Reverse charging mechanism a procedural way of discharging tax liabilities and formalities by buyer of services or goods or both instead of seller.
Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the liability may be cast on the recipient under the reverse charge mechanism. Reverse charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply.
Provisions applicable to buyer or recipient in case of reverse charging
If you as a recipient of services or goods or both are liable to pay tax under reverse charge mechanism, you have to comply with all the provisions applicable under GST to a registered person.
For example, following procedural as well as documentary functions are performed when a registered person makes a supply.
- Issue a tax invoice
- Furnishing details in monthly returns
- Calculating and remitting the tax liability
- Documenting the charging as well as payment cycles
Above are the general functions that a registered person has to perform to comply with law. When you pay under RCM, it becomes your obligations to comply with these rules.
Tax should be charged by buyer/recipient of goods under reverse charging (RCM)
You must be aware that under GST tax liability arises of time of supply. So to find out the point at which you will be liable to charge tax on supplies received and fall under RCM, you first need to check the time of supply.
In case of RCM, the time of supply is earliest of:
- The date of the receipt of goods; or
- The 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; or
- The date immediately following 30 days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.
If you are not able to find the time of supply as per above list then time of supply will the date on which you account the transaction in your books of accounts.
Point of taxation under Reverse Charge Mechanism (RCM) in case of receipt of services
In case of services the time of supply should be earliest of:
- Date of actual payment or date of accounting of payment, whichever is earliest,
- Date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.
In case of import of services from associated parties, the time of supply should be earliest of:
- Date of accounting or
- Date of payment
Accounting entries of tax paid under RCM
Before moving to accounting treatment and entries that should be posted lets understand some basic points.
- Expense needs to be booked,
- Vendor should be credited,
- Input credit is available but only after payment of tax
Considering above points, we suggest to have a separate accounting ledger specifically for tax paid under Reverse Charge and should not be clubbed with normal tax ledgers.