What is RCM in GST journal entry?

Reverse Charge Mechanism (RCM) in GST Journal Entry

In the context of the Goods and Services Tax (GST) in India, the Reverse Charge Mechanism (RCM) is a provision that shifts the liability for paying GST from the supplier to the recipient of goods or services. This is applicable in specific scenarios, such as imports and certain types of domestic transactions.

Journal Entry for RCM Transactions

When a business records an RCM transaction in its GST journal, the following entries are typically made:

Debit:

• Expenses/Assets: The amount of the expense or asset incurred.
• Input Tax Credit (ITC): The amount of eligible GST input tax credit that can be claimed.

Credit:

• Accounts Payable (Net Purchase Amount): The net amount of the purchase or expense.
• Output Tax Liability for GST: The amount of GST payable on the transaction.

Explanation:

In an RCM transaction, the recipient of goods or services is responsible for paying GST. The supplier is not required to charge GST on the invoice. Instead, the recipient must include the GST amount in both its input tax credit (ITC) and output tax liability accounts.

The debit to expenses/assets represents the cost of the transaction. The debit to ITC represents the GST input tax credit that can be claimed. This credit reduces the overall GST liability of the business.

The credit to accounts payable represents the net amount owed to the supplier. The credit to output tax liability represents the GST payable on the transaction.

Example:

Suppose a business imports goods worth INR 100,000. The applicable GST rate is 18%.

Journal Entry:

Debit:

• Import Expense: INR 100,000
• ITC: INR 18,000

Credit:

• Accounts Payable: INR 100,000
• Output Tax Liability for GST: INR 18,000

Implications of RCM

The Reverse Charge Mechanism has several implications for businesses:

• It shifts the responsibility for paying GST from the supplier to the recipient.
• It reduces the compliance burden on suppliers.
• It allows recipients to claim ITC on GST paid on imports or certain domestic transactions.
• It prevents evasion of GST by ensuring that all taxable transactions are accounted for.