mentioned under GST law.

How Does RCM Work?

Under RCM, when a specified supply takes place, the recipient is required to:

• Pay the GST on behalf of the supplier.
• File the applicable GST return (like GSTR-3B) and claim Input Tax Credit (ITC), subject to the conditions laid out under GST law.

2. When is RCM Applicable?

RCM under GST is applicable in the following cases:

1. When the Supplier is Unregistered

If the supplier of goods or services is unregistered under GST, and the recipient is registered, the recipient will have to pay the tax under RCM. This applies when the recipient is registered and receiving taxable goods or services from an unregistered supplier.

2. Specific Goods or Services Under the RCM

Certain goods and services are specifically mentioned in the GST law under which RCM applies, such as:

• Transportation of goods by a goods transport agency (GTA), where the recipient is liable to pay tax.
• Legal services provided by a senior advocate or law firm.
• Services provided by an insurance agent.
• Supply of goods/services from an unregistered supplier to a registered recipient.
• Arbitration services, when the recipient is registered.
• Casual taxable persons providing services in certain cases.

These supplies are subject to RCM, meaning the recipient, being a registered taxpayer, will be responsible for paying the tax directly to the government.

3. Import of Services

In cases of imported services (services received from abroad), the recipient of the service (who is registered under GST) must pay the GST under RCM. This ensures that imported services are not exempted from GST.

3. Key Points about Reverse Charge Mechanism (RCM)

Here are some essential points to keep in mind regarding RCM under GST:

• GST Payment by Recipient: The registered recipient of the supply will pay the GST directly to the government.
• ITC Availability: In most cases, the recipient can claim Input Tax Credit (ITC) on the tax paid under RCM, as long as the purchased goods or services are used for business purposes.
• Exemption for Small Supplies: RCM does not apply for certain small value supplies. For example, if the value of transportation services by a GTA does not exceed ₹1,500 per consignment, RCM will not apply.
• No Need for GST on the Supplier’s End: Since the recipient pays the tax under RCM, the supplier is not required to charge or remit GST on that transaction.

4. Process of Reverse Charge Mechanism (RCM)

The process involved in RCM is straightforward but requires careful compliance from the recipient. Here’s how it works:

Step-by-Step Process:

1. Identify RCM Applicable Supply: The recipient needs to identify whether the supply received falls under RCM. If yes, the GST liability rests with the recipient.
2. Payment of GST by Recipient: The recipient must pay GST on the taxable value of the goods or services received. This is done via GSTR-3B, and the tax must be paid in cash (if ITC is not available).
3. Claim ITC (if eligible): After paying the GST under RCM, the recipient can claim Input Tax Credit (ITC) on the GST paid, as long as the goods or services are used for business purposes and meet the necessary conditions.
4. File GST Return: The recipient must report the transaction in the appropriate GST returns (GSTR-3B, GSTR-1). The recipient also needs to ensure that the GST paid under RCM is included in the returns, ensuring transparency.
5. Compliance Check: The recipient must ensure that all compliance requirements, such as maintaining proper documentation and accounting records, are met to avoid penalties.

5. Example of Reverse Charge Mechanism (RCM)

Let’s consider an example to better understand RCM:

Example 1 – GTA Service (Transportation)

• Scenario: A registered company in India receives transportation services from an unregistered goods transport agency (GTA) for transporting goods.
• Under RCM, the company (recipient) is responsible for paying the GST directly to the government, even though the GTA (supplier) does not charge any GST.

Example 2 – Legal Services

• Scenario: A registered business receives legal services from a senior advocate who is unregistered under GST.
• In this case, the business (recipient) will pay the GST on the legal fees under RCM, and can claim ITC, if the services are used for business purposes.

6. RCM: Key Advantages and Challenges

Advantages of RCM:

• Streamlined Compliance: RCM helps in better tracking and collecting GST, especially for sectors like transportation, legal services, and others.
• Wider Coverage: It ensures that tax is collected on services supplied by unregistered taxpayers, which would otherwise be missed.
• Simplicity: RCM simplifies the tax collection process for the government by placing the responsibility of paying taxes on the recipient.

Challenges of RCM:

• Cash Flow Impact: Businesses may face cash flow issues since they need to pay the tax under RCM upfront and then claim ITC.
• Complex Compliance: Maintaining accurate records and filing returns for RCM can be challenging, especially for small businesses.
• Ineligibility for ITC in Some Cases: If the recipient uses the services for non-business purposes, they may not be able to claim the ITC.

7. Conclusion

The Reverse Charge Mechanism (RCM) plays an essential role in India’s GST framework. It shifts the responsibility of paying GST from the supplier to the recipient in certain cases, ensuring that no taxes go unpaid, especially in transactions involving unregistered suppliers or services.

Businesses need to be diligent in identifying when RCM applies and ensure that they pay GST and claim ITC (if eligible) as required by law. Ensuring compliance with RCM provisions will help businesses avoid penalties and streamline their tax processes.

📞 Need Assistance with Reverse Charge Mechanism (RCM) or GST Compliance?

If you’re facing any difficulties related to RCM compliance, filing GST returns, or any other GST-related queries, feel free to reach out to Taxeasy Solution for expert assistance:

📍 Taxeasy Solution
Supaul Bazar, Biraul,
Darbhanga, Bihar – 847203
📞 Mob: 6289187606
📧 Email: jhajp96@gmail.com