Reverse Charge Mechanism Under GST Concept and Applicability

The Reverse Charge Mechanism under GST is a key feature of India’s Goods and Services Tax system. Unlike the normal GST process, where the supplier pays tax, RCM under GST shifts the tax payment responsibility to the recipient (buyer). This system is vital for capturing tax from unorganized sectors and ensuring proper taxation of specific goods and services.

In simple words, the reverse charge mechanism in GST means the buyer pays the GST instead of the seller. The government introduced this mechanism to widen the tax net and ensure compliance from sectors where suppliers may not be registered or may evade tax.

What is the Reverse Charge Mechanism?

In regular GST, the supplier raises a tax invoice and pays GST to the government. Under RCM applicability under GST, the buyer pays GST directly to the government. The supplier may not even be registered under GST, but the recipient (who is registered) becomes liable to pay GST.

This mechanism ensures that:

• Tax is collected even from unregistered suppliers.
• Certain services and goods notified by the government are taxed properly.
• The scope of GST is widened.

| Also, read an in-depth article on how the Reverse Charge Mechanism works.

When is Reverse Charge Applicable?

Various provisions govern the applicability of the reverse charge mechanism under GST:

1. Section 9(3) of CGST Act & Section 5(3) of IGST Act

This applies to notified goods and services where the recipient must pay GST.

2. Section 9(4) of CGST Act & Section 5(4) of IGST Act

This applies when goods or services are purchased from unregistered suppliers.

3. Section 9(5) of CGST Act & Section 5(5) of IGST Act

This applies to e-commerce transactions where the liability is shifted to the e-commerce operator or recipient.

Reverse Charge Mechanism Notification Under GST

The government issues notifications listing goods and services under RCM. These are called the Reverse charge mechanism notification under GST and specify the categories where RCM applies.

List of Goods Notified Under Reverse Charge

Some of the major goods under RCM include:

Sr. No	Goods	Supplier	Used goods/scrap
1	Cashew nuts (not shelled/peeled)	Agriculturist	Registered person
2	Tendu leaves (bidi wrapper)	Agriculturist	Registered person
3	Tobacco leaves	Agriculturist	Registered person
4	Essential oils	Unregistered person	Registered person
5	Silk yarn	Manufacturer	Registered person
6	Raw cotton	Agriculturist	Registered person
7	Lottery	State Govt./Local Authority	Distributor
8	Used goods / scrap	Government authority	Registered person
9	Priority Sector Lending Certificate	Registered person	Registered person
10	Metal scrap	Unregistered person	Registered person

List of Services Notified Under Reverse Charge

Services covered under RCM include:

S. NO.	SERVICES	SUPPLIER	RECIPIENT
1	GTA services	GTA	Factories/registered persons
2	Legal services	Advocate	Business entities
3	Arbitral tribunal services	Arbitral tribunal	Business entities
4	Sponsorship services	Any person (other than corporate)	Corporate/partnership
5	Government services to businesses	Government bodies	Business entities
6	Renting immovable property	Government/others	Registered person
7	Director of Services to the company	Director	Company
8	Security services	Any person	Registered person
9	Lending securities	Lender	Borrower through intermediary

This is the list of goods and services notified under the reverse charge mechanism that businesses must keep in mind.

Time of Supply Under Reverse Charge

Understanding the time of supply under reverse charge is crucial because it determines when GST becomes payable. Under RCM, GST is payable at the earliest of:

• 60 days from the invoice date, if the supplier issues an invoice
• Date of payment, if the recipient pays earlier

For example, if the supplier issues an invoice on 1st May and the recipient pays on 20th May, the time of supply is 20th May.

Self Invoice Under Reverse Charge

When the supplier is unregistered, the recipient must issue a self–invoice.

Self-invoice under reverse charge is a GST invoice prepared by the recipient on behalf of the unregistered supplier. This invoice must contain all required details, such as:

• GSTIN of the recipient
• Name and address of supplier
• Invoice number and date
• Description of goods/services
• Amount and GST rate

The self–invoice is necessary for GST compliance and helps in documenting the transaction properly.

ITC on Reverse Charge Mechanism in GST

Under RCM, the recipient can claim Input Tax Credit (ITC), but only after paying the tax in cash.

To claim ITC:

• Goods/services must be received
• Used for business purposes
• Tax must be paid under RCM

However, ITC cannot be used to pay RCM tax. The tax must be paid in cash first, and then ITC can be claimed while filing returns.

Reverse Charge Mechanism Journal Entry

For accounting purposes, a journal entry under RCM would typically look like this:

When goods/services are received:

• Input GST (RCM) – Dr
• Expense / Asset Account – Dr
• GST Payable (RCM) – Cr

When GST is paid:

• GST Payable (RCM) – Dr
• Bank / Cash – Cr

How To Pay GST Under Reverse Charge

Here is a simple step-by-step approach on how to pay GST under reverse charge:

1. Identify if the supply falls under RCM
   Check if the goods/services are notified or if the supplier is unregistered.
2. Create a self-invoice (if the supplier is unregistered)
   Prepare the self-invoice with all mandatory details.
3. Calculate GST liability
   Determine the GST rate applicable.
4. Make a payment in cash
   Pay the GST in cash through the GST portal.
5. Claim ITC
   Claim ITC while filing GST returns once tax is paid.

How TMWala Can Help

Managing RCM under GST can be complex due to frequent notifications and compliance requirements. TMWala can help you:

• Identify RCM applicability in your transactions
• Prepare accurate self-invoices
• Ensure timely GST payment under RCM
• Help you claim ITC correctly

With expert support from TMWala, businesses can stay compliant and avoid penalties.

Conclusion

The Reverse Charge Mechanism under GST is an essential compliance requirement for many businesses. Understanding RCM applicability under GST, reverse charge mechanism notification under GST, time of supply under reverse charge, and self-invoice under reverse charge is crucial for smooth operations.

For businesses dealing with unregistered suppliers, notified goods/services, or e-commerce transactions, RCM becomes mandatory. With correct documentation and timely payments, businesses can claim ITC and stay fully compliant.

FAQs

1. What is the Reverse Charge Mechanism under GST?
   It is a mechanism where the buyer pays GST instead of the supplier.
2. Who is liable to pay tax under RCM?
   The recipient (buyer) is liable to pay GST.
3. When does RCM apply?
   RCM applies to notified goods/services, purchases from unregistered suppliers, and certain e-commerce transactions.
4. What is the purpose of RCM?
   To widen the tax net and ensure tax compliance from unregistered suppliers.
5. What is a self-invoice under reverse charge?
   A self-invoice is issued by the recipient when the supplier is unregistered.
6. Can ITC be claimed under RCM?
   Yes, ITC can be claimed after paying GST in cash under RCM.
7. Can ITC be used to pay RCM tax?
   No, RCM tax must be paid in cash first before claiming ITC.
8. What is the time of supply under RCM?
   GST is payable at the earlier of 60 days from the invoice date or the date of payment.
9. What are some goods covered under RCM?
   Cashew nuts, tendu leaves, tobacco leaves, essential oils, silk yarn, etc.
10. How to pay GST under reverse charge?
    Identify RCM applicability → create self-invoice → calculate GST → pay in cash → claim ITC.