Reverse Charge Mechanism (RCM)

Reverse Charge is a Mechanism under which the liability to pay the tax is on the recipient instead of the supplier of goods or services. In normal circumstances, the Supplier collects the tax from Buyer and deposit the same to the government. In simple term, we can say that, under the reverse charge mechanism Buyer directly deposit the due tax to the government instead of paying it to the supplier.

Applicability of Reverse Charge Mechanism:

• Supply of notified goods & services (Sec 9(3) of The CGST Act, 2017)
• Purchase from Unregistered person (Sec 9(4) of The CGST Act, 2017)
• Imports

How the Reverse Charge Mechanism operates:

1. A person who is liable to pay tax under reverse charge mechanism needs to be registered under GST irrespective of the turnover. (As per Section 24 of The CGST Act, 2017)
2. GST under RCM needs to be deposited through Cash only. As per section 49(4) of The CGST Act, 2017, the Input tax credit can be used only for the payment of Output tax.
3. A person can avail the credit of tax paid under RCM, The only condition is that the goods/services on which RCM is paid are used in the course or furtherance of business.
4. GST Compensation Cess will be applicable on the tax computed under the Reverse charge mechanism. This is proposed to compensate the state for the loss of revenue. This is not yet implemented.
5. Under RCM, All the provisions of the Act will apply to the recipient of Goods/Services as they apply to suppliers.
6. In the case of an E-Commerce Operator liability to pay Tax lies on the recipient of service.

When the Tax under RCM become due for payment:

Here comes the Concept of Time of supply into the picture. On the basis of “Time of Supply “. A person comes to know when the tax is becoming due for payment.

The Determination of Time of Supply in case of goods will be earliest of the following date:

• the date of the receipt of goods;
• the date of payment as entered in the books of account of the recipient;
• the date on which the payment is debited in his bank account,
• the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.

The Determination of “Time of Supply” in case of Services will be earliest of the following date:

• the date of payment; or
• the date immediately following after sixty days from the date of issue of the invoice by the supplier.

# In case, it is not possible to find out the time of supply then the time of supply will be considered the date of entry in the books of account of the recipient of the supply.