What is the Forward Charge Mechanism in GST With Example?

Goods and Services Tax (GST) has changed the way taxes are assessed and collected in India. The implementation of the forward charge mechanism, which places the responsibility of collecting and remitting the tax on the supplier, is one of the key aspects of the GST system. 

In this article, we will understand what the forward charge mechanism under GST is and explore the applicability and advantages of the forward charge mechanism. 

What is the forward charge mechanism in GST?

FCM full form in GST is forward charge mechanism and represents a mechanism where the responsibility of collecting tax and remitting it to the government is on the suppliers of the goods and services. Under this system, the recipients are relieved from the burden of direct tax payment, which makes it easy to comply with the GST regulations.

Applicability of FCM in various GST scenarios

Applicability of FCM in various scenarios involves specific groups of taxpayers, including regular taxpayers, casual taxable persons, non-resident taxable persons, and those under the GST composition scheme. For example, if someone organises a one-time event (casual taxable person), FCM makes sure they are responsible for paying taxes related to that event. Similarly, for someone temporarily doing business in the country (non-resident taxable person), FCM simplifies the tax process. Even businesses choosing the GST composition scheme need to follow FCM, ensuring simplicity in compliance.

Advantages of the forward charge mechanism

There are several advantages of the forward charge mechanism, making tax compliance more streamlined. The key benefits are given below:

Simple and clear taxes

The forward charge mechanism makes taxes simpler and easier to understand. This simplicity reduces the complexity of tax calculations, making it easier for taxpayers to fulfil their obligations without undue complications.

Transparent tax process

FCM ensures you can see exactly how much tax you're paying due to the amounts being mentioned clearly on the supplier invoices. This helps everyone know how much they owe and why.

Playing by the tax rules

FCM encourages everyone to follow the tax rules. By making suppliers responsible for tax payments, it reduces the chance of people trying to avoid paying taxes and encourages everyone to do their part.

Efficient tax collections

FCM makes collecting taxes smoother. When suppliers handle tax payments, the government can collect what it's owed more efficiently, helping things run more smoothly for everyone.

Process of collecting and remitting GST under forward charge

Now that you know what is forward charge mechanism in GST, Here is how the process of collecting and remitting GST under forward charge work:

Invoice generation by suppliers

Suppliers create invoices for goods or services they provide, clearly indicating the relevant tax amount.

Payment by recipients

Recipients pay the total invoice amount, which includes both the cost of goods or services and the applicable taxes, to the suppliers.

Tax collection and GST return filing by suppliers

Suppliers collect the tax amount from the recipients, file their GST returns, disclose the collected taxes and remit the same to the government.

Input tax credit for registered recipients

Recipients registered under GST can then claim Input tax credit (ITC) for the tax amounts they paid on their purchases at the time of filing their own tax returns. This, however, is contingent on suppliers fulfilling their tax obligations by submitting the taxes to the government.