Friday, May 3, 2024

Understanding GST: Forward Charge vs. Reverse Charge Mechanism

GST Liability Allocation:

  • Forward Charge Mechanism (FCM): Under FCM, the responsibility to collect and remit GST lies with the supplier. This is the standard method where the supplier charges GST on invoices and remits this to the government.
  • Reverse Charge Mechanism (RCM): Under RCM, the responsibility shifts from the supplier to the recipient of the goods or services. This mechanism is triggered under specific scenarios mandated by the GST law.

Detailed Comparison Table:

CharacteristicForward Charge Mechanism (FCM)Reverse Charge Mechanism (RCM)
Tax LiabilityResponsibility lies with the supplier.Responsibility shifts to the recipient.
GST Invoice ChargingGST is charged and shown on the invoice.GST is not charged on the invoice; recipient accounts for it.
Input Tax Credit (ITC)Supplier can claim ITC on inputs.Recipient can claim ITC on the GST paid under RCM.
Registration RequirementMandatory for suppliers crossing the threshold limit.Mandatory for recipients if dealing under RCM, irrespective of their turnover.
Usual ApplicationApplies universally under standard GST transactions.Applied specifically to cases mandated by law.

RCM in E-commerce: Application and Impact

E-commerce operators like Ola, Uber, Airbnb, and Urban Company are subjected to RCM for certain services where they facilitate services between unregistered service providers and consumers. This ensures tax compliance and minimizes evasion.

RCM E-commerce Table:

SectorServiceE-commerce OperatorRCM Applicability
Transportation ServicesRide-sharingOla, Uber, RapidoE-commerce operator pays GST on behalf of drivers.
Accommodation ServicesHotel/Room BookingAirbnb, Oyo, Make My TripPlatform handles GST for unregistered hosts.
Housekeeping ServicesCleaning, RepairsUrban CompanyPlatform responsible for GST on individual services.

List of Goods and Services under RCM


Sr No.Supply of GoodsSupplier of GoodsRecipient of Goods
1Cashew NutsAgriculturistAny registered person
2Bidi LeavesAgriculturistAny registered person
3Tobacco LeavesAgriculturistAny registered person
4Silk YarnIndividuals/entities involved in productionAny registered person
4ARaw CottonAgriculturistAny registered person
5LotteryState Government/UT/Local authorityLottery distributor/agent
6Used Vehicles, etc.Central/State Government/UT/Local authorityAny registered person


Sr. No.Services DescriptionSupplierRecipient
1Services by non-residentIndividual/entity outside taxable territoryDomestic business
2Transport of goods by roadGoods Transport AgencyRegistered business entities
3Legal services by an advocateIndividual advocate or firmAny business entity
4Arbitration servicesArbitral tribunalAny business entity
5Sponsorship servicesAny sponsorBody-corporate or partnership firm
6Select government servicesGovernment or local authorityBusiness entities excluding specific exempt services
7Director servicesDirector of a company/body corporateThe company or body corporate
8Insurance agent servicesInsurance agentEntities engaged in insurance business
9Recovery agent servicesRecovery agentBanking/financial institutions
10International transport of goodsPerson outside taxable territoryCustoms station in India
11Intellectual property rightsCopyright holder (Author, etc.)Publisher, music company, producer
12E-commerce transport servicesTaxi driver or Rent-a-cab operatorPlatform users (via e-commerce operator)
13RBI Overseeing Committee servicesMembers of the Overseeing CommitteeReserve Bank of India

Conclusion: Strategic Importance of RCM

The Reverse Charge Mechanism ensures compliance, broadens the tax base, and counters evasion. It demands adaptability in accounting systems and business operations to manage cash flows effectively. A comprehensive understanding of RCM fosters compliance and enhances the transparency of the GST framework, ensuring a smooth taxation process for all stakeholders involved.