What is RCM under GST?
Reverse Charge Mechanism or RCM under GST is the payment of Taxes in a reversed cycle that is directly through the recipient to the Government. The Working of reverse charge is tricky & technical involving multiple conditions.
We have created a detailed guide on the working of the Reverse Charge Mechanism in depth. With the foreseen implementation of the New GST Return Filing System, some changes will also be seen in the RCM applicability under GST.
Addressing these changes and their effects on the workflow of the Mechanism in advance is always a better idea than being stunned or confused upon the actual implementation of the changes.
What is Reverse Charge Mechanism or RCM under GST?
Reverse Charge Mechanism is not a new term for the GST Regime, but one may have face issues or confusion in understanding due to its complexity.
In the normal mechanism of tax payment, the recipient of goods or services pays the tax to the Supplier who then pays it to the Government by filing monthly/quarterly returns & releasing the Tax Liabilities.
This does not happen in the reverse charge mechanism. Under RCM the recipient pays to the supplier an amount, excluding the GST & pays the GST directly to the Government.
Let us see how this happens with an example-
Mr. A buys goods from an unregistered Supplier, Mr. B, worth Rs. 50,000 & a tax-rate of 10%.
Since Mr. B is an unregistered supplier, the Reverse Charge will be applicable here, Mr. A will pay Rs. 50,000 to Mr. B, that is payment exclusive of taxes.
Total Amount- Rs. 50,000
CGST applicable 2.5% - Rs. 1250
SGST applicable 2.5% - Rs. 1250
Total Tax Liability 5% - Rs. 2500
Mr. A will have to generate an Invoice himself & pay the applicable tax liability to the Government directly & not to his supplier Mr. B.
The reverse charge mechanism is applicable under certain circumstances
- Supplies from unregistered supplies to a registered supply
- Goods & Services specified by CBIC to pay GST under RCM
- Supply of services by E-commerce Operators
Working & Applicability of RCM in GST with Examples
As mentioned in the previous section about RCM applicability in GST, Reverse Charge is applicable under certain circumstances & scenarios. let us try to understand these in detail of RCM business turnover-
1. Taxable Supply of Goods from an unregistered person to a registered person:
Section 9(4) of the CGST Act and 5(4) of the IGST Act, state that any supply of the taxable goods from an unregistered person to a registered person will fall under reverse charge applicability.
In such a condition a registered buyer will release the Tax liability on behalf of their unregistered supplier. The buyer will need to generate an Invoice for himself & declare it in the relevant sections of forms GSTR-1 & GSTR-3B and accordingly release the Tax liability.
Mr. Raghav is a Registered Buyer, who purchases goods worth Rs. 80,000 from Mr. Kishan, who is an unregistered supplier in such cases the payment of GST needs to be made through RCM
The applicable tax rate on the consignment is 5% so,
Total value of goods- Rs. 80,000
Applicable CGST 2.5% - Rs. 2000
Applicable SGST 2.5% - Rs. 2000
Total Tax Liability 5% - Rs. 4000
Mr. Raghav will only pay Rs. 80,000 to Mr. Kishan & pay the GST, Rs. 4000 directly to the Government by creating an Invoice for himself.
2. Specific Goods Categorized by CBIC to fall under GST RCM applicability
CBIC has specified goods & services to mandatorily pay the GST liability under Reverse Charge in section 9 (3) of the CGST Act and section 5 (3) of the IGST Act.
These goods comprise of Silk, Raw Cotton, Tobacco, Cashewnuts lottery, used vehicles, used goods, confiscated goods, wasted & scrappy material.
In the case of sale or purchase of such goods, the Recipient is obligated to pay the taxes directly to the Government & not the Supplier.
All the GST Act provisions will be applicable to the Recipient instead of the Supplier.
