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What is reverse charge mechanism (RCM) in GST and who pays the tax?

GradeHunt_TeamGradeHunt Team ·

I keep reading about reverse charge in GST. In which cases does the receiver pay GST instead of the supplier, and can the receiver take input tax credit of it?
reverse chargercmgstcgst act

1 answer

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Normally the supplier collects GST from the customer and pays it to the government (forward charge). Under reverse charge mechanism (RCM), the recipient of the goods or services pays the GST directly. Two situations under the CGST Act: 1. Section 9(3): notified categories of goods and services where the recipient pays the GST, subject to the supplier and recipient conditions in the notification. Common examples include services of a goods transport agency (in specified cases), legal services by an advocate to a business entity, sponsorship services to a body corporate or partnership firm (only where the supplier, that is the party being sponsored, is not a body corporate; since 16 January 2025, a body corporate that supplies sponsorship services charges GST itself under forward charge), and services of a director to the company. 2. Section 9(4): supplies from unregistered persons to a notified class of registered persons, only for notified categories (currently only specified supplies received by promoters of real estate projects). Key points: - The recipient must be registered and pays GST in cash. It cannot be paid using input tax credit. - The recipient can then claim input tax credit of the GST paid under RCM, if the inward supply is used for business and other ITC conditions are met. - A recipient paying under RCM must issue a self-invoice within 30 days of receiving the supply when the supplier is unregistered (Section 31(3)(f) read with Rule 47A), and a payment voucher when paying the supplier (Section 31(3)(g)). - The time of supply follows special reverse charge rules. For services, it is the earlier of the date of payment and the date immediately after 60 days from the supplier's invoice (Section 13(3)). If the supplier is unregistered and you issue a self-invoice, it is the earlier of the date of payment and the date of your self-invoice. For goods, it is the earliest of the date of receipt, the date of payment and the date immediately after 30 days from the supplier's invoice (Section 12(3)). Quick example: A company whose turnover last year was above the GST registration threshold pays an advocate Rs 50,000 for legal services. The advocate charges no GST. The company pays 18% GST (Rs 4,500 CGST + Rs 4,500 SGST, or Rs 9,000 IGST if inter-state) under RCM in cash, then claims Rs 9,000 as ITC if it is used for taxable business supplies. The notified lists change from time to time, so check the current notifications on cbic-gst.gov.in.

For learning only, not professional advice.

GradeHunt_TeamGradeHunt Team · 0 pts ·

For learning only, not professional advice.