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RCM / ITC Reverse Charges: Meaning and Effect in Accounting¶

Overview¶

Reverse Charge Mechanism (RCM) and Input Tax Credit (ITC) under reverse charges are crucial concepts in GST (Goods and Services Tax) compliance. Understanding their impact is essential for businesses using Merciglobal Cloud ERP, especially in terms of accounting treatment, compliance, and input credit claims.

What is Reverse Charge Mechanism (RCM)?¶

Under normal tax compliance, the supplier is responsible for collecting and paying GST. However, under Reverse Charge Mechanism, this responsibility shifts to the recipient of goods or services.

Applicable Scenarios:¶

  • Purchase from unregistered dealers
  • Import of services
  • Notified goods/services (e.g., legal services, goods transport agency)

Impact of RCM on Accounting¶

When RCM applies, the buyer (recipient) must: - Pay GST directly to the government instead of the supplier - Record the transaction in the books with separate liability and ITC entries

Journal Entries:¶

Example: Payment under RCM for services worth ₹10,000 @18% GST

Expense A/C                     Dr. ₹10,000
  To Creditor A/C                              ₹10,000


CGST RECEIVABLE A/C                 Dr. ₹900
SGST RECEIVABLE A/C                 Dr. ₹900
  To EXPENSE A/C                      ₹1,800


EXPENSE A/C                      ₹1,800
   To CGST PAYABLE A/C                 Dr. ₹900
   To SGST PAYABLE A/C                 Dr. ₹900

This reflects: - Recognition of expense - Liability to pay GST under RCM - Claiming ITC on the same - The GST Receivable A/c & GST Payable A/c Effects are nullified.

Input Tax Credit (ITC) under RCM¶

Even though the recipient pays GST under RCM, they are eligible to claim ITC if: - The goods/services are used for business - Tax has been paid and reported in GSTR-3B

🚩 Important Conditions:¶

  • Must be a registered taxpayer
  • Payment should be made through cash ledger
  • Maintain proper documentation

📌 Conclusion¶

Reverse Charge Mechanism and ITC under RCM are compliance-critical components of GST. Proper accounting and documentation can ensure full ITC claim and compliance. Merciglobal Cloud ERP ensures that your business is not only compliant but also efficient and audit-ready.

For any business dealing with RCM, automation and precision in accounting entries are non-negotiable — and that's where Merciglobal Cloud ERP makes all the difference. ✅

For more details or a demo, contact the Merciglobal sales team or your internal support advisor.