What is Reverse Charge in GST?

The concept of Reverse Charge Mechanism (RCM) in the GST (Goods and Services Tax) regime in India is a crucial aspect that reflects a thorough understanding of businesses operating within the framework of GST. This in-depth blog talks about what is reverse charge in GST, discusses the circumstances under which this mechanism applies, identifies the entities liable to pay GST under RCM, and states other significant aspects that are key for ensuring seamless compliance with GST regulations.

What is Reverse Charge?

Let’s understand the reverse charge in GST. In the regular GST mechanism, the supplier of goods or services charges and collects GST from the recipient. However, under RCM, the responsibility to pay GST shifts to the recipient of the supply. This generally happens when the supplier is unregistered under GST or falls under specific categories notified by the government.

When is Reverse Charge Applicable?

The applicability of RCM depends on various factors. Here's a table for reference:

Time of Supply Under Reverse Charge

The determination of the time of supply under the Reverse Charge Mechanism (RCM) is vital for the correct application of GST provisions. The time of supply under RCM is governed by Section 12 and Section 13 of the Central Goods and Services Tax Act, 2017.

• In case of goods:
  • The date of receipt of goods and the date of payment.
  • The date of payment is immediately after 30 days from the date of issuance of the invoice by the supplier.

• In case of services:

  The time of supply in reverse charge mechanisms refers to the moment at which GST is applied. The earliest of three circumstances determines it:

  • Date of Payment: The recipient makes payment for the products or services on this date.
  • Date After 60 Days: The payment date falls back to 60 days following the invoice's issuance by the supplier if it isn't specified. It guarantees that tax responsibilities are clear.
  • Entry in Books: The recipient's recording of the transaction in their accounting books marks the time of supply in the event that either of the aforementioned can't be established. As a backup plan, it ensures appropriate GST reporting.

Also Read: What is GST (Goods & Services Tax)? Meaning & Types of GST Returns

Registration Rules Under Reverse Charge

A registered taxpayer liable to pay GST under RCM doesn't need to register under GST solely for this purpose, provided they are already registered for other taxable supplies.

Who Should Pay GST Under Reverse Charge?

Under the Reverse Charge Mechanism (RCM), the liability to pay GST shifts to the recipient who is registered under GST. The recipient becomes liable to pay GST under RCM in the following scenarios:

• Purchasing from Unregistered Suppliers: When a registered taxpayer procures taxable goods or services from an unregistered supplier, they are required to pay GST under RCM, excluding exempted cases as specified by the GST laws.
• Receiving Specific Goods or Services Listed Under RCM: The recipient is obligated to pay GST under RCM for specific goods or services that are listed in the RCM notification issued by the government. These notifications detail the goods and services for which the recipient bears the responsibility of discharging the GST liability.

Also Read: Structure of GST in India: Breakdown of the Four-Tier System

Input Tax Credit (ITC) Under Reverse Charge

When the recipient pays GST under RCM, they are eligible to claim Input Tax Credit (ITC) for the tax paid, provided that all prescribed conditions are met. This ITC can then be used to offset the tax liability on their outward supplies, thus preventing double taxation and ensuring a seamless credit mechanism within the GST framework. It's important for recipients to adhere to the specified conditions for claiming ITC under RCM to effectively manage their tax obligations and maintain compliance with GST regulations.

What is Self Invoicing?

Under the Reverse Charge Mechanism (RCM), the recipient is required to issue a self-invoice that includes comprehensive details of the supply and the GST amount payable. This self-invoicing process serves as a record of the tax payment and facilitates the seamless claiming of Input Tax Credit (ITC). The self-invoice, which contains all pertinent information related to the transaction, plays a critical role in maintaining accurate records of the tax liability and the subsequent ITC claim. Adhering to the self-invoicing requirements is crucial for ensuring compliance with GST regulations and streamlining the tax reporting process under RCM.

Also Read: GST on Rent: Definition, Regulations & Calculation Guide

How Businesses Manage Reverse Charge with Business Loans?

A Business loan plays a major role in assisting businesses to effectively manage cash flow challenges that may arise due to the payment of GST under the Reverse Charge Mechanism (RCM). Here's how businesses can use business loans:

• Bridge the Gap: Short-term working capital loans can serve as a valuable tool to bridge the gap between the payment of GST under RCM and the receipt of payment from customers. These loans provide businesses with the necessary funds to fulfil their tax obligations under RCM while ensuring that their operations continue smoothly until customer payments are received.
• Manage Inventory: Inventory financing can be instrumental in managing purchases from unregistered suppliers, thereby facilitating timely payments under RCM. This form of financing allows businesses to optimise their inventory management processes and ensure a steady supply of goods from unregistered suppliers without encountering liquidity constraints.

Conclusion

Understanding reverse charge in GST is important for businesses dealing with unregistered suppliers or specific categories of goods and services. By following the guidelines and using available resources, businesses can ensure smooth compliance and manage cash flow efficiently.

Frequently Asked Questions

1. What is reverse charge in GST with an example?

For example, suppose a registered company purchases furniture from an unregistered dealer for Rs. 10,000. The company needs to pay GST under RCM on this purchase.

2. Who is eligible for RCM in GST?

Any registered taxpayer receiving supplies attracting RCM becomes eligible to claim ITC.

3. What is the RCM 5000 limit in GST notification?

Supplies from unregistered dealers below Rs. 5,000 per day are exempt from RCM.

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