How to calculate RCM in GST with example?

Understanding Reverse Charge Mechanism (RCM) in GST with an Example

In the Goods and Services Tax (GST) regime, the Reverse Charge Mechanism (RCM) plays a crucial role in ensuring tax compliance. RCM applies when a registered supplier makes purchases from another registered dealer that fall significantly short of the expected amount.

Triggering Conditions for RCM

RCM is triggered when the actual purchases made by a registered supplier from another registered dealer are less than 80% of the expected purchases. For instance, if a supplier expects to purchase goods worth ₹1,00,000 from a registered dealer but only purchases goods worth ₹70,000, RCM would be applicable.

Calculation of GST Liability under RCM

Under RCM, the supplier who receives goods or services is held liable for paying GST on the shortfall. The GST liability is calculated as 18% of the difference between the actual purchases and the 80% threshold.

Example:

In the aforementioned example, the supplier would be liable to pay GST on the shortfall of ₹30,000. Therefore, the GST liability under RCM would be:

GST Liability = 18% x (₹1,00,000 - ₹70,000)
GST Liability = 18% x ₹30,000
GST Liability = ₹5,400

Significance of RCM

RCM serves as a preventive measure to discourage the practice of under-reporting purchases to evade GST. By holding the recipient of goods or services accountable for GST payment, it ensures that tax is collected at every stage of the supply chain, preventing revenue leakage.

Conclusion

The Reverse Charge Mechanism in GST plays a vital role in ensuring fairness and transparency in the tax system. By preventing under-reporting of purchases, RCM helps to safeguard tax revenue and maintain a level playing field for businesses. It is essential for registered suppliers to be aware of RCM provisions and to comply with them accurately to avoid any potential penalties or liabilities.