What is the 5000 limit for RCM under GST?

Unveiling the Evolution of Reverse Charge Mechanism (RCM) in GST: From 5000 Limit to Current Thresholds

Under the Goods and Services Tax (GST) regime, the Reverse Charge Mechanism (RCM) plays a crucial role in ensuring tax compliance. Prior to the implementation of GST, the RCM was triggered when the value of purchases from unregistered suppliers exceeded ₹5,000. This threshold created a significant challenge in monitoring and enforcing tax obligations for small businesses and informal traders.

In response to these concerns, the GST Council introduced significant revisions to the RCM provisions in October 2017. The previous threshold of ₹5,000 was abolished, effectively eliminating the need to determine the registration status of suppliers for purchases below this amount.

Current RCM Thresholds

Under the GST regime, the RCM applies to certain categories of supplies made by unregistered suppliers, regardless of the value of the transaction. These categories include:

• Supply of goods or services to a registered person
• Sale of goods through e-commerce operators
• Services provided by an overseas supplier
• Supply of online information and database access or retrieval services

For these categories, the recipient of the goods or services is responsible for paying the GST on the transaction. This ensures that tax is collected even when the supplier is not registered under GST.

Benefits of Revised RCM Provisions

The revision of RCM thresholds has brought several benefits:

• Increased Tax Compliance: By removing the ₹5,000 threshold, the GST Council has made it easier for tax authorities to track and enforce compliance for small businesses and informal traders.
• Reduced Burden on Small Businesses: The elimination of the threshold has reduced the administrative burden on small businesses that previously had to determine the registration status of suppliers.
• Simplified GST Administration: The uniform application of RCM provisions across all categories of supplies has simplified the GST administration process and reduced the risk of disputes and litigation.

Conclusion

The evolution of the Reverse Charge Mechanism under GST, from the 5000 limit to the current thresholds, has been a significant step in improving GST compliance and simplifying tax administration. By abolishing the ₹5,000 threshold, the GST Council has effectively expanded the scope of RCM, ensuring that all taxable supplies, regardless of their value, are subjected to GST. This has resulted in a more equitable and efficient GST system that benefits both taxpayers and tax authorities alike.