Reverse Charge Mechanism under GST is a mechanism under which the usual cycle of tax payment is reversed.
Under Reverse Charge, the recipient pays to the supplier an amount exclusive of GST, the recipient then pays the GST directly to the Government.
RCM is a complex concept that works in select scenarios only.1. What is RCM full form under GST?
The full form of RCM under GST is Reverse Charge Mechanism, where the GST payment process is reversed & instead of the supplier the recipient has to release the tax liabilities.
2. What is the meaning of RCM?
RCM or Reverse Charge Mechanism under GST is a mechanism where the supplier & the recipient change their roles in paying the GST.
In the normal system, the recipient pays the GST to the Supplier who then pays it to the Government but under Reverse Charge, the recipient pays the GST directly to the Government & not via the Supplier.
This Mechanism is applicable to certain situations, goods & services specified by the Government.
3. What is Reverse Charge in GST?
Reverse Charge in GST is the amount of GST that the recipient has to pay directly to the Government & not through the supplier, because such situations, goods or services were specified by the Government to fall under the Reverse Charge Mechanism.
4. What is the RCM list under GST? Explain the RCM Applicability under GST
RCM List under GST is the List of goods & services that the Government has specified to under RCM -
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List of supply of Goods under RCM
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) | Agriculturist | Any registered person |
3. | Tobacco leaves | Agriculturist | Any registered person |
4 | Silk yarn | Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of Silk Yarn | Any registered person |
5 | Raw cotton | Agriculturist | Any registered person |
6 | Supply of lottery | State Government, Union Territory or any local authority | Lottery distributor or selling agent |
7 | Used vehicles, seized and confiscated goods, old and used goods, waste and scrap | Central Government, State Government, Union territory or a local authority | Any registered person |
List of supply of Services under RCM
Sr No. | Description of Supply of Goods | Supplier of goods | Recipient of Goods |
|---|---|---|---|
1. | Any service supplied by any person who is located in a non-taxable territory to any person other than nontaxable online recipient. | Any person located in a non-taxable territory | Any person located in the taxable territory other than nontaxable online recipient |
2 | GTA Services | Goods Transport Agency under GST (GTA) who has not paid integrated tax at the rate of 12% | Any factory, society, cooperative society, registered person, body corporate, partnership firm, casual taxable person; located in the taxable territory |
3 | Legal Services by advocate | An individual advocate including a senior advocate or 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 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 non- taxable 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 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 Overseeing Committee to Reserve Bank of India | Members of Overseeing Committee constituted by the Reserve Bank of India | Reserve Bank of India. |
Note - Apart from the goods & services specified in the table above, RCM is also applicable when a supplier is an unregistered person if the taxable value is more than INR 5000 a day and also if the supplies are affected with e-Commerce.
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6. What is Section 9(3) of GST under the CGST Act?
Section 9(3) under the CGST Act states the lists of Goods & Services that are liable to RCM under GST.
7. What is the meaning of Section 9(4) of GST under the CGST Rule?
Section 9(4) of the CGST Act states that: if a registered recipient purchases from an unregistered supplier, then it becomes the responsibility of the recipient to pay the Tax Liabilities instead of the supplier under Reverse Charge Mechanism.
8. Can we claim ITC on RCM in same month?
Yes, you can claim the Input Tax Credit on RCM in the same month, when you paid the GST under RCM.
9. How do I claim reverse charge on GSTR 3b?
Reverse Charge is not something that you claim but it is something that you pay under the Reverse Charge Mechanism.
You can declare the supplies liable to RCM in GSTR-3B & claim ITC on it.
You can declare the supplies under RCM in Table 3.1(d) of Form GSTR-3B.Go through the detailed checklist to claim maximum ITC and save your money.
10. How does RCM on unregistered dealer work?
RCM on unregistered dealer works as follows-
Mr. A buys goods from an unregistered supplier Mr. B. Then since the supplier is unregistered this becomes a case of Reverse Charge, & so Mr. A will pay a price exclusive of taxes.
These Taxes Mr. A will directly pay to the Government in his monthly return filings.
Now as these purchases are input for Mr. A's business he can claim ITC on it while filing his returns & paying taxes on the finished goods.
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11. Can you explain the RCM applicability under GST?
RCM is applicable to a set of supply of goods & services specified by CBIC and to certain situations where the supplier is an unregistered person.
