Reverse Charge Mechanism (RCM) Under GST: Applicability to Goods, Services, and E-Commerce

Introduction

The Goods and Services Tax (GST) is designed to simplify indirect taxation by placing the responsibility of tax payment on the supplier of goods or services. However, in certain cases, the Reverse Charge Mechanism (RCM) shifts this liability to the recipient. This exception is applicable to specific notified goods and services, transactions involving unregistered suppliers, and certain e-commerce operations. Understanding RCM is crucial for businesses to ensure compliance, avoid penalties, and correctly claim Input Tax Credit (ITC).

What is Reverse Charge Mechanism (RCM)?

Under the RCM, the responsibility to pay GST lies with the recipient of goods or services rather than the supplier. This mechanism ensures that tax is collected even in situations where the supplier is either unregistered or operates under specific conditions that make compliance challenging.

For example, if a registered business purchases services from a legal professional (advocate), the business, as the recipient, must pay GST under RCM.

Applicability of RCM

RCM applies in two broad cases:

1. Supplies from Unregistered Suppliers

– **Intra-State Transactions**: When a registered person purchases goods or services from an unregistered supplier within the same state, RCM is applicable if the value of all transactions exceeds ₹5,000 in a single day.
– **Inter-State Transactions**: RCM applies regardless of transaction value when goods or services are procured from an unregistered supplier located in another state.

**Note**: RCM for unregistered suppliers was deferred until 30th September 2019 but resumed from 1st October 2019 for specific cases.

2. Notified Goods and Services

The government has notified specific goods and services that fall under RCM, irrespective of the supplier’s registration status. The recipient of these goods or services is liable to pay GST.

Notified Goods Under RCM

Goods	Supplier	Recipient (Liable for GST)
Cashew nuts (not shelled/peeled)	Agriculturist	Registered person
Silk yarn	Manufacturer of silk yarn	Registered person
Used vehicles, seized goods, or scrap	Government or local authority	Registered person
Priority sector lending certificates	Registered person	Registered person

Notified Services Under RCM

Service	Provider	Recipient (Liable for GST)
Goods Transport Agency (GTA) services	Goods Transport Agency	Registered business entities
Legal services	Advocates or law firms	Business entities in taxable territory
Sponsorship services	Any person	Body corporates or partnerships
Director’s services	Company director	Company or body corporate
Renting residential dwellings to registered persons	Any person	Registered person

RCM for e-Commerce Operators (ECO)

For certain services provided through e-commerce platforms, the e-commerce operator (ECO) must pay GST under RCM. These include:
– Passenger transportation (radio taxi, motor cab, etc.).
– Accommodation services by unregistered suppliers.
– Housekeeping services like plumbing and carpentry.

**Example:** If a ride-sharing company facilitates a taxi ride, the operator is liable to pay GST under RCM.

Invoicing Under RCM

For compliance under RCM, self-invoicing is mandatory. This means the recipient of goods or services must issue an invoice in their own name, recording the transaction for GST purposes.

Key Steps:

1. Create a self-invoice including the supplier’s name, GSTIN (if available), and transaction details.
2. Mention the GST amount under RCM.
3. Maintain records for at least five years for audit purposes.

Conclusion

The Reverse Charge Mechanism (RCM) is an essential feature of GST, ensuring tax compliance in cases where the supplier may not be registered or when specific goods or services are involved. By shifting the tax liability to the recipient, RCM broadens the tax net and simplifies the process for the government. Businesses must understand and adhere to RCM provisions, including timely self-invoicing and filing, to claim ITC and avoid penalties.

Example Summary: A textile manufacturer purchases raw cotton from a farmer. Under RCM, the manufacturer must pay GST on the transaction. By self-invoicing and paying GST, the manufacturer complies with GST laws and can claim ITC to offset its tax liability on output supplies.