All You Need to Know about Raising a GST Invoice for RCM

The Reverse Charge Mechanism ( RCM ) is an important aspect of the Goods and Services Tax ( GST ), where the recipient of goods or services is liable to pay the tax instead of the supplier. To comply with RCM, businesses must raise a tax invoice that meets specific requirements.

A proper invoice format shall be followed by the recipient to avoid the penalties as the recipient issues the GST invoice.. It shall include all the basic details of the goods or services supplied by them. In this article, the important aspects of tax invoice generation will be discussed including the basics of RCM, supplies that come under RCM, its applicability, the difference between an RCM invoice and a regular invoice, GST Returns to be filed, and the non-compliance of the RCM GST invoice format.

WHAT IS REVERSE CHARGE MECHANISM

The Reverse Charge Mechanism is a tax collection approach within the GST framework that transfers the tax payment responsibility from the supplier to the recipient of goods or services. Unlike the standard procedure where the supplier is responsible for collecting and remitting the tax to the government, RCM mandates that the recipient directly pays the tax.

Under the RCM, the obligation to pay GST is transferred from the supplier to the recipient of goods or services. This shift in responsibility means that the recipient, instead of the supplier, is directly accountable for remitting GST to the government. RCM aims to improve tax compliance and secure tax collection, particularly in scenarios prone to tax evasion or non-compliance.

It is applicable to certain notified goods and services as specified by the government. This mechanism is especially pertinent when a registered recipient acquires goods or services from an unregistered supplier, thereby broadening the tax base to include potentially untaxed transactions. Additionally, specific sectors like real estate are required to adopt RCM for designated transactions, ensuring these high-risk areas meet their tax obligations.

When RCM is in effect, the recipient must issue a self-invoice for the transaction, as the supplier is not responsible for providing a tax invoice. This self-invoicing is essential for maintaining precise financial records and ensuring transparency in tax documentation. Furthermore, the recipient can claim input tax credit for the GST paid under RCM, provided they adhere to the conditions outlined in the GST law. This feature allows businesses to offset the tax paid against their output tax liability, preventing a cumulative tax burden.

GST payments under RCM must be made in cash and cannot be offset against input tax credits, emphasising the need for sufficient liquidity to manage these financial responsibilities. The recipients must keep detailed records of all transactions subject to RCM and report them accurately in their GST returns.

To get a Comprehensive Guide on RCM Click here.

APPLICABILITY OF RCM

The two types of RCM situations. The first one is  governed by Section 9(3) of the CGST/SGST Act, 2017 and Section 5(3) of the IGST Act, depending on the nature of the supply or the supplier. The second scenario, addressed by Section 9(4) of the CGST/SGST Act and Section 5(4) of the IGST Act, involves taxable supplies made by an unregistered person to a registered person. The situations of RCM applicable are as follows:

When Supply of Goods or Services Listed by the CBIC

The CBIC is authorised to make a list of services or goods supplied to make it under the RCM. The RCM provision 9(3) of CGST Acts does not waive the GST liability, however, the same will be shifted from the supplier to the recipient.

Supply from an unregistered dealer to a registered dealer

According to Section 9(4) of the CGST Act, if an unregistered supplier provides goods or services to a GST-registered recipient, the RCM is triggered. In this situation, the registered recipient is responsible for directly paying the GST to the government, rather than the unregistered supplier. The recipient must also issue a self-invoice for these transactions to ensure proper documentation and compliance with GST regulations.

For intrastate transactions, the registered recipient must pay both Central GST and State GST under RCM. In contrast, for inter-state transactions, Integrated GST ( IGST ) is applicable. The government periodically updates the list of goods and services that fall under this reverse charge provision.

RCM FOR SUPPLIES

Supplies of Goods under RCM as Listed by the CBIC

The Central Board of Indirect Taxes and Customs ( CBIC ) has notified specific goods and services that fall under the RCM. The following goods are liable for RCM:

1. Any Goods which are imported into India
2. Cashew nuts, not
3. shelled or peeled
4. Bidi wrapper
5. leaves(tendu)
6. Tobacco leaves
7. following essential oils other than of citrus fruit namely: -

a) of peppermint Mentha piperita);

b) of other mints : spearmint oil, Water mint-oil (ex-mentha aquatic), Horsemint Oil, Bergamentoil, Mentha

8. Silk Yarn
9. Raw Cotton
10. Supply of Lottery
11. Used vehicles, seized and confiscated goods, old and used goods, waste and scrap
12. Priority Sector Lending Certificate
13. Cement
14. Capital goods

Supplies of Services under RCM as Listed by the CBIC

1. Purchase of any goods and receipt of any service from an unregistered person
2. Supply of Services by GTA
3. Advocate services
4. Services supplied by an arbitral tribunal
5. Services provided by way of sponsorship
6. Services supplied by the Central Government, State Government, Union territory or local authority to a business entity ( exclusions are there)
7. Services supplied by a director of a company or a body corporate
8. Services supplied by an insurance agent
9. Services supplied by a recovery agent
10. Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright
11. Security services (services provided by way of supply of security personnel)
12. Services provided by way of renting of a motor vehicle
13. Radio taxi or passenger transport services provided through an E- commerce operator
14. Renting residential places
15. Housekeeping services
16. Services supplied by individual Direct Selling Agents
17. Services provided by an agent of business correspondent

WHY TAX INVOICE IS MANDATORY IN RCM

A tax invoice is a document that provides evidence of a transaction, confirming that the supply of goods or services has taken place. This is particularly important under the RCM, where the recipient is responsible for paying the GST. The tax invoice helps determine the GST liability of the recipient, who must remit the tax directly to the government. Additionally, it enables the recipient to claim input tax credit for the GST paid under RCM, which can be offset against their output tax liability.

