What Is Reverse Charge Mechanism Under GST?
The introduction of the Goods and Services Tax (GST) has been one of the most revolutionary changes in the Indian taxation system till date. It has completely transformed indirect taxation in the country and has simplified it by combining multiple different taxes into one. We encounter GST in one form or the other almost every single day of our lives.
GST has to be paid when you eat out at a restaurant, purchase goods, or avail services. It has become a part and parcel of our lives. While Goods and Services Tax as a concept is fairly easy to understand, there’s one concept that causes a bit of confusion for many – Reverse Charge Mechanism (RCM). And that’s what we’re going to be looking at.
But before we explore RCM under GST, let’s quickly take a look at how it usually works.
How does GST work?
Say you’re a shopkeeper registered under GST. Now, although you collect GST from the end consumer, you’re the one who is required to pay the tax to the authorities, right? So basically, under the Goods and Services Tax, the supplier of goods and services is legally liable to pay GST. Despite this being the norm, however, that’s not always the case. Here’s where Reverse Charge Mechanism comes into play.
What is the Reverse Charge Mechanism?
Under the Reverse Charge Mechanism, the tax liability shifts from the supplier to the receiver of goods and services. This effectively means that the receiver of the goods and services will become liable to pay GST tax to the authorities instead of the supplier. That said, RCM becomes applicable only under certain given circumstances.
When is this Reverse Charge Mechanism likely to come into play?
Now that you’ve understood what RCM under GST is, let’s take a look at the circumstances where this concept becomes applicable.
1.When a GST registered dealer purchases from an unregistered dealer
A dealer who is unregistered under Goods and Services Tax cannot raise a GST invoice and therefore would not be liable to pay tax.
And so, when a GST registered dealer purchases goods or services from an unregistered dealer, the liability to pay the requisite tax to the authorities falls on the registered dealer and not the unregistered dealer despite being the seller.
2.In the event of e-commerce services
An entity operating under the e-commerce space that’s supplying services through registered service providers would be liable to pay GST. This is despite the fact that it is the registered service providers who are actually supplying services.
3.During the supply of certain specified goods and services
The Central Board of Indirect Taxes and Customs (CBIC) has specified a list of goods and services where the RCM under GST would be applicable. Here’s a quick overview of the items in the list.
- Tobacco leaves
- Silk yarn
- Cashew nuts
- Raw cotton
- Services provided by a Goods Transport Agency (GTA)
- Legal services by an advocate
That said, this list is merely illustrative and is by no means exhaustive. There are a number of other goods and services included in this list as well, which can be obtained from the official website of the Central Board of Indirect Taxes and Customs.
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