What is RCM under GST with example?

Reverse Charge Mechanism under GST: A Comprehensive Guide

Introduction

The Reverse Charge Mechanism (RCM) is a unique provision introduced under the Goods and Services Tax (GST) regime in India. It reverses the traditional mechanism of tax collection, placing the GST liability on the recipient instead of the supplier in certain specific scenarios.

Understanding RCM

GST follows the principle of “destination-based taxation,” where the tax is levied at the point of consumption. However, in some cases, it is challenging for the authorities to collect GST from the supplier due to factors such as unregistered suppliers or tax evasion. The RCM addresses these challenges by making the recipient responsible for paying the GST.

When RCM is Applicable

RCM is applicable in specific transactions, as prescribed by the GST Council. Some common examples include:

• Unregistered suppliers making sales to registered recipients
• Goods imported by registered recipients (above the exemption limit)
• Services received from overseas entities (located outside India) by registered recipients

Procedure for RCM

Under RCM, the recipient becomes the “deemed supplier” and is liable for the following actions:

• Calculate and pay GST on the transaction
• File a GST return showing the tax paid under RCM
• Issue an invoice to the supplier, indicating that the GST has been paid under RCM

Example of RCM

Suppose Company A (registered recipient) purchases goods worth ₹100,000 from Company B (unregistered supplier). Under RCM, Company A is liable for paying the GST on this transaction. The GST rate for the goods is 18%, so Company A must calculate the GST liability as follows:

GST = ₹100,000 x 18% = ₹18,000

Company A will issue an invoice to Company B indicating that ₹18,000 has been paid as GST under RCM. Company A will then file a GST return and pay the GST to the government.

Benefits of RCM

• Improved GST compliance: RCM ensures that GST is paid on transactions even if the supplier is unregistered.
• Reduced tax evasion: It discourages tax evasion by unregistered suppliers.
• Simplified tax administration: It reduces the burden on the authorities to track down and collect GST from unregistered suppliers.

Conclusion

The Reverse Charge Mechanism under GST is a significant provision that helps ensure GST compliance and reduces tax evasion. By making the recipient responsible for paying GST in certain specific transactions, RCM strengthens the GST framework and enhances the tax revenue collection process.