INDEX
- What is Reverse Charge Mechanism (RCM)?
- Why Was RCM Introduced?
- Types of Reverse Charge Mechanism
How to Pay GST Under RCM?
GST Return Reporting for RCM
Input Tax Credit (ITC) on RCM
- Consequences of Non-Compliance
- Best Practices to Manage RCM
Reverse Charge Mechanism (RCM) under GST in India
The Goods and Services Tax (GST) in India is primarily a self-assessed tax system, where suppliers collect and deposit the tax to the government. However, there’s an important exception to this rule — the Reverse Charge Mechanism (RCM).
Under RCM, the recipient of goods or services is liable to pay GST instead of the supplier. This shift in responsibility is significant and affects both compliance and accounting processes.
In this article, we’ll break down the concept of RCM, when it applies, who it affects, and how to comply with the rules under Indian GST law.
1. What is Reverse Charge Mechanism (RCM)?
Reverse Charge Mechanism means that the liability to pay GST shifts from the supplier to the recipient of goods or services.
This is contrary to the usual practice where the supplier collects the tax and pays it to the government. Under RCM, the recipient must self-invoice, calculate the applicable GST, and pay it directly to the government.
2. Why Was RCM Introduced?
The main reasons for introducing RCM in GST are:
To bring unregistered suppliers under the tax net.
To ensure tax compliance in high-risk sectors or transactions.
To track purchases from unorganized sectors.
To plug revenue leakage and promote tax transparency.
3. Types of Reverse Charge Mechanism
RCM under GST applies in three broad scenarios:
(a) Specified Categories of Goods or Services
The government has notified certain goods and services where RCM is mandatory. For example:
| Service/Goods | GST Rate | Recipient |
|---|---|---|
| GTA (Goods Transport Agency) | 5% | Registered person |
| Legal services by an advocate | Nil | Business entity |
| Sponsorship services | 18% | Body corporate or partnership firm |
| Import of services | Varies | Importer |
| Supply of cashew nuts, bidi wrapper leaves, etc. by an agriculturist | Varies | Registered dealer |
🔖 Legal Reference: Section 9(3) of CGST Act, 2017
(b) Supply from Unregistered to Registered Dealer (URD Transactions)
Under Section 9(4) of the CGST Act, RCM applied if a registered person purchased goods/services from an unregistered person.
However, as per the latest notifications (updated in 2019 and still valid as of 2025), RCM under 9(4) is applicable only to specified sectors, such as:
Promoters/Builders purchasing from unregistered suppliers (for construction).
(c) Import of Services
If a business or individual imports services into India (e.g., software, consultancy), RCM applies, and the recipient must pay IGST under reverse charge.
4. How to Pay GST Under RCM?
Self-invoice the transaction (if the supplier hasn’t issued a GST invoice).
Calculate the GST payable (CGST + SGST or IGST).
Pay the tax in cash only — Input Tax Credit (ITC) cannot be used to pay RCM liability.
Claim the paid tax as ITC in the next return, if eligible.
5. GST Return Reporting for RCM
| Return Form | Details to Report Under RCM |
|---|---|
| GSTR-1 | Not applicable (supplier doesn’t report) |
| GSTR-3B | Report RCM liability in Table 3.1(d) and ITC claim in Table 4(A)(3) |
| GSTR-9 | Annual summary of RCM transactions |
6. Input Tax Credit (ITC) on RCM
Yes, Input Tax Credit can be claimed on tax paid under RCM, provided:
The goods/services are used for business purposes.
The recipient has paid the tax in cash.
All ITC eligibility conditions under Section 16 of CGST Act are met.
7. Consequences of Non-Compliance
Interest & Penalty on unpaid RCM liability.
Disallowance of ITC if RCM not correctly paid.
Scrutiny & Notices from GST Department
8. Best Practices to Manage RCM
Maintain a RCM checklist for your purchases.
Train your accounting team to identify RCM invoices.
Reconcile RCM payments monthly with GSTR-3B.
Avoid dealing with unregistered suppliers, unless necessary.
Frequently Asked Questions (FAQs) –
1. Is RCM applicable to all purchases from unregistered dealers?
No. As of now, only specific sectors (like construction) are notified under Section 9(4).
2. Can I use ITC to pay RCM?
No. You must pay RCM liability in cash first, and then claim ITC if eligible.
3. What happens if I forget to pay RCM?
You may face interest, penalty, and disallowance of ITC. It’s advisable to correct the error and pay the tax ASAP.
Key Takeaways
The Reverse Charge Mechanism under GST ensures better compliance and tax coverage, especially in high-risk or unorganized sectors. While it adds a layer of responsibility for the recipient, proper systems and awareness can make RCM compliance smooth and error-free.
If you’re a registered GST taxpayer, it’s crucial to identify RCM transactions, pay taxes on time, and claim ITC correctly to avoid any penalties or cash flow issues.