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Reverse Charge in The GST Era

Reverse charge mechanism (RCM)- Are you also having trouble understanding this dreaded Reverse Charge Mechanism (RCM) under Goods and Services Tax (GST). Here a brief note along with Key discussion points to explain the concept of RCM in simple words:

RCM is not a new concept, we are already dealing with this system of passing tax liability under the erstwhile service tax regime. But it has definitely undergone a big change as it returns again under the GST Regime.

In terms of pros and cons, this reverse charge mechanism will be burdensome for small businesses, but on the other hand it will increase tax compliance for the country as a whole and would increase transparency.

  • Meaning: Reverse Charge means recipient of goods or services has to pay tax and deposit it to the government on the behalf of supplier.
  • 100% Reverse Charge:Under GST, recipient has to pay 100% tax and there is no concept of partial reverse charge as in the case of service tax.
  • Time of Supply:The point on which supply is liable to tax. In case of supply of services, time of supply is the earliest of following: –
  • date of payment or date of debit, whichever earlier
  • date immediately following sixty days from date of issue

Where not possible to determine time of supply, date of entry in books shall be considered.

  • Specified Category of Goods & Services for specified supplies: RCM is applicable, irrespective of the fact whether the supplier of services is registered or un-registered. Such specified category includes Goods Transport Agency (GTA) Services, Legal & Arbitral Services, Sponsorship Services, Services provided by Director (of the co.) to the company, Insurance agent etc. subject to the fulfilment of certain other conditions and criteria as mentioned in the respective Act.
  • Unregistered Dealer: Where registered person receives any supplies i.e. purchases any goods or avails any services from an unregistered person, tax shall have to be paid by the registered person receiving such supplies under the RCM provisions (however, he can avail the benefit of Input Tax Credit on the same)
  • Business Expenses below Rs. 5,000: Under GST Regime, not only outward supplies all business expenses too are now a point of concern. As far as the erstwhile VAT/ST regime was considered, we never bothered to consider the debit side of Profit & Loss a/c. But under GST, where aggregate amount of services availed from unregistered person or persons exceeds 5,000 per day, then tax has to be paid by registered person himself under RCM.
  • Exclusions: Payments for the following are not to be considered for charging tax under RCM (Salary & Wages, Interest, Government Fees, Electricity Charges, Car Fuel).
  • Inclusions: Other than mentioned above, all expenses are included (E.g.: Rent, Repairs & Maintenance, Business Promotion expenses etc.)
  • Advance Payments: Are you making advance payment to suppliers? Be ready to pay tax under RCM. Because, advance paid for reverse charge supplies is also leviable to GST.
  • Inter-State Transactions: Any unregistered dealer is not allowed to deal in any inter- state transaction. Any person indulging in interstate trade is required by the new laws to register himself with GSTN. The liability for payment of taxes therefore falls upon the supplier and not the receiver in this case. Hence, there will be no RCM for inter- state transactions other than specified transactions and RCM shall be confined to only transactions that occur within state i.e. Intra- State Transactions.
  • Input Tax Credit:
  • The person paying tax under RCM can avail benefit of Input Tax Credit only after making payment of tax in his electronic cash ledger.
  • There exist certain cases in which ITC is not available such as goods & services used for personal consumption, works contract services, rental cab, food and beverages etc, subject to fulfilment of certain other conditions as well.
  • Requirement for Registration: Payment of tax under RCM is mandatory and requires for mandatory registration even if turnover is below threshold limit and recipient of the supply is not required to register.
  • Compliances:
  • Recipient has to create a TAX INVOICE and also required to mention on the tax invoice that tax is payable under reverse charge.
  • Every registered person shall maintain & keep records of supplies attracting RCM.
  • Payment of Tax: Tax under RCM shall be paid through cash only and cannot be discharged by using Input Tax Credit.

 

By Mansi Singhal, First year Intern 

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