On July 1, 2017, the Goods and Services Tax (GST) was introduced in India and this has consolidated the convoluted system of indirect taxes into a single umbrella. The main philosophy of GST is to have a smooth value chain of tax credits. In a normal GST, the supplier imposes the tax, collects it from the recipient and pays the tax to the Government. However, in certain sensitive or risky sectors, the Government would rather prefer to collect the tax directly from the recipient, in order to minimise evasion. It is here that the Reverse Charge Mechanism or RCM comes into effect.
Reverse Charge shifts the tax liability from the supplier to the buyer.This is, apparently, a minor change but with far-reaching effects including the compliance procedures, cash flow, eligibility to Input Tax Credit (ITC) and the general management of business. RCM is not merely a formality of compliance, but it transforms financial and tax planning, especially where business has unregistered suppliers, imported services, or notified groups of goods and services.
This blog will be a detailed exploration of Reverse Charge Mechanism or RCM under GST in India. Here, we will explore when and how it applies, who is impacted, legal provisions, and how to comply efficiently.
What is Reverse Charge Mechanism (RCM)?
Reverse Charge Mechanism (RCM) under GST refers to a provision where the recipient of goods or services is liable to pay GST, instead of the supplier.
Key Characteristics of RCM under GST:
- Tax is paid by the recipient directly to the government.
- Recipients must self-invoice and maintain additional documentation.
- RCM taxes must be paid in cash. The ITC cannot be used for payment.
- ITC can be claimed later, subject to fulfilment of specified conditions.
Legal Provisions Governing RCM:
- Section 9(3), CGST Act – RCM on notified goods or services.
- Section 9(4), CGST Act – RCM on supplies from unregistered dealers (presently suspended, but partially active for notified classes).
- Section 5(3) and 5(4), IGST Act – Similar provisions for inter-state and import transactions.
The law empowers the GST Council to notify the goods and services where RCM will apply.
When Does Reverse Charge Apply?
RCM is not a blanket rule. It applies in three primary scenarios:
A.RCM on Notified Goods and Services (Section 9(3))
The Government issues periodic notifications under this section of the GST Act. Common notified categories include:
Goods:
- Cashew nuts (not shelled or peeled)
- Bidi wrapper leaves (tendu leaves)
- Raw cotton (from agriculturist)
- Used vehicles sold by Government departments
Services:
- Legal services provided by an advocate or firm to a business entity
- Services provided by a Goods Transport Agency (GTA)
- Sponsorship services provided to companies
- Renting of motor vehicles by a non-corporate to a body corporate
- Services offered by a director to the company
- Recovery agent services offered to banks or NBFCs
B.RCM on Import of Services (Section 5(3), IGST Act)
Any service received from a supplier located outside India by a registered person is subject to IGST under RCM, regardless of the nature of service.
Examples:
- Cloud-based software or platform services from a foreign SaaS provider
- Marketing or consultancy services offered by a non-resident
C. RCM on Supplies from Unregistered Dealers (Section 9(4))
This provision was originally applicable to all inward supplies from unregistered persons, but was deferred due to industry concerns. Currently, it applies only when:
- The recipient is a notified class of registered persons (such as, promoters in real estate sector)
- The goods or services are notified by the Government
In construction, if a promoter purchases cement or capital goods from an unregistered supplier, RCM applies under Section 9(4) of the GST Act.
Key Parties Involved in an RCM Transaction
A.Supplier:
- Does not charge GST
- May or may not be registered
- Only issues a basic invoice (no tax line items)
B.Recipient (You):
- Must pay GST under RCM
- Must generate a self-invoice and payment voucher
- Must report RCM liability in GSTR-3B
- Can claim ITC later if conditions are met
RCM puts the entire onus of tax compliance on the recipient. Hence, businesses must maintain internal workflows to detect and process RCM transactions accurately.
GST Registration Requirements under RCM
As per section 24 of the CGST act, any person liable to pay tax under reverse charge must necessarily register even though his turnover falls below the normal threshold.