RCM is also applicable to supplies that are affected by e-Commerce.
12. On which Items RCM is applicable under GST?
Following is the list of supply of items specified by CBIC on which RCM is applicable-
Serial No. | Description of Supply of Goods |
|---|---|
1 | Cashew nuts, not shelled or peeled |
2 | Bidi wrapper leaves (tendu) |
3 | Tobacco leaves |
4 | Silk yarn |
4A | Raw cotton |
5 | Supply of lottery |
6 | Used vehicles, seized and confiscated goods, old and used goods, waste and scrap |
13. How to check GST Paid by Supplier in RCM under GST?
If the GST is paid by the supplier it will not be considered a supply under RCM.
However, if you want to check if your supplier has declared the supplies & paid the GST, you can check the same in your GSTR-2A.
If you are a registered supplier & wish to see if your recipient has declared the sales under RCM, you will have to take follow up from your recipient.
14. What are inward supplies liable to Reverse Charge?
Inward supplies of goods or services that are either purchased from an unregistered supplier or are specified by the Government to be under Reverse Charge Mechanism are inward supplies liable to Reverse Charge for the recipient of such goods or supplies.
15. What are the exemptions to RCM?
There are a few cases that are exempted from Reverse Charge under GST-
- Exempted goods or services- If the goods or services are exempted from GST then the Reverse Charge would not be applicable.
- If the aggregate value of the goods & services does not exceed the amount of Rs. 5000 a day, then such transactions will be exempted from the provisions of reverse charges.
16. What is 'Time of Supply' in Reverse Charge under GST?
The time of supply under GST simply means the particular time when such goods or services are supplied to a recipient.
In very simple language the date of supply is the date when the payment against such supplies is made.
In certain cases when it becomes vague to find out the date of payment for Services, then the date of entry of such payments by the recipient can be considered as the time of supply.
17. Are there some key points to keep in mind while dealing with RCM?
There are a few important points you can consider while dealing with RCM-
- Invoice management & storage- Make sure to store & properly manage the RCM invoices, as these will be useful in GSTR-1 monthly return filing as well as in GSTR-9 annual return filing
- Accurate management of accounts when there are RCM supplies in it. Precision is advised while claiming ITC on RCM supplies.
- Ensure that you pay the tax liabilities through Cash Ledger only & not Credit ledger. Although, you can receive the claimed ITC in your Credit Ledger.
18. How are services by e-commerce operators treated under RCM?
Supplies through e-Commerce are treated just like other supplies under RCM.
In this case, also the recipient of the services will pay the GST.
However, since all of the recipients of such services are unregistered people, the e-Commerce operator must hire an assess who would collect all the Taxes from such recipients & pay it to the Government.
19. How does ITC work under RCM?
ITC under RCM works just the same as it works in the regular GST System.
In the regular system, the recipient has to ensure that the supplier declares the invoices on which the recipient has to claim ITC. This does not happen in the supplies under RCM.
As the recipient is the one who pays the taxes, he can himself declare the invoices on which he wishes to claim ITC & claim the ITC for the same in the same month.
One condition applies here, the goods or supplies under RCM should be solely used for the Business purpose only.The recipient has to discharge the Tax Liability through Electronic Cash Ledger & he can receive the Credit claimed in the Electronic Credit Ledger.
Note- Some of the information in the article has been referred from CBIC
20. How do you calculate RCM in GST ?
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Reverse Charge is not something to calculate in general, Reverse Charge Mechanism is a mechanism under which the recipient of the goods is liable to pay the taxes to the Government instead of the supplier of the goods.
However, here is an example for you to understand how RCM works practically-
RCM is applicable on select goods, services & supplies.
Purchase of raw cotton is liable to RCM; Mr. Abhinav purchased raw cotton for his cotton boutique from Mr. Pura worth INR 50,000.
The tax rate of cotton is 5%, meaning Mr. Abhinav needs to pay a total of INR 50,000 + 5% GST, that is INR 52,500.
But since raw cotton purchase falls under RCM he will only pay INR 50000 to Mr. Pura.
Mr. Abhinav will then have to create a self-invoice and pay the tax amount of INR 2500 directly to the Government via his GSTR-3B
The recipient in this case Mr. Abhinav will have to furnish, table 3.1 D of GSTR-3B & pay the taxes as per usual.
