Answer By law4u team
The Reverse Charge Mechanism (RCM) under Goods and Services Tax (GST) is a system in which the liability to pay tax shifts from the seller (supplier) to the buyer (recipient) of goods or services. Normally, in GST, the supplier collects tax from the buyer and deposits it with the government. But under reverse charge, it is the buyer who is required to pay GST directly to the government instead of the supplier. This mechanism is laid down under Section 9(3), 9(4), and 9(5) of the Central Goods and Services Tax Act, 2017 (CGST Act), and similar provisions exist in the State GST Acts and Integrated GST Act, 2017. Purpose of Reverse Charge Mechanism The main objective of introducing RCM is to: 1. Bring unorganized sectors into the tax system (for example, transport, goods transport agencies, etc.). 2. Ensure tax compliance where the supplier is not registered or located outside India. 3. Ease tax collection by shifting responsibility to large, registered buyers who are easier for the government to monitor. Types of Reverse Charge under GST There are three major categories where reverse charge applies: 1. RCM under Section 9(3) – Specific Notified Goods or Services The government has notified certain goods and services where GST must be paid by the recipient. Examples include: Goods Transport Agency (GTA) services. Legal services provided by an advocate or firm of advocates. Sponsorship services provided to a company or partnership firm. Supply of cashew nuts, tendu leaves, or bidi wrapper leaves by an agriculturist. Services provided by a director to a company. Import of services from outside India. In these cases, even though the supplier issues the invoice, the recipient must pay the GST. 2. RCM under Section 9(4) – Supply by an Unregistered Dealer When a registered person purchases goods or services from an unregistered person, the registered buyer becomes liable to pay GST under reverse charge. However, the government has restricted this provision and applies it only to specific categories of goods or services or notified persons, not to every unregistered purchase. For instance, this rule may apply in cases like: Promoters and builders purchasing supplies for construction work from unregistered persons. 3. RCM under Section 9(5) – Through E-Commerce Operators Certain online platforms (e-commerce operators) are liable to pay GST instead of the actual suppliers for services provided through their portals. Examples include: Ola, Uber – for passenger transport services. Zomato, Swiggy – for restaurant delivery services. UrbanClap/Urban Company – for household or personal services. Here, the service provider is often small and unregistered, so the law makes the e-commerce company responsible for collecting and paying GST. Input Tax Credit (ITC) under RCM When a registered taxpayer pays tax under the reverse charge mechanism, they can claim Input Tax Credit (ITC) on that amount (subject to eligibility). However, ITC can be claimed only after the tax is actually paid to the government in cash. For example: A company hires a lawyer (advocate service under RCM). The company pays GST on that service under reverse charge. It can later claim ITC for the same amount while filing GST returns. Time of Supply under RCM The time of supply determines when GST becomes payable. Under RCM: For goods: The earlier of (a) date of receipt of goods, (b) date of payment, or (c) 30 days from the date of invoice. For services: The earlier of (a) date of payment, or (b) 60 days from the date of invoice. Compliance Requirements under RCM 1. The recipient must issue a self-invoice since the supplier does not charge GST. 2. The recipient must maintain records of such transactions. 3. The tax must be paid in cash (not through ITC). 4. The tax amount paid under RCM can be claimed as ITC in the next return, if eligible. 5. Details of RCM transactions must be reported in GSTR-3B and GSTR-1 returns. Example Suppose a company hires a lawyer for legal services: Normally, the lawyer would charge GST. But legal services are covered under RCM. So, the lawyer issues an invoice without GST. The company pays the applicable GST (say 18%) directly to the government. The company can then claim ITC on this tax in its next return. Penalty for Non-Compliance If a person liable under reverse charge fails to pay GST: Interest is payable on the delayed payment. Penalties can be imposed under Section 122 of the CGST Act, 2017. ITC may be disallowed until the tax is paid. Conclusion The Reverse Charge Mechanism (RCM) is an essential part of the GST framework that shifts the responsibility of tax payment from the supplier to the buyer in specific cases. It helps bring transparency and accountability into sectors where suppliers are unorganized or unregistered. Although it increases compliance for businesses, it ensures the government collects tax efficiently and fairly.
