Under GST ‘Reverse Charge Mechanism’, shortly and popularly known as RCM, is a method via which the recipient of goods or services is made liable to pay the tax. In nut-shell, the chargeability of payment of tax gets reversed from the supplier to the recipient and hence the method/ mechanism is named as ‘Reverse Charge Mechanism’.
Broadly speaking, ‘Reverse Charge Mechanism’ is applicable in all the following cases-
- Imports of goods or services;
- Purchase from an unregistered dealer; and
- Supply of notified goods or services;
In the present article we will look into the background and concept of What is RCM in GST; analyze the time of supply under RCM and briefly study the provisions and what is payment voucher in GST.
Reverse Charge Mechanism in GST : Concept
The term ‘reverse charge’ is defined under section 2(98) of the Central Goods and Services Tax Act, 2017. It simply states that payment of tax is to be done by the recipient -
Let us look into the CGST provisions attached with RCM in brief under the table below [please note IGST provisions i.e., section 5(3) or section 5(4) are similar to that of CGST provisions section 9(3) or section 9(4)] -
Provision | RCM Applicability under GST |
|---|---|
Section 9(3) of the Central Goods and Services Tax Act, 2017 | As per these provisions, the notified supply of goods or services are covered under the reverse charge mechanism. |
Section 9(4) of the Central Goods and Services Tax Act, 2017 | As per this provision, a reverse charge under GST is applicable on all the inward supplies received by a registered person from an unregistered person. [Notification no. 7/2019- Central Tax (Rate) dated 29th March 2019. |
Reverse Charge Mechanism : List of crucial points to be noted under GST
- Basic comparison between erstwhile reverse charge concept and GST reverse charge concept is tabulated hereunder-
Erstwhile reverse charge concept | GST reverse charge concept |
|---|---|
There was a concept of partial reverse charge under erstwhile law. That is, a certain percentage of tax was payable by the supplier and the remaining percentage of the tax was payable by the recipient. | There is a concept of full reverse charge. That is, wherever, a reverse charge is applicable, the recipient is required to pay the tax fully. (The concept is done partial reverse charge under GST). |
The concept of reverse charge was applicable only to the services. The same was not applicable to the goods. | The concept of reverse charge is applicable to both services as well as goods. (Even the goods are covered under reverse charge in GST) |
- As per provisions of section 24(1)(iii) of the Central Goods and Services Tax Act, 2017, the recipient who is required to pay tax under RCM is mandatorily liable to obtain registration under GST. Notably, the threshold exemption is not applicable under RCM.
- The recipient cannot utilize Input Tax Credit for payment of tax under RCM. That means the payment of tax under RCM is to be made in cash only i.e., via Electronic Cash Ledger.
- The recipient, who has paid tax under RCM, is eligible to avail input tax credit of the same provided the goods or services are used for the furtherance of the business and all the conditions of input tax credit is satisfied.
- Under RCM, all the provisions of the Central Goods and Services Tax Act, 2017 will be applicable to the recipient as if the recipient is a person liable to pay the tax in relation to the supply of specified goods or services.
- As per provision of section 35 of the Central Goods and Services Tax Act, 2017, the registered person is required to keep and maintain records of all the supplies attracting payment of tax under the GST reverse charge mechanism.
What is Time of supply of services under RCM
‘Time of Supply of services under GST’ holds a great importance under GST. In simple terms, ‘Time of Supply’ means the time when the liability to pay the tax on goods or services will arise.
Provisions of section 12(3) of the Central Goods and Services Tax Act, 2017 deal with the ‘Time of Supply’ in case of a supply of ‘Goods’ under RCM. Accordingly, the time of supply of goods under GST will be the earliest of the following-
- The date of receipt of goods;
- The date of payment (earlier of date of debit in a bank account or date entered in books of account); or
- The date immediately succeeding the completion of 30 days from the date of issue of invoice/ any other document.
Further, provisions of section 13(3) of the Central Goods and Services Tax Act, 2017 deal with the ‘Time of Supply’ in case of a supply of ‘Services’ under RCM. Accordingly, the time of supply will be the earliest of the following-
- The date of payment (earlier of date of debit in a bank account or date entered in books of account); or
- The date immediately succeeding the completion of 60 days from the date of issue of invoice/ any other document.
In both the above case (i.e., time of supply of goods under GST or time of supply of services under GST), it is not possible to determine the time of supply as per the above prescribed method. Then, the time of supply will be considered as the date of entry in the books of accounts of the recipient of goods or services.
GST Invoice & Payment voucher under RCM
As per provisions of section 31(3) of the Central Goods and Services Tax Act, 2017, the registered person liable to pay tax under RCM as per section 9(3) or section 9(4) is required to issue the following two documents-
Section | Relevant document to be issued |
|---|---|
Section 31(3)(f) | A tax invoice in respect of goods/ services received from an unregistered supplier. |
Section 31(3)(g) | A payment voucher at the time of making payment to the supplier. |
Thus, the above chart makes it very clear that under RCM the recipient is compulsorily required to issue a payment voucher to the supplier of goods or services.
When to Prepare the Payment Voucher?
The question, when to prepare the payment voucher is answered under section 31(3)(g) of the Central Goods and Services Tax Act. Accordingly, the recipient is required to prepare a payment voucher at the time of making payment of such goods or services to the supplier.
How to prepare payment voucher in GST?
The second question i.e. what all details are to be covered under the payment voucher in GST is answered under rule 52 of the Central Goods and Services Tax Rules, 2017. Accordingly, the payment voucher in GST should cover all the following details -
Reverse Charge Mechanism: Conclusion
We can conclude as follows-
- A person is liable to pay the tax under RCM either under section 9(3) or section 9(4) of the Central Goods and Services Tax Act, 2017,
- Such person liable under RCM is mandatorily required to obtain GST registration,
- If the goods or services are received from an unregistered person, then the person is required to issue both i.e., tax invoice and payment voucher.
- However, if the goods or services are received from the registered person, then the person is required to issue only the payment voucher.
- Such payment voucher is to be issued by the recipient at the time of making payment to the supplier, and
- The payment voucher should contain all the applicable particulars specified under rule 52 of the Central Goods and Services Tax Rules, 2017.