REVERSE CHARGE MECHANISM (RCM)

After the implementation of GST there are lots of confusions arises among the common people, traders, business man and manufacturer about the taxation system, the main confusion surrounded between the two taxation terms that is input tax credit and reverse charge mechanism (RCM).

As our GST rule all we know in a business, if the annual turnover in a financial year is within Rs 20 lakh (Rs10 lakh for north eastern and hill states) then he have not required paying GST. But the confusion arises when the rule is going to the market.

From the earlier discussion How GST works it was shown that the whole GST process is actually a chain system. That means if manufacturer pay GST when he buy inputs and wholesaler buy the finished product with the proper GSTN(GST registration number),then wholesaler are eligible to claim input tax credit from the government.

The Indian industrial sector are divided two parts organized sector and unorganized sector. Many big industrial sectors depend on small and unorganized sector. For example in textile industry some material which is mainly hand stitching and where embroidery is needed  has come mainly from the unorganized sector where large number of house hold engaged with it as a part time job. But after the implementation of GST when this unregistered seller supply their product to the registered seller then registered seller have to pay the whole tax when he sale the product because unregistered seller was not paying GST when he sale to the registered seller and here the reverse charge mechanism come into action .About this bitterness many registered and large seller disagree to buy product from their unorganized seller and pruning their buying.

The concept of reverse charge mechanism actually borrowed from the service tax. In earlier tax system reverse charge mechanism exists in service tax but we do not accustom with the term. Reverse charge is completely new tax on goods after the implementation of GST. Actually it is an initiative to take organized and unorganized sector into under a one umbrella .But in present scenario small suppliers are facing panic with the new taxation system.

Existence of Reverse charge on service tax

To clear our idea how reverse tax exist in service tax take an example suppose you are a client and you borrow a lawyer , here lawyer is a service provider and you are a service receiver. Here lawyer   pay tax to the government because he provide the service and moreover you pay the tax as a service receiver. Same way in insurance also reverse charge exists.

Reverse charge on goods

The term reverse charge is completely new for goods after the implementation of GST. From the Input tax credit we know that goods comes in the hand of the final consumer through crossing multiple stages .i.e manufacturer sale the finished product to the wholesaler ,wholesaler sale the labeled product to the retailer and retailer sale the labeled product to the final consumer. In the new GST system if  every stage i.e manufacturer ,wholesaler ,retailer pay GST with GST registration number then wholesaler ,retailer are eligible to claim input tax credit from the government .So this is a chain and in this chain manufacturer ,wholesaler ,retailer must be registered and they have to be GSTN. But the confusion arises if you are a small and unregistered supplier and the buyer of your product are registered. In that case if he buy product from you at RS100 and sale the product including his cost at RS120, then he have to pay GST on Rs120 and in that case he is not eligible to claim input tax credit because you are a unregistered seller and you have not paid GST on RS100.So here the buyer of your product pay the reverse charge.

Now for that reasons in current scenario in India registered and big manufacturer are unwilling to buy the product from the small unregistered supplier, moreover the billing system confused the traders as they are not so much habituated. But it will be  expected that continuous intervention of the government and the introduction of the e-billing system by the central government have made some relief  of the traders.