REVERSE CHARGE MECHANISM -RCM
Under normal circumstances, the supplier of goods or services collects the tax and pays it to the Govt. But in case of Reverse Charge mechanism , the receiver becomes liable to pay the tax to the Govt., which means the chargeability gets reversed.
Reverse charge mechanism is a mechanism where the recipient of the goods and/or services who happens to be a registered dealer is liable to pay GST instead of the supplier.
Self-invoicing means raising a purchase invoice, which is to be done when you have purchased goods / services from an unregistered dealer AND such purchase of goods or services falls under reverse charge mechanism.
Since supplier is unregistered person hence cannot issue a GST-compliant invoice to you, thus you become liable to pay taxes on the supplier’s behalf. Hence, self-invoicing, in this case, becomes necessary.
All registered taxpayers are required to pay GST under reverse charge need to register for GST and the threshold of Rs 20 Lakhs does not apply to them.
When is Reverse Charge Mechanism Applicable
When Supply of Goods/Services is made by an Unregistered dealer to a Registered dealer
If an un-registered GST vendor, supplies goods/services to a person who is registered under GST, then Reverse Charge mechanism is applicable. Which means that the GST should be paid directly by the receiver of goods/services to the Government instead of the supplier.
The registered dealer will pay CGST and SGST in case of intra state purchases under reverse charge mechanism by self-invoicing for the purchases made.
For all Inter-state purchases from un-registered dealer, the buyer has to pay IGST.
Services catered through an e-commerce operator
In case of an e-commerce operator supplying services then reverse charge mechanism will be applicable to the e-commerce operator. GST has to be paid by e-commerce operator.
For example, Zomato provides food services. So Zomato is liable to pay GST and collect it from the customers instead of the registered service providers.
In case if an e-commerce operator does not have it’s physical presence in the taxable territory, then operator need to appoint a representative for tax related matters, and all the tax liabilities would be completed by the said person on behalf of e-commerce operator.
For Supply of certain goods and services specified exclusively, by CBEC
CBEC has issued an exclusive list of goods and services on which reverse charge mechanism is applicable.
The government has given an exemption limit of Rs. 5,000 per day. If a total purchase is of less than Rs. 5,000 in one day from unregistered person then there is no requirement to pay tax on RCM.
Time of Supply under Reverse Charge Mechanism
Time Of Supply in case of Goods
The time of supply shall be the earliest of the following dates, when supplying under reverse charge mechanism:
- the date of receipt of goods
- the date of payment
- immediately after 30 days from invoice date issued by the supplier
Still, If it is not possible to determine the time of supply, then it is the date of entry in the books of account of the recipient.
Time Of Supply in case of Services
The time of supply shall be the earliest of the following dates under reverse charge:
- The date of payment
- immediately after 60 days from the invoice date of the supplier
When the time of supply cannot be determined then it shall be the date of entry in the books of account of the recipient.
Is Input Tax Credit allowed under Reverse Charge?
Tax paid on reverse charge mechanism will be available for input tax credit if such goods and/or services are used, or will be used, for business purpose. The recipient (i.e., who paid reverse tax) is eligible for input tax credit.
How to Activate Reverse Charge Mechanism in Tally.ERP9
From Gateway of Tally -> Press F11 Key ->
select Statutory and Taxation ->
Change Set Alter GST details to Yes ->
Enable the feature Enable Tax Liability on Reverse Charge to Yes.
How to do Self Invoicing
Select Accounting Voucher from Gateway of Tally and press F9 key to select Purchase Voucher .
Enter supplier Invoice no. ->
Enter Date of purchase ->
select the unregistered dealer from which purchase has been done.
Select the item, quantity and rate (The invoice amount should be more than Rs 5000) .
Press Alt+A to see Tax Analysis. following screen will appear.
To know Reverse Charge Liability to be booked go to
Display -> Statutory Reports -> GST -> GSTR2
How to Book Reverse Charge Liability and be eligible for Input Tax Credit.
To book Reverse Charge Liability and be eligible for ITC.
From the GSTR2 report shown above
go to stat adjustments by pressing Alt+J ->
select Increase of Tax Liability & Input Tax Credit in additional details select Purchase from Un-registered Dealer.
Now a Journal voucher will open with Dr and Cr options. Select CGST with tax percentage of total amount. then again select Dr and repeat the process for with SGST again.
Note: Tax will not be automatically calculated. It needs to be written manually
Now repeat same process with Cr options for both CGST and SGST ledgers entries. By crediting CGST and SGST you have created Tax Liability for your self. Once the Tax Liability has be created, it can be either paid or ITC can be availed for the same.
Select Tax as GST -> select Goods / Services as per actual and save the voucher.
Now Reverse charge has been booked so, if you again go to GSTR2 reports then the screen will look like this. The Reverse Charge Mechanism Liability to be booked is zero and B2BUR invoice -4B will show the Total Input Tax Credit available.
Reverse Charge Mechanism in Tally.ERP9 has been explained both practically and theoretically. Pl feel free to comment , like and share the blog.