Summary of "Reverse Charge Mechanism in GST | RCM in GST | RCM Accounting Entries in GST"
Summary: Reverse Charge Mechanism (RCM) in GST – Business and Compliance Insights
This video by Vikas Sharma provides a comprehensive explanation of the Reverse Charge Mechanism (RCM) under GST, focusing on its business implications, compliance requirements, and accounting treatment. The content is highly relevant for businesses handling GST, especially in understanding tax liability shifts, registration mandates, invoicing, and input tax credit (ITC) processes.
Key Concepts & Frameworks
RCM Definition & Objective
- Under RCM, the liability to pay GST shifts from the supplier to the recipient (service receiver or goods recipient).
- Objective: Expand tax coverage, especially targeting specific classes of suppliers (e.g., unregistered suppliers, certain notified goods/services) and ensure tax collection from organized sectors.
- RCM was previously part of service tax and is now integrated into GST.
Forward Charge vs Reverse Charge
- Forward Charge: Supplier charges GST on invoice and deposits it with the government.
- Reverse Charge: Supplier issues invoice without GST; recipient pays GST directly to the government.
Example: For a Rs 1 lakh service with 18% GST: - Forward charge: Supplier invoices Rs 1,18,000 (Rs 1,00,000 + Rs 18,000 GST), collects and deposits GST. - Reverse charge: Supplier invoices Rs 1,00,000 (no GST), recipient pays Rs 18,000 GST directly to government and Rs 1,00,000 to supplier.
Legal Provisions & Sections
- RCM is governed under four sections: two under CGST Act (Sections 9(3), 9(4), 24, 49) and two under IGST Act (Sections 5(3), 5(4)).
- Sections related to supplies from unregistered dealers to registered dealers are currently not operational.
- Section 24 mandates compulsory GST registration for persons liable to pay tax under RCM, irrespective of turnover thresholds.
Business Operations & Compliance Processes
GST Registration
- Mandatory registration under GST if liable to pay tax under RCM, even if turnover is below exemption limits.
- No turnover threshold exemption for RCM-registered persons.
Invoicing & Self-Invoice
- Supplier issues invoice without GST under RCM.
- Recipient must generate a self-invoice reflecting GST liability and payment under RCM.
- Monthly consolidated self-invoice allowed (no need for invoice-wise self-invoice).
Input Tax Credit (ITC) Treatment
- Recipient can claim ITC on GST paid under RCM if goods/services are used for business.
- Supplier cannot claim ITC on GST for supplies under RCM.
- Payment of GST liability under RCM must be made in cash; ITC cannot be used to discharge RCM liability.
- Accounting entries involve booking GST liability and simultaneously claiming ITC on the same amount, creating a matching credit and debit.
GST Return Filing (GSTR-3B & GSTR-1)
- RCM liability must be declared in Table 3.1(b) (Outward taxable supplies under reverse charge) of GSTR-3B.
- ITC claimed on RCM paid GST is reported in Table 4A(5) (Inward supplies liable to reverse charge) of GSTR-3B.
- Proper disclosure ensures compliance and avoids penalties.
Specified Goods and Services under RCM
Goods under RCM (examples)
- Cashew nuts, tendu leaves, bidi wrapper leaves supplied by agriculturists to registered persons.
- Other notified goods as per government notifications.
Services under RCM (examples)
- Goods Transport Agency (GTA) services
- Legal services by advocates
- Sponsorship services
- Director’s remuneration services (with specific clarifications)
- Insurance agent services
- Recovery agent services
- Banking and financial services
- Security services
Businesses receiving these services or goods must apply RCM compliance strictly.
Actionable Recommendations for Businesses
- Understand your GST liability under RCM: Identify if the goods/services you receive fall under notified categories requiring RCM.
- Register under GST if liable for RCM: Even if below turnover thresholds.
- Maintain proper invoicing: Generate self-invoices for RCM transactions monthly.
- Accurately record accounting entries: Reflect GST liability and ITC simultaneously.
- File GST returns correctly: Declare RCM liability and claim ITC in respective tables in GSTR-3B.
- Pay RCM GST liability in cash: Do not offset with ITC.
- Stay updated on notifications: Some sections are currently not operational; monitor government updates.
Key Metrics & Compliance Points
- GST rate example used: 18%
- Invoice values and GST amounts illustrated with Rs 1 lakh service and Rs 18,000 GST.
- Registration mandatory regardless of turnover when RCM applies.
- Monthly filing and payment timelines aligned with standard GST return cycles.
- ITC claimability conditional on business use and actual payment of GST under RCM.
Presenter & Source
- Presenter: Vikas Sharma
- Channel: Vikas Sharma’s YouTube Channel
- Additional Resources: wconsultancy.com
This summary captures the core business, compliance, and operational aspects of Reverse Charge Mechanism under GST as explained in the video.
Category
Business
