Definition
RCM.
Tax liability shifts to recipient of supply.
Statutory Definition
GST Law.
Etymology & Origin
A tax collection mechanism designed to shift the burden of paying tax from the supplier to the recipient, often used where the supplier is in the unorganized sector or located outside the taxable territory.
Full Legal Analysis
Under normal tax rules, the supplier of goods or services is liable to collect tax from the recipient and pay it to the government. Under the Reverse Charge Mechanism (RCM), this liability is reversed: the recipient of the goods or services is liable to pay the tax directly to the government.
RCM is typically applied in situations to widen the tax net, such as when a registered business purchases from an unregistered supplier, or for specific services like goods transport agency (GTA) services, legal services by advocates, and import of services.
A critical feature of RCM under GST is that the recipient must pay the tax in cash; they cannot use their existing Input Tax Credit (ITC) to discharge RCM liability. However, once paid, they can claim the same amount as ITC in the same month, provided the supply is used for business purposes.
The Supreme Court struck down the levy of IGST on ocean freight under RCM for CIF imports, ruling it amounted to double taxation since customs duty is already paid on the total CIF value.
Advocates must carefully identify RCM liabilities for their corporate clients, as failure to pay RCM leads to immediate interest and penalty, and the subsequent loss of the corresponding input tax credit.
This Term in Indian Statutes
Central Goods and Services Tax Act, 2017, 2017
"Government may specify categories of supply where tax is payable on reverse charge basis."
The enabling provision for shifting tax liability to the recipient.
