Reverse Charge Mechanism under GST-Part I
What is the Reverse Charge Mechanism i.e. RCM under GST?
GST, being Indirect Tax, is normally collected by the supplier of goods/ services from the customer and then paid by him to the Government. The credit of the tax paid is passed on to the buyer. This is called a Forward Charge Mechanism.
However, in the case of the Reverse Charge Mechanism (RCM) under GST, instead of paying the tax through the supplier, the buyer directly pays tax on his purchases to the Government. Buyers can avail its input tax credit while paying taxes on their outward supplies.
Which section covers provisions relating to RCM?
Section 2(98) of CGST Act, 2017 defines RCM as follows:
“reverse charge” means the liability to pay tax by the recipient of the supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act.
Section 9(3) of the CGST Act, 2017 states that the Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on a reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax about the supply of such goods or services or both.
Section 9(4) of the CGST Act, 2017 states that the Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of the supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax about such supply of goods or services or both.
Notification №4/2017 — Central Tax (Rate) and Notification №4/2017 — Integrated Tax (Rate) covers a list of goods on which RCM is applicable.
Similarly, Notification №13/2017 — Central Tax (Rate) and Notification №10/2017 — Integrated Tax (Rate) cover a list of services on which RCM is applicable.
To get the list of goods and services on which RCM is applicable, read our blog “Reverse Charge Mechanism under GST- Part II”.
How should the buyer disclose RCM liability in GSTR 1 and GSTR 3B?
No disclosure is required in GSTR 1 for RCM as this is inward supply i.e. purchase of the buyer and not outward supply i.e. sale.
In GSTR 3B, RCM liability is to be shown in Table №3.1-d.
Input tax credit of the same can be taken in Table №4- A- 3:
Can I utilize an Input tax credit to pay RCM liability?
No. RCM is input tax liability. Therefore, ITC cannot be utilized for payment of the same. It has to be paid in cash. However, once it is paid, it can be utilized as ITC while paying outward taxes.
Conclusion
The Reverse Charge Mechanism (RCM) under GST shifts the responsibility of tax payment from the supplier to the buyer. While it applies to specific categories of goods and services as notified by the government, buyers must ensure compliance by accurately disclosing RCM liability in GSTR 3B.
It’s important to note that input tax credit cannot be utilized to pay RCM liability directly, but once paid, it can be utilized as ITC for paying outward taxes.
