Under new indirect tax regime, all different taxes got clubbed under one head i.e. GST. In order to further improve the newly implemented taxation system, smoothen the transition and widen government’s tax base many changes have been proposed by the government and the GST Council. One such proposal laid down to improve GST implementation is Reverse Charge Mechanism (RCM) with an aim to enhance tax compliance and coverage across organized, partly organized and unorganized sector in India.

As we all know, the concept of RCM is not new as it was brought up ahead from Service Tax regime. However, under GST, the RCM has been entitled with a broader scope as compared to Service Tax. RCM under GST is applicable on notified goods as well as on services and contrary to the Service Tax RCM, the concept of partial reverse charge does not exist; the recipient is required to pay a complete 100% tax on its supply.

In the previous taxation regime, the collection of service tax from the numerous unorganized sectors often proved to be a troublesome chore. However, with the implementation of RCM with GST, an effort has been made to place the services as per the existing regime and increase the tax collection and compliance ratio.

Let’s see the effect and intention of the reverse charge mechanism under GST:

Supply by Unregistered dealer:

In scenarios wherein a registered taxpayer purchases goods or services from an unregistered person, the liability to pay GST shifts to the registered person, wherein the purchased supply falls in taxable category (RCM is not applicable on the supply of exempted goods).

As per the reverse charge mechanism, the registered dealer has to take the responsibility to pay GST, along with the provisions of the act applicable as if he is the supplier of the goods or services.

The GST provision enables each taxpayer to take the input tax credit but in order to avail the credit of tax paid, first, he has to pay the taxes in cash and then to avail the credit on all those purchases in the next month. The provision clearly states that GST credit cannot be availed on food and beverages, building, passenger vehicle even if the tax is paid on RCM basis, which puts the burden of such tax directly on the taxpayer.

The aim behind this is to prevent tax evasion since it would be almost impossible to collect tax from the unregistered dealer. It would increase tax compliance and promote transparency. Also, this will increase working capital, compliances, classification disputes etc. for registered businesses. In order to refrain themselves with the burden of tax payment of the supplier and reduce complications, registered taxpayers might choose to deal with registered suppliers over the unregistered ones. This could hamper the business of the unregistered dealer and in an attempt to maintain their market share, they might be required to voluntarily register or at least assist their registered customers in GST compliance (such as to identify HSN Codes, applicable GST rates etc.).

Note:

Starting 1st Feb 2019, Reverse Charge Mechanism (RCM, in case of supplies made by unregistered persons to registered persons) is applicable, only on specified goods/services and specified persons.

To know all aspects and provisions of RCM, click here: Reverse Charge Mechanism (RCM) under GST

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