What is Reverse Charge Mechanism (RCM) in GST and what we as entrepreneurs have to keep in mind while entering into such transactions. In this article we will tell you everything in detail about RCM on Services (RCM on Goods will be covered by another article), when you need to pay RCM and what happens to the amount you have paid as RCM.
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Let us begin by understanding what is RCM.
What is RCM:
RCM is a transaction in which there is a liability on the recipient of goods or services or both to discharge GST. This concept has been borrowed from the earlier Service Tax and Excise Laws. Normally, under GST law, the seller has to discharge GST which he collects from its customer, but in RCM cases, which is an exception, the customer has to discharge GST instead of the seller. One thing is to note here is that the seller shall not collect GST if the customer is paying GST under RCM.
Let us understand this with an example. Suppose A lawyer provides Legal Services to a businessman. In ordinary circumstances, the lawyer must collect GST from the businessman and pay to the government. But, since the Legal Services are covered under RCM, the businessman will have to discharge GST on behalf of the lawyer to the government.
RCM provisions are in place because at times it is difficult for the government to track the categories of people covered under RCM (Like transporters or agriculturists) hence, they transfer their responsibility on the people who are receiving their services.
Yes, in this case, you are essentially doing the government’s job. Without getting paid!
Keeping this in mind NOT all transactions attract RCM, but only specified transactions attract RCM. Following are the services which attract RCM:
|SL No||Services||Who should be the Supplier of Service?||Who should be the recipient of service?||Date from which RCM is applicable|
|1||Services of Goods Transport Agency||Supplier-Goods Transport Agency(GTA is person who transports goods by road and issues a consignment note or any other documents evidencing the transport of goods)||Recipient-Any factory, society, registered person, body corporate, Partnership firm, Casual taxable persons.||01st July 2017|
|2||Legal Services of the Advocate||Supplier-An Advocate including a Senior advocate or a Firm/LLP of advocates.||Recipient-Any business entity.||01st July 2017|
|3||Services of an arbitral tribunal to a business entity||Supplier-An Arbitral tribunal||Recipient-Business entity.||01st July 2017|
|4||Sponsorship Services||Supplier-Any person||Recipient-body corporate or Partnership firm.||01st July 2017|
|5||Director’s Services||Supplier-Any director of a company||Recipient-The company||01st July 2017|
|6||Service of recovery agent||Supplier-Recovery agent||Recipient-Banking institution, financial institution, NBFC||01st July 2017|
|7||Service of Insurance agent||Supplier-Insurance Agent||Recipient-Any person carrying on insurance business.||01st July 2017|
|8||Services of overseas committee||Supplier-Members of overseas committee constituted by RBI||Recipient-RBI.||01st July 2017|
|9||Services of author, music composer, photographer, artist or like by way of transfer or permitting the use or enjoyment of copyright.||Supplier- author, music composer, photographer, artist||Recipient-Publisher, music company, producer or like.||01st July 2017|
|10||Transportation of goods by vessel in case of FOB contracts, where the contract is on CIF basis then value shall be deemed to 10% of the CIF value||Supplier-Any person located in non-taxable territory i.e. India||Recipient-Any Registered person.||01st July 2017|
|10||Security Services||Supplier-Any person other than body corporate||Recipient-A registered person located in taxable territory||01st January 2019|
|11||Services of business correspondent||Supplier-An agent of business correspondent||Recipient-The business correspondent||01st January 2019|
|12||Services of an individual Direct Selling Agent (IDSA)||Supplier-IDSA other than a body corporate, partnership firm, LLP firm||Recipient-The company||27st July 2018|
|13||Services of business facilitator||Supplier-Business Facilitator||Recipient-Any banking company||01st January 2019|
|14||Services of hiring of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration paid by service recipient||Supplier-Any person, other than body corporate who supplies the services to body corporate and does not issue an invoice charging CGST at 6%||Recipient-Body Corporate(Body corporate includes a company, a foreign company, a corporation or LLP)||01st October 2019|
|15||Services of lending securities under Securities lending Scheme||Supplier-Lender||Recipient-Borrower.||01st October 2019|
|16||Service supplied by any person by way of transfer of developments rights or Floor Space Index(FSI) for construction of a project by a promoter ( These are mainly Joint Development Agreements)||Supplier-Any Person||Recipient-Promoter(In general builder)||01st October 2019|
|17||Long term lease of land (more than 30 years) by any person against consideration in the form of upfront amount (Premium, Salami, development charges or by whatever name called) and periodic rent for construction of a project by a promoter.||Supplier-Any Person||Recipient-Promoter||01st October 2019|
|RCM on E-commerce operator(Only on Few specified services like transport-OLA, uber, accommodation-OYO, housekeeping services-Urban clap)||Supplier-E-commerce operator||Recipient-Any Person||01st July 2017|
|18||Services supplied by Central Government, State Government or union territory or local authority to a business entity||Supplier- Central Government, State Government or union territory or local authority||Recipient-Any business entity||01st July 2017|
Note: In relation to Point no. 18, there are few things that we need to know: –
There are few exceptions to Point 18, which means there are some services, even though supplied by Government to a business entity, they do not attract RCM. They are namely:
1. Services by Department of postal, services of life insurance, express parcel post, or agency services. For example services of the Indian Post office are covered under forward charge i.e. Government has to charge GST on the services provided.
2. Service by way of transport of goods or passenger, for example, you might have seen the IRCTC charging GST on the various services provided by it.
3. Service in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport
4. There is also a monetary limit of Rs. 5000: Thus incase the amount payable to the Government for any services received is below Rs.5000, the recipient is not required to pay any GST under RCM.
What happens to the amount a person pays as GST under RCM?
An obvious question would come to your mind here. What would happen to the amount one pays as GST under RCM? Is it my cost? Do I get credit for that?
You get a credit of the amount you pay as GST under RCM. Thus, if in November 2020 you are paying Rs 10,000 as GST under RCM, you can take the credit of the Rs 10,000 you have paid. Yes, yes. We know what you are thinking. What is the use of RCM then? We’ll let you know when we know 😉, but for now, we can just say that it is one of the most powerful checks in GST and its non-compliance may lead to serious tax liabilities.
Few things to know before we conclude:
- The Credit is available for the tax under RCM and the same can be availed in the month of payment.
- The Payment of RCM must be done in the form of Cash ONLY ( through Cash ledger). In other words, you cannot use the Input tax credit you already have to pay your RCM liability.
- A person who is liable to pay RCM shall mandatorily register himself under GST, even though his turnover doesn’t exceed the limits specified for registration.
- The payment of RCM shall be done in Form GSTR-3B and the credit for the same shall be availed in Form GSTR-3B.
- A businessman paying RCM shall issue self invoices and payment vouchers for the purpose of RCM.
- Credit availed for RCM can be used for payment of other GST liabilities.
- Even a composition dealer has to pay GST on RCM basis, if he receives any of the above services.
RCM in GST is a law that is sometimes considered unnecessary as the tax you pay under RCM does not result in higher revenues for the government. Only time will tell the real reason why this part of the law has been implemented. Having said that, non-compliance to this law may invite scrutiny into your books by the GST Department.