For a long time, many business owners and professionals have questioned why the Reverse Charge Mechanism (RCM) was brought under the ambit of the Goods and Services Tax (GST). What is the necessity of paying GST under RCM and subsequently availing it as an input credit? Is this not an unnecessarily tedious mechanism, especially for micro and small entrepreneurs? How does this system contribute to revenue generation?

The Challenges of RCM for Small Businesses

Many small business owners and professionals express concerns over the lack of clarity surrounding RCM, particularly because its regulations have changed multiple times. While the Indian government emphasizes the idea of ‘Ease of Doing Business,’ the ambiguity of such tax laws often complicates compliance for MSMEs.
One of the biggest challenges MSMEs face is the increased cost of compliance. The burden of funding RCM liabilities adds to their working capital requirements, making it difficult for them to sustain operations smoothly. The time and effort spent on ensuring compliance can be better utilized in business growth and expansion.
Discussions with senior professionals in the industry, including both practicing and non-practicing experts, reveal an entirely different perspective. They argue that RCM serves as a tool to track businesses that evade GST registration under the pretext of not exceeding the threshold limit.
Many vendors and service providers deliberately ensure that their turnover per customer does not exceed Rs. 20 lakhs, thus avoiding mandatory GST registration. However, when their cumulative business across multiple customers is taken into account, they are, in fact, liable for registration. The RCM mechanism helps bring such unregistered dealers into the tax net, thereby increasing overall GST compliance and revenue collection.

Striking a Balance: Compliance vs. Business Growth
While the government’s intention behind RCM may be commendable, it raises an important question—are we unnecessarily burdening small businesses with excessive compliance requirements? Should MSMEs, which are already struggling to survive in a competitive market, be subjected to additional procedural complexities?
Instead of imposing compliance burdens on law-abiding taxpayers, the government should explore alternative mechanisms to identify and track businesses that evade GST registration. Tax policies should aim to facilitate business growth rather than act as a policing mechanism that creates additional hurdles for small entrepreneurs.

To Sum It Up
RCM, while beneficial in identifying tax evasion, also brings significant compliance challenges for small businesses. Striking the right balance between revenue collection and ease of doing business is crucial for India’s economic growth. The government should consider revisiting its approach to ensure that tax policies promote a business-friendly environment without compromising revenue integrity.