Mr. Rahul is a registered supplier of Silk in Karnataka. He sells his Silk worth Rs. 200000 to Mr. Punit who is a registered dealer in Delhi. Now, Silk falls under 5% Tax rate-
Total value of goods- Rs. 200,000
Total Applicable IGST (Interstate) 5% - Rs. 10,000
Since Silk is specified by the Government to fall under Reverse Charge, the suppliers & buyers will have to switch places to pay the GST Liability.
Mr. Punit will pay only Rs. 200000 to Mr. Raghav, & create an invoice himself & release the Tax Liability by directly paying GST to the Government.
3. Supply of Services through e-Commerce Operators
As per section 9(5) of the CGST Act, 2017, any services supplied to a registered person by an e-Commerce Operator will also fall under Reverse Charge.
An e-commerce operator will need to collect the GST from the unregistered customers & pay it to the Government under Reverse Charge as if he is the supplier, instead of the Service Provider.
Helpr is an application that provides household-related help to the client doorstep.
Helpr, under RCM, must collect tax from the customers instead of the registered service providers & pay it to the Government.
Workflow & Reporting of supplies under RCM- Old GST System
After the applicability of RCM on goods & services, the next important thing to know is the working & Reporting of the RCM in the current System of GST Return Filing.
Currently, the Reverse Charge details are furnished in GSTR-1 (auto-populated to GSTR-2A) and GSTR-3B.
Reporting of supplies under RCM in GSTR-1
Form GSTR-1 is the declaration of the outward supplies of a Taxpayer & is filed every month by them.
The invoice-wise details on Invoices Debit & Credit Notes are declared in this form.
Here, section 4 of Form GSTR-1 is designated to contain the details of all outward supplies.
And, Table 4B & 4C contain the details of the Supplies under RCM & Supplies through e-commerce operators respectively.
Table 4B- This is where you need to report the supplies under the Reverse Charge Mechanism.
Table 4C- In this table, you need to declare the supplies effected by through e-commerce operators attracting TCS (Tax collected at source)
Reporting of supplies under RCM in GSTR-3B:
As you must know that GSTR-3B is the summary of all the outward & inward supplies, Tax Liabilities & ITC for the tax period.
This form is based on GSTR-1 & GSTR-2A of the taxpayers.
Using this form you release the Tax Liabilities either through Cash or using the availed Input Tax Credit through the Electronic Credit Ledger.
The details in GSTR-3B are not declared on an invoice-level but on aggregate value basis.
As far as supplies liable to Reverse Charge Mechanism are concerned, you can declare them in the following table of GSTR-3B :
Table- 3.1 Outward supplies and inward supplies on reverse charge > (d) Inward Supplies (liable to reverse charge)
Input Tax Credit on supplies under Reverse Charge
The provision of ITC under reverse charge is no different from the general process. Under the RCM as well the recipient of goods Claims Input Tax Credit & the supplier doesn’t. The only difference here is that the recipient also pays the GST through their GSTR-3B against which they can claim ITC.
The recipient can declare the ITC in their form GSTR-3B under Table 4A, which he will receive in their Electronic Credit Ledger. From here they can adjust the ITC with their outward Tax Liability.
Any Tax liability that needs to be released by the Recipient under RCM can only be done through the Electronic Cash Ledger.
Mr. Raj is a dealer who purchases goods from Mr. Mohan who is an unregistered person. Despite the supplier being an unregistered person, this becomes a case of RCM.
Mr. Raj will have to create a self-invoice & discharge the Tax liabilities. On releasing the Tax liability through Cash & by using such goods for Business purpose only, he becomes eligible to take Input tax Credit for such transactions.He can avail Input Tax Credit for the invoice in the same month in Table-4 of his GSTR-3B
Working & Reporting of supplies under RCM- New GST Returns System
Under the New GST Return System, the current forms are replaced with a set of new forms & annexures that are segregated in a systematic manner as per the turnovers & the types of supplies of the Businesses.
