Table of Contents▼
Under the standard Goods and Services Tax (GST) framework, the supplier of goods or services collects tax from the buyer and deposits it with the government. This is known as Forward Charge. However, the GST law contains an exception called the Reverse Charge Mechanism (RCM). Under RCM, the tax liability shifts entirely from the supplier to the recipient of the goods or services. The buyer must calculate the tax, pay it directly to the government, and document the transaction. In this article, we explain how RCM works, the key services covered, and the invoice requirements.
Why does the government use RCM?
The primary purpose of RCM is to collect tax from unorganized sectors or non-resident suppliers where tax administration is difficult. By shifting the compliance burden to organized buyers, the tax department ensures revenue collection on transactions that might otherwise go unreported.
Common Goods and Services under RCM
The government specifies which transactions attract RCM. The most common business services include:
- Services from Goods Transport Agencies (GTA): Transport services provided by GTAs to registered businesses attract RCM at 5% (unless the GTA opts to pay 12% under forward charge).
- Legal Services: Advisory or representation services provided by an advocate or firm of advocates to any business entity.
- Sponsorship Services: Sponsorship services provided to body corporates or partnership firms.
- Government Services: Specific services provided by local authorities or governments to businesses (excluding renting of immovable property and postal services).
- Purchase from Unregistered Suppliers: Purchases from unregistered dealers (previously under Section 9(4), currently restricted to specific sectors like real estate developers).
How to Account for and Pay RCM
If your business receives services subject to RCM, you must adhere to these accounting guidelines:
- Self-Invoicing: Because the unregistered supplier cannot issue a tax invoice, the buyer must issue an invoice to themselves detailing the transaction and tax calculations.
- Cash Payment: RCM liability must be paid in cash. You cannot utilize your existing Input Tax Credit (ITC) to pay RCM liability. The tax must be deposited via GSTR-3B using your cash ledger.
- Claiming ITC: Once paid in cash, you can claim Input Tax Credit for the RCM amount in the same month's return, provided the purchase was made for business purposes.
Conclusion
RCM adds an extra layer of compliance for accounting teams. Ensure your ledger accounts identify RCM expenses (like transporter bills and legal fees) to pay the tax on time and claim the corresponding tax credits.