Reverse charge refers to a system in which the recipient of the goods or services pays the Goods and Services Tax (GST) rather than the supplier.
The recipient of the goods typically pays the supplier the value of the items and any taxes, who then pays the government the GST.
This is an ultimate guide to the Reverse Charge Mechanism (RCM) in GST, which helps you understand how it works in the GST regime.
Without further ado, let’s get started!
What is Reverse Charge Mechanism in GST?
A GST reverse charge is the amount of GST that the recipient must pay directly to the government, rather than through the supplier, if the goods or services are determined by the government to fall under the reverse charge mechanism.
What is the RCM ITC?
The Reverse Charge Mechanism states that recipients of goods or services, not their suppliers, are liable for the tax.
The tax burden in the case of the RCM under GST is the opposite of what it would normally be under the GST process.
The buyer or recipient of the goods and services is now liable for paying the tax instead of the seller, who is exempt from doing so. This sum includes the GST, which the supplier will eventually pay to the government.
The Reverse Charge Mechanism of the GST is only applicable in certain situations and for a limited range of goods and services.
The purpose of shifting the cost of GST payments to the recipient is to tax the import of services, exempt some categories of suppliers, and expand the taxation of other unorganized
Sectors.
Who pays GST under RCM?
Under RCM, the recipient of the goods or services is responsible for paying the GST. However, in order to comply with GST regulations, the person providing the goods must indicate on the tax invoice whether RCM tax is due.
When paying GST under RCM, the following considerations should be taken into account:
- Only if the recipient of goods or services uses those goods or services for business or the expansion of business can they claim an ITC on the tax amount paid under RCM.
- When discharging liability under RCM, a composition dealer should pay tax at the standard rates rather than the composition rates. They are also not qualified to make any claims for input tax credits for taxes paid.
- The tax due or paid in accordance with the RCM may be subject to the GST compensating CESS.
When can we claim ITC on RCM?
The individual who paid tax under RCM in a certain month can claim it as ITC in the following month.
How many types of RCM are there in GST?
According to the GST law, there are two categories of RCM:
- CGST Act, Section 9(3): Supply of certain goods or services
- CGST Act, Section 9(4): The provision of specified goods or services to specified registered persons by an unregistered person
List of Goods under RCM in GST
| Sr. No. | Description of supply of goods | Supplier of Goods | Recipient of Goods |
| 1 | Cashew nuts (not shelled or peeled) | Agriculturist | Any registered person |
| 2 | Bidi Wrapper Leaves (tendu), Tobacco Leaves | Agriculturist | Any registered person |
| 3 | Silk Yarn | Manufacturer of silk yarn from raw silk or silk worm cocoons | Any registered person |
| 4 | Lottery | State Government, Union Territory, or local authority | Lottery distributor or selling agent |
| 5 | Raw Cotton | Agriculturist | Any registered person |
| 6 | Used vehicles, seized and confiscated goods, old and used goods, waste, and scrap | Central Government, State Government, Union Territory or local authority | Any registered person |
| 7 | Purchase of priority sector lending certificate | Registered person | Any registered person |
List of services under RCM in GST
| S. No | Description of Supply of Service | Supplier of Goods | Recipient of service |
| 1. | Any service supplied by any person who is located in a non-taxable territory to any person other than a non-taxable online recipient | Any person located in a non-taxable territory | Any person located in a taxable territory other than a non-taxable online recipient. |
| 2. | GTA Services | Goods Transport Agency (GTA) who has not paid integrated tax at the rate of 12% | Any factory, society, cooperative society, registered person, body corporate, partnership firm, or casual taxable person; located in the taxable territory |
| 3. | Legal Services by advocate | An individual advocate, including a senior advocate or a firm of advocates | Any business entity located in the taxable territory |
| 4. | Services supplied by an arbitral tribunal to a business entity | An arbitral tribunal | Any business entity located in the taxable territory |
| 5. | Services provided by way of sponsorship to anybody corporate or partnership firm | Any person | Anybody corporate or partnership firm located in the taxable territory |
| 6. | Services supplied by the Central Government, State Government, Union territory, or local authority to a business entity excluding, – (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority;(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;(iii) transport of goods or passengers. | Central Government, State Government, Union territory, or local authority | Any business entity located in the taxable territory |
| 7. | Services supplied by a director of a company or a body corporate to the said company or the body corporate | A director of a company or a body of corporate | The company or a body corporate located in the taxable territory |
| 8. | Services supplied by an insurance agent to any person carrying on insurance business | An insurance agent | Any person carrying on insurance business, located in the taxable territory |
| 9. | Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company | A recovery agent | A banking company or a financial institution or a non-banking financial company, located in the taxable territory |
| 10. | Services supplied by a person located in the nontaxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India | A person located in a non-taxable territory | Importer, as defined in clause (26) of section 2 of the Customs Act, 1962 (52 of 1962), located in the taxable territory |
| 11. | Supply of services by an author, music composer, photographer, artist, or the like by way of transfer or permitting the use or enjoyment of a copyright covered under section 13(1)(a) of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music Company, producer, or the like | Author or music composer, photograph her, artist, or the like | Publisher, music company, producer, or the like, located in the taxable territory |
| 12. | Supply of services by the members of the Overseeing Committee to the Reserve Bank of India | Members of Overseeing Committee constituted by the Reserve Bank of India | Reserve Bank of India. |
Who can claim ITC under RCM?