21. How do I pay reverse charge in GST portal?
Recipients need to furnish Table 3.1 D of GSTR-3B to pay the GST liable to RCM.
The GSTR-3B needs to be filed on the GST Portal on a monthly basis along with the RCM transaction details & the RCM taxes need to be paid using the Electronic Cash ledger only.
Taxpayers can later claim the ITC on such transactions, in table-4A of GSTR-3B of the same month.
22. Who will issue RCM invoice?
The recipient of the goods, services & supplies will issue self-made invoices for RCM transactions, irrespective of the supplier being an unregistered person.
If the supply is liable to RCM, then the recipient will have to issue the invoices for himself & declare them in their GSTR-1 & GSTR-3B.
23. RCM expenses list under GST
Following in the RCM Expense List, where Reverse Charge is applicable:
Sr. No. | Nature of Expense | Tax Rate on Expense | Is the registered supplier allowed to levy tax | Reverse Charge (If supply is unregistered) | ITC Eligibility |
|---|---|---|---|---|---|
1 | Conveyance Expense – Radio Taxi like OLA & UBER or other AC vehicle | 5% | Yes | Yes | No |
2 | Payment to GTA under GST | 5% | No | Yes | Yes |
3 | Traveling in Train by AC or First class | 5% | Yes | Yes | No |
4 | Job Work / Labour Charges for textile yarn & textile fabric | 5% | Yes | Yes | Yes |
5 | Job Work / Labour Charges for diamond, jewellery & precious metal | 5% | Yes | Yes | Yes |
6 | Job Work / Labour Charges for printing of books, journals & periodicals | 5% | Yes | Yes | Yes |
7 | Food & Beverages Expense (Non AC restaurant) | 12% | Yes | Yes | No |
8 | Room Rent in a hotel, lodge (Rs.1000 to 2500 per room per day | 12% | Yes | Yes | Yes |
9 | Fuel (Furnace Oil/LPG) | 18% | Yes | Yes | Yes |
10 | Sales Promotion/Business Promotion | 18% | Yes | Yes | Yes |
11 | Food & Beverages Expense (AC restaurant) | 18% | Yes | Yes | No |
12 | Mineral water | 18% | Yes | Yes | Yes |
13 | Truck/ Tempo Hire Charges | 18% | Yes | Yes | Yes |
14 | Club & Membership fees | 18% | Yes | Yes | No |
15 | Advertisement Charges / Hoarding / Magazine / News Papers / Media | 18% | Yes | Yes | Yes |
16 | AMC Charges | 18% | Yes | Yes | Yes |
17 | Broker Fee & Charges | 18% | Yes | Yes | Yes |
18 | Cancellation Charges | 18% | Yes | Yes | Yes |
19 | Extended Warranty | 18% | Yes | Yes | Yes |
20 | House Keeping Charges | 18% | Yes | Yes | Yes |
21 | Insurance paid on goods & vehicle | 18% | Yes | Yes | Yes |
22 | Payment to advocate | 18% | No | Yes | Yes |
23 | Loading & Unloading – others/ Hamali | 18% | Yes | Yes | Yes |
24 | Training Expense | 18% | Yes | Yes | Yes |
25 | Payment to Post office for Speed post & parcel post | 18% | No | Yes | Yes |
26 | Postage and Courier Charges | 18% | Yes | Yes | Yes |
27 | Printing & Stationery (Flex Printing, Broad Printing, Notice Printing) | 18% | Yes | Yes | Yes |
28 | Recruitment Expenses | 18% | Yes | Yes | Yes |
29 | Commission Paid | 18% | Yes | Yes | Yes |
30 | Rent Paid for commercial use of premises | 18% | Yes | Yes | Yes |
31 | Godown Rent for commercial purpose | 18% | Yes | Yes | Yes |
32 | Repair and Maintenance – Building / Electrical | 18% | Yes | Yes | Refer Note 1 |
33 | Room Rent in a hotel, lodge (Rs.2500 to 7500 per room per day | 18% | Yes | Yes | Yes |
34 | Payment for Sponsorship Services | 18% | Yes | Yes | No |
35 | Security Charges | 18% | Yes | Yes | Yes |
36 | Sundry Expenses | 18% | Yes | Yes | Yes |
