Under Reverse Charge Mechanism (RCM), in case of certain specified supplies, a recipient directly pays GST to the Government instead of paying to the supplier.
1. Time of Supply
In case of supplies of goods or services on which RCM is applicable, the time of supply shall be the earliest of the following dates:
|Goods (Cashew nuts, tobacco leaves, government lottery, etc.)||Services (Legal, GTA, sponsorship, director fees, insurance agent, security services, etc.)|
|1. Date of receipt of goods*|
|2. Date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account,
whichever is earlier*
|1. Date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever
|3. Invoice Date of supplier + 30 days||2. Invoice Date of supplier + 60 days|
*When not possible to determine such dates, then the date of entry in the books of account of the recipient of supply shall be considered as the time of supply.
2. Payment of interest
As can be seen in the above table, the time of supply to pay GST liability is defined in GST law. To prevent a company from paying interest on delayed payments, it is advisable to develop a system to track payments to vendors under RCM and in case payment to the vendor is delayed, invoices ageing (30 days/60 days) as per the above table must be taken into consideration for payment of RCM liability.
3. Import of Service from Associated Enterprises
In case of import of service from associated enterprises, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier. For example, if an invoice is dated 5th April 2020, payment to the vendor is made on 6th April 2020, but the entry in the books of accounts is made on 31st March 2020, then the time of supply is 31st March 2020 and tax shall be payable vide GSTR-3B on 20th of the next month, that is, 20th April 2020 (due date).
4. Invoice of Supplier Vs Self invoice
As per Rule 46(p), it must be mentioned on the supplier’s invoice whether a tax on such supply is payable on reverse charge basis – Yes or No.
As per Section 9(3), in case of RCM, tax is paid by the recipient, and he must act as the person liable for paying the tax. It means that he must issue an invoice himself in such cases.
5. To be paid through cash only
As per Rule 85(4), the tax payable on reverse charge basis shall be paid in cash only by debiting the electronic cash ledger on GST portal.
6.RCM Credit Time limit
A recipient on the basis of a self invoice can claim an input tax credit of such RCM cash payments. It is the date on such invoice that must be considered as the date for availing credit and accordingly, time limit criteria for availing credit shall apply as per Section 16(4).
7. Not to include in aggregate turnover, turnover in state/UT, output supply
The definitions of “aggregate turnover” as per Section 2(6), “turnover in state/UT” as per Section 2(112) and “output tax” of a person as per Section 2(82) exclude the “value of supplies” on which a person as a recipient must discharge RCM liability
8. Compulsory Registration
As per Section 24(iii), persons who are required to pay tax under RCM are supposed to get compulsorily registered.
9. Keep control with expense ledgers – Bifurcate specific expense GLs
It is a common phenomenon for departmental auditors to develop a correlation between the amount of expense booked under specific RCM expense ledgers and the amount of GST discharged on them. For example, if INR 1,00,000/- is booked as a legal expense under Legal Expense GL, then the auditors would require the recipient to pay GST @18% on the value of INR 1,00,000/-, that is, INR 18,000/. Hence, it must be ensured that any non-legal or professional consultancy service expense does not get booked under this Legal Expense GL because it will get difficult to convince the auditors to exclude it from RCM liability. It is advisable to create expense ledgers in books of account as per the reverse charge categories. This will help in having an internal reconciliation of expense vs tax paid. People making entries in the system must be trained to book such entries under the correct GL.
10. Maintain invoice level details
As per Rule 56, a person must keep a proper account of supplies attractive RCM liability, including invoices, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers, refund vouchers. A proper report having invoice wise break up of RCM liability discharged on a monthly basis must be maintained.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, the author accepts no liability, and disclaims all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Author: CA. Paresh Kapasi and CA. Krutika Kumbhani
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