In order to claim an input tax credit under GST, the following requirements must be satisfied:
- An official GST-registered supplier’s bit note or tax invoice must be in the possession of the individual claiming the input tax credit.
- The goods and/or services must be received by the person making the input tax claim.
- The tax that is levied in connection with this supply must be paid into the account of the relevant government.
- The return required by Section 39 must be provided by the party claiming the input tax credit.
- Only purchases made in the context of the sale of taxable or zero-rated goods or services are eligible for input tax credits. Purchases for any supplies that fall outside these categories are not eligible for ITC claims.
- Only a registered taxable individual has the authority to submit an input tax credit claim for the appropriate goods or services. The terms of Section 16(7) are used to determine how much credit a person is entitled to (which is to be issued). Note that under the current system, the capital goods credit would also be valid on a proportionate basis.
- After receiving the final installment of goods against an invoice which is received in installments, the registered taxable person is qualified to submit an input tax credit claim.
- When a person additionally claims depreciation under the Income Tax Act for the GST component, the individual is not eligible for an input tax credit under the GST for capital goods. One cannot claim input tax credits and depreciation for the same goods and/or services at the same time.
How to record RCM purchase entry in tally?
Record purchase (inward supply) of goods
- Go to Tally’s Gateway > Accounting Vouchers > F9: Purchase
2. Enter the required details.
3. Click A : Tax Analysis > F1 : View a detailed tax analysis report showing reverse charge amounts.
4. Press Esc to go back to the purchase voucher.
5. Press Enter to save.
Record purchase (inward supply) of services
1. Go to Tally’s Gateway > > Accounting Vouchers > F9: Purchase .
2. Enter the required details.
3. Click A : Tax Analysis > F1 : View a detailed tax analysis report showing reverse charge amounts.
4. Press Esc to go back to the purchase voucher.
5. Press Enter to save.
How to file RCM in GSTR 1?
Suppliers must report RCM of eligible sales in GST RET-1. The invoice recipient has to report reverse charge purchases in GST ANX-1. Recipient must report inter-invoice reverse charge purchases in Table 3H GST ANX-1 (inward supplies attracting reverse charge)
Inward RCM supplies reported by the recipient are automatically entered by GST ANX-1 in Table 3B of GST RET-1 (details of inbound shipments subject to reverse charge).
Can RCM be paid through ITC?
Amounts paid on a reverse charge are paid by electronic ledger debit. You cannot use the input tax credit to settle your reverse charge liability. However, after the reverse charge liability has ended, the recipient may claim the credit if otherwise entitled.
Frequently Asked Questions(FAQs):-
1. Can GST on RCM be paid through ITC?
A supplier is not entitled to claim an ITC for GST paid on a supply made with goods or services that required tax from the recipient.
2. Can we claim ITC on RCM in the same month?
Yes, When you paid the GST under RCM, you can claim the Input Tax Credit in the same month.
3. Is RCM shown in GSTR 1?
Yes, the recipient must issue the invoices on his or her own behalf and include them in their GSTR-1 and GSTR-3B declarations if the supply is subject to RCM.
4. How much on professional services is for RCM under GST?
RCM does not apply to professional services (other than legal services provided by Advocate).
5. How to claim RCM credit in GSTR 3B?
A reverse charge is not a charge, it is a payment as part of the reverse charge mechanism. You can declare the supplies liable to RCM in Table 3.1(d) ogGSTR-3B and claim ITC.
Conclusion
This ultimate guide will help you better understand the Reverse Charge Mechanism (RCM) in GST. To know more about such topics on GST, visit our website, InstaFiling. Feel free to reach out to our team to resolve your queries.