37 | Job Work / Labour Charges for garment processing | 18% | Yes | Yes | Yes |
38 | Job Work / Labour Charges (Other) | 18% | Yes | Yes | Yes |
39 | Sitting Fees, Commission or any other payment made to director by company | 18% | Yes | Yes | Yes |
40 | Audit Fees, Account Writing , Professional Fees (other than Advocate) | 18% | Yes | Yes | Yes |
41 | Research & Development Expenses | 18% | Yes | Yes | Yes |
42 | Food & Beverages Expense (AC restaurant) | 28% | Yes | Yes | No |
43 | Wall Paint | 28% | Yes | Yes | No |
44 | Room Rent in a hotel, lodge Above Rs.7500/- | 28% | Yes | Yes | Yes |
45 | Traveling Expenses International | 28% | Yes | Yes | No |
46 | Amusement Park/ Theater Ticket | 28% | Yes | Yes | Yes |
47 | Cold drink | 40% | Yes | Yes | No |
48 | Repairs & maintenance Charges if it has not resulted into immovable property | 18% / 28% | Yes | Yes | Yes |
49 | Electrical Fittings | 18% / 28% | Yes | Yes | No |
50 | Staff Uniform Expenses | 5% / 12% | Yes | Yes | Yes |
51 | Packing material & Packing Charges | 5% / 12% / 18% | Yes | Yes | Yes |
52 | Plant & Machinery | Actual Rate | Yes | Yes | Refer Note 3 |
53 | Furniture & Fixture | Actual Rate | Yes | Yes | Refer Note 3 |
54 | Motor Car | Actual RateYes | Yes | Yes | No |
55 | Building | Actual Rate | Yes | Yes | No |
56 | Office Equipment including Computer, Software & Hardware | Actual Rate | Yes | Yesrefe | Refer Note 3 |
57 | Free Gift given to staff (Exempt upto Rs.50000/- per staff p.a) | Applicable Rate | Yes | Yes | No |
58 | Free Gift given to staff (Above Rs.50000/- per staff p.a) | Applicable Rate | Yes | Yes | Yes |
59 | Diwali/ New year Gift purchased & debited to P & L | Applicable Rate | Yes | Yes | Yes |
Following is the expense list on which RCM is not applicable-
Sr. No. | Nature of Expense | Tax Rate on Expense | Is the registered supplier allowed to levy tax | Reverse Charge (If supply is unregistered) | ITC Eligibility |
|---|---|---|---|---|---|
1 | Salary, wages & bonus paid to employee | 0% | No | No | No |
2 | Electricity bill | 0% | No | No | No |
3 | Water Charges/ Plain Water | 0% | No | No | No |
4 | Bank Interest | 0% | No | No | No |
5 | Professional Tax | 0% | No | No | No |
6 | BMC Tax | 0% | No | No | No |
7 | Building / Property Tax | 0% | No | No | No |
8 | Rent Deposits | 0% | No | No | No |
9 | Other Deposits | 0% | No | No | No |
10 | Petrol / Diesel/ CNG/Kerosene Expenses (Motor Spirit) | 0% | No | No | No |
11 | Liquor Expenses | 0% | No | No | No |
12 | Registration Fees (ROF / ROC / RTO etc) | 0% | No | No | No |
13 | Bad Debt | 0% | No | No | No |
14 | Donation | 0% | No | No | No |
15 | Labour Welfare Contribution to Government | 0% | No | No | No |
16 | Fine & Penalties | 0% | No | No | No |
17 | Conveyance Expense – Non AC Taxi, Auto, Bus, Train | 0% | No | No | No |
18 | Loading & Unloading in relation agricultural produce/ Hamali | 0% | No | No | No |
19 | Rent Paid for residential use | 0% | No | No | No |
20 | Godown Rent for agricultural produce | 0% | No | No | No |
21 | News paper & magazines | 0% | No | No | No |
22 | Remuneration to Director & partners | 0% | No | No | No |
23 | Bank Charges – Service charges recovered | 18% | Yes | No | Yes |
24 | Telephone, Mobile & internet Charges | 18% | Yes | No | Refer note 2 |
25 | Health Insurance | 18% | Yes | No | No |
Refer this note
If repair & maintenance expenses lead to the construction of immovable properties then input credit is not available.