Moreover, a tax invoice is essential for ensuring compliance with GST regulations and maintaining accurate records. Under RCM, the recipient must generate a self-invoice, making the tax invoice a vital component of this process. It also facilitates verification and audit of transactions, promoting transparency and accuracy in the financial records. By keeping detailed and accurate tax invoices, businesses can effectively manage their GST obligations and tax reporting.

To get a Comprehensive Guide on RCM Click here.

HOW TO RAISE A TAX INVOICE FOR RCM

A GST invoice, which includes all transaction details and both input and output tax amounts, must be prepared and issued by every GST-registered business to their customers. To ensure accurate tracking and maintenance of RCM transactions, it is crucial to properly document all related transactions. 

In the RCM, self-invoicing refers to the process where the recipient of goods or services, rather than the supplier, generates and issues an invoice for the transaction. This is a unique requirement under RCM, where the recipient is liable to pay GST on the reverse charge basis.

There will be a proper invoice format in which all basic details including Supplier's details, Recipient's details (your business), Description of goods/services, GST rate and amount..etc. The mandatory columns shall be filled for availing RCM benefits.

RCM GST Invoice Format

1. Invoice Number
2. Invoice Date: Date of issue
3. Recipient's Details:
4. Name
5. GSTIN (GST Identification Number)
6.  Address
7. Supplier's Details:
8. Name
9. GSTIN (if registered)
10. Address

5. Description of Goods/Services
6. HSN/SAC Code
7. Unit or quantity of products
8. GST Rate Applicable GST rate for the supply
9. GST Amount payable on reverse charge basis
10. Total Amount (value of the supply)
11. Reverse Charge Mechanism (RCM) Mentioning in the invoice
12. Signature of authorised person

DIFFERENCE BETWEEN AN RCM GST INVOICE AND A REGULAR INVOICE

In the RCM, the recipient takes on the responsibility of paying GST, unlike in regular transactions where the supplier bears this duty. An RCM invoice serves as a notification to the recipient to directly calculate and remit the tax to the authorities. In contrast, a regular invoice, issued by the supplier, includes the GST amount to be collected from the recipient and deposited with the government.

The key difference lies in the GST liability, which falls on the recipient in an RCM invoice, requiring them to directly pay the tax. Conversely, in a regular invoice, the supplier is accountable for collecting GST and remitting it to the government.

An RCM invoice must explicitly state that the tax is payable under the reverse charge mechanism, without displaying the GST amount. Instead, it should include a declaration stating the recipient's responsibility for tax payment. In contrast, a regular invoice details the GST amount, applicable tax rates, and provides a breakdown of the taxable value and total amount payable, including taxes.

The recipient must ensure compliance with RCM invoices by maintaining accurate records, reporting reverse charge transactions in their GST returns, and paying the tax. They may also claim ITC if eligible. In contrast, suppliers issuing regular invoices must ensure accurate invoicing, collect GST from recipients, report transactions in their GST returns, and claim ITC on their purchases.

RCM invoices apply to specific scenarios outlined in GST law, such as transactions involving goods and services, supplies from unregistered to registered dealers, and notified supplies. Regular invoices are used in general transactions where the supplier is responsible for charging GST and remitting it to the government.

To get a Comprehensive Guide on RCM Click here.

GST RETURNS

The RCM sales can be shown in following GST Returns:

GSTR-1: This return is applicable for businesses that do not have any tax liability to pay to the government. Once this online GST return is filed, there is no additional tax payment required from the company. Table 4B is exclusively kept for this purpose. All outward supplies on which reverse charge is applicable and which has been excluded in 4A should be shown in 4B.

GSTR-3B: Businesses must fill out GSTR-3B to provide a summary of their GST liabilities for a specific period. This return includes details of outward supplies made by the organisation, calculates the tax liability, and claims the input tax credit based on the summary provided. In Table 3.1, details of outward supplies and inward supplies subject to reverse charge, where tax is payable by you, should be shown.

GSTR-9: This return is required for taxpayers with an annual turnover exceeding 2 crores. It must be filed annually and includes detailed information about both outward and inbound supplies made during the financial year. GSTR-9 consolidates information from GSTR-1, GSTR-2A, and GSTR-3B, providing a comprehensive overview of tax liabilities and payable amounts.

To get a Comprehensive Guide on RCM Click here.

CONSEQUENCES FOR NON-COMPLIANCE

All businesses under RCM are required to include a comprehensive description of each item on their GST invoices to meet regulatory standards. Non-compliance with these guidelines may lead to substantial penalties.

Failure to comply with the Reverse Charge Mechanism (RCM) invoice format requirements can result in serious consequences. A penalty under Section 125 of the Section 125 of the CGST Act may be imposed, which can amount to as much as ₹25,000. Additionally, any delays in the payment of GST can attract interest charges.

One of the repercussions of non-compliance is the rejection of Input Tax Credit (ITC) claims. Incomplete or incorrect invoices can lead to the denial of these claims, which can adversely affect the financial situation of the business. Moreover, the businesses may face delays in the processing of GST refunds, exacerbating cash flow issues.

Non-compliance also increases the scrutiny and audits by tax authorities. This not only consumes time and resources but also poses a risk to the business’s reputation. Consistent non-compliance can damage the credibility of the business, making it difficult to maintain trust with stakeholders and clients.

In more severe cases, businesses may face prosecution under Section 132 of the CGST Act. This can lead to legal issues and additional financial penalties. Furthermore, repeated non-compliance may result in the cancellation of GST registration, effectively halting the business operations until compliance is restored.

To get a Comprehensive Guide on RCM Click here.