The Annexures namely, Anx-1 & Anx-2 are liabilities & Purchase Annexures respectively that all businesses need to file, monthly.
This will contain the declaration of the sales & purchases made in the tax period. Annexure-2 of the recipient is auto-generated from Annexure-1 of the suppliers just like the current system.
Further, there are 3 types of main returns, GST RET-1, GST RET-2 & GST RET-3.
GST RET-1 is the mandated, main return form for all the Businesses having an annual aggregate turnover of more than Rs. 5 Crores. This form is optional for Businesses with a turnover of less than Rs. 5 Crores.
Taxpayers must file this from & release their Tax Liabilities, monthly.
Form GST RET-2 & GST RET-3 are quarterly filing forms that the small taxpayers can opt for, although the Tax liabilities will still need to be released monthly through Form GST PMT-08
Businesses with a turnover less than Rs. 5 Crores can opt for any one of the three forms, as per their convenience & the types of supplies that they have as only GST RET-1 supports all sorts of supplies.
If you opt for quarterly filing you can use the Form GST PMT-08 to release your Tax Liabilities, without filing your GST Returns.
As for supplies under RCM, these need to be reported in the Outward Supply Annexure or Anx-1.
Reporting of supplies under RCM in GST Annexure-1 & GST RET-1, 2, & 3
In the New GST Return system, the recipient who will be paying the GST under reverse Charge Mechanism will need to declare such invoices in Table 3H of GST Anx-1 as Inward Supplies under reverse charge.
From here the details will auto-populate in the Main Return GST RET-1 or GST RET-2 or GST RET-3 in Table 3B.
Later the Input Tax Credit on the purchases under Reverse Charge will get auto-populated in Part 5- Inward Supplies Attracting Reverse Charge > Table 4A.
Although the suppliers having, outward supplies liable to reverse charge must declare such supplies in Table 3C of form GST RET-1. However, Sahaj or Sugam filing suppliers need not declare sales under RCM.
Comparative analysis & the Impact of the Change on Businesses
Apart from the difference in reporting of the supplies under reverse charge, there are other changes brought to the RCM by New GST Returns.
And these changes are going to have deep impacts on the workflow of the mechanism as well as on the participant partaking in the Reverse Charge Mechanism.
Due to the new system, the roles of the supplier & recipients are going to be swapped in RCM.
In contrary to the current system, the recipient will have to do the invoice-wise reporting of supplies under Reverse Charge, instead of the supplier
And the supplier will have to report the summary RCM supplies which is currently done by the recipient.
Even though Anx-1 will take the place of GSTR-1 in the New GST Return System, its nature is different from Form GSTR-1.
Anx-1 requires the reporting of supplies where tax liability & discharges instead of simple outward supplies.
Recipients will have to be extra careful while doing the invoice-wise reporting of the inward RCM supplies, as you may not have done it before, you may face some problems &some errors may arise.
You should still try to make the reporting precise & error free as errors or delays can have interests & penalties.
The new system also requires the manual detailed reporting of RCM liabilities on the Import of Goods and Services in Anx-1.
The old system did not require such detailed reporting of RCM as the New System does, this can be a big challenge for Taxpayers.
The reporting of RCM under New GST Return System is to be done, GSTIN wise, Tax-rate wise & Place of supply wise, this looks like too much work for the accountants of Large Enterprises.
To conclude the article, it can be said that multiple changes are brought to the Reverse Charge under GST likes changes in the working of the mechanism & changes in the reporting of the supplies under the mechanism.
These changes will definitely have consequences on businesses, mostly not very favorable for them.
And as it is widely said about changes, that nobody likes them unless it turns something bad to something good.
The New GST Return System has various unfriendly impacts for the Businesses initially, so it becomes even more important for it to reap something good in the long run.
Measures to make it happen are being expected from the government, but more practical problems may arise on the actual implementation of the System
The Government's or the Business's response to these challenges & impacts will decide the success of the New System