If Telephone, Mobile & Internet bill is in the name of the company and address and place of business is mentioned only then should one claim the input credit on such expenses.
Input credit is available completely. However if goods are sold/disposed of/ scrapped/ thrown away within 5 years, then input credit @ 5% per quarter is available for the used period and balance is to be reversed for not availing full use of the good at the time of date of sale.
RCM on freight limit 750
This means that, if the supplier of goods (consignor) pays freight to the GTA, then the supplier will be treated as the recipient only if he belongs to the category of persons above then he will pay GST on reverse charge basis.
And if the liability of freight payment lies with the receiver of the goods (Consignee), then the receiver of goods will be treated as the receiver of transportation services only if he belongs to any of the above category of persons, he will pay GST on reverse charge basis.
Accounting Treatment of Reverse Charge Mechanism
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Here is the simple breakdown of how the accounting treatment of RCM under GST works-
RCM charges need to be paid as per the usual tax rates, directly to the government via Form GSTR-3B.Recipients need to furnish Table 3.1 D of GSTR-3B to pay the GST liable to RCM.
Taxpayers can later claim the ITC on such transactions, in table-4A of GSTR-3B of the same month. RCM charges need to be paid using the Electronic Cash Ledger only.
However the credit of the same can be availed & used to discharge other tax liabilities.
Accountants need to maintain a separate Ledger for RCM transactions. This ledger shall contain the RCM tax payment details as the following entries-
GST RCM on foreign expenses
Since the suppliers of the goods are foreign countries with different taxpayers & tax structures, they should not have to undertake the tax liability.
This will also make import & foreign exchange simpler.
Hence, as per Notification no.10/2017-IT(R) dated 28.06.2017, one of the notified category on which GST is applicable under RCM is “any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient”.
GST liability under RCM in case of Import of service has to be paid in cash/bank. GST ITC to the extent of IGST paid can be availed and utilized in the same month subject to ITC eligibility, to release the outward tax liability.
RCM under GST transport
RCM is applicable on GST Services, GTA Services are nothing but outsourced transport agencies that provide the transportation services to transport goods and issue a consignment note against the same.
RCM under GST Transportation
Note- Transportation Agencies that issue the consignment notes are only considered as GTA under GST
- 1A Factory registered under or governed by the Factories Act, 1948
- 2A Registered Society
- 3A Co-Operative Society established by or under any law
- 4A Company
- 5A Partnership Firm
- 6Association of person
- 7A GST registered person
- 1Transport of agricultural produce
- 2Transport of milk, salt, food grains including rice, flour, pulses
- 3Transport of organic manure
- 4Transport of newspapers or magazines registered with the Registrar of Newspapers
- 5Transport of relief materials for victims of natural or man-made disasters, calamities, accidents or mishaps
- 6Transport of defense or military equipment
- 7Transport of any goods, where the gross amount charged for transportation for a consignment transported in a single carriage does not exceed INR 1,500
- 8Transport of any goods, where consideration charged for transportation of all such goods for a single consignee does not exceed INR 750
RCM on labor charges under GST
Sr. No | Nature of Expense | Tax Rate on Expense | Is the registered supplier allowed to levy tax | Reverse Charge (If supply is unregistered) | Input Tax Credit Eligibility |
|---|---|---|---|---|---|
1 | Labor Welfare Contribution to Government | 0% | No | No | No |
2 | Labor Charges for textile yarn & textile fabric | 5% | Yes | Yes | Yes |
3 | Labor Charges for diamond, jewelry & precious metal | 5% | Yes | Yes | Yes |
4 | Labor Charges for printing of books, journals & periodicals | 5% | Yes | Yes | Yes |
5 | Labor Charges for garment processing | 18% | Yes | Yes | Yes |
6 | Labor Charges (Other) | 18% | Yes | YesYe | Yes |
Reverse charge entry in Tally
Go to Gateway of Tally >> Inventory Info. >> Stock Items >> Alter >> and select the stock item.
On the GST applicability window
Is GST Applicable? – Select Applicable & Set/alter GST details? – Select Yes
Press F12: Configure and set “Enable reverse charge calculation?” to Yes
On the Taxability option – Select Taxable
For “Is reverse charge applicable?” Dialogue box -Select Yes .
Enter the GST rates.
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