Reverse Charge Mechanism (RCM) Under GST- 20 Toughest FAQs Answered

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June 11, 2020

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Reverse Charge Mechanism under GST is a mechanism under which the usual cycle of tax payment is reversed. In the normal system, the recipient of goods will pay the value of the goods & relevant taxes on it to the supplier who then pays the GST to the Government.

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. We have tried to simplify the Reverse Charge Mechanism for you by answering the 20 most common & important questions on RCM & its working.
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?

RCM List under GST is the List of goods & services that the Government has specified to under RCM - 

List of supply of Goods under RCM

Serial 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

4A

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

Serial 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 (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 & the supplies are affected with e-Commerce.

5.

How to Show RCM sales in GSTR filing?

You can declare the inward or outward supplies under RCM currently in Forms GSTR-1 & GSTR-3B.

GSTR-1 : Table 4B

GSTR-3B : Table 3.1(d)

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 ITC 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.
    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.

    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


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