Implication:
- Registration may be necessary even in a singular RCM transaction (e.g. hiring a GTA or a lawyer).
- Taxpayers under composition schemes are not allowed to enter RCM transactions (other than inward supplies under RCM).
Therefore, even small companies or startups have to make plans in case they are involved in any services where RCM will be applicable.
Payment & Input Tax Credit (ITC) Under RCM
How to Pay RCM Tax:
- Must be paid using Electronic Cash Ledger
- Cannot use ITC to pay RCM liability
- Paid in the same month the liability arises
How to Claim ITC on RCM:
- Once tax is paid, ITC can be claimed in the same or subsequent month
- ITC is allowed only if:
- Goods/services are used for business
- GST payment proof is available
- Invoice and payment voucher are generated
Time of Supply Rules (RCM Specific):
These rules determine when tax liability arises.
For Goods:
- Earliest of:
- Date of receipt
- Date of payment
- 30 days from invoice
For Services:
- Earliest of:
- Date of payment
- 60 days from invoice
Accurate recording of these dates is vital to avoid interest on delayed RCM payments.
Practical Examples of RCM Transactions
Let’s break down some practical use cases where RCM is encountered frequently:
A.Legal Services
A private limited company engages an advocate for litigation advice. The advocate issues an invoice without GST. The company must:
- Pay 18% GST under RCM
- Claim ITC if used for business
- Report in GSTR-3B under RCM section
B.Goods Transport Agency (GTA)
A manufacturing unit hires a GTA. If the GTA has opted for 5% GST (RCM), then:
- Recipient must pay tax under RCM
- Must maintain consignment notes and self-invoice
- Can claim ITC if conditions are satisfied
C.Import of Marketing Services
An Indian tech firm outsources digital marketing to a Singapore-based agency. IGST is paid under RCM:
- Applicable under import of services
- Tax paid in cash ledger
- Full ITC can be claimed if service used for business promotion
D.Real Estate – Cement from Unregistered Dealer
Promoters in the real estate sector buying cement from unregistered sources must:
- Pay GST @28% under RCM
- Maintain self-invoices
- Cannot claim ITC if the project is for affordable housing (as per ITC denial rules)
Compliance and Documentation under RCM
RCM compliance goes beyond payment — it involves a detailed documentation trail.
Required Documents:
- Self-Invoice – when the supplier is unregistered or doesn’t charge GST
- Payment Voucher – for every RCM payment made
- Invoice Register – mapping RCM liabilities monthly
- GSTR-3B – liability and ITC reported in correct columns
- GSTR-9 – summarised annual RCM figures for audit and reconciliation
Inaccurate RCM reporting is a frequent red flag during departmental GST audits, especially for high-value service sectors like IT, logistics, and consulting.
Consequences of Non-Compliance
RCM compliance is mandatory and time-sensitive. Delays or omissions can lead to:
Interest Liability-
- 18% interest per annum on delayed RCM payments
Blocked ITC
- If RCM is not paid correctly, the ITC claim is invalid and may be reversed
Penalty and Legal Risk
- Penalty under Section 122 for tax evasion or incorrect filings
- Potential disallowance of vendor ITC chain
RCM requires businesses to proactively assess their vendors and services monthly, identify RCM-triggering events, and follow a compliance calendar.
Final Thoughts
Reverse Charge Mechanism or RCM under GST is not only a compliance challenge but a strategic tax requirement that the businesses have to learn to handle. Are you a startup using foreign SaaS, a manufacturer who hires local transporters, or a developer who uses unregistered vendors? RCM will impact your cash flow, your ITC eligibility, and your legal position under GST.
When RCM checks are incorporated into procurement, finance, and accounting processes, and when businesses keep abreast of government notifications, they can transform RCM into a compliance advantage.
Create a strong internal system, speak to tax experts, and do not view RCM as a post-facto adjustment. Compliance is not optional in the GST era. Rather, it is a source of competitive advantage.
