Reverse Charge Mechanism (RCM) Under GST – Complete Updated Guide

GST has simplified India’s indirect tax system, but at the same time it has introduced certain special provisions to ensure proper tax collection. One such important provision is the Reverse Charge Mechanism (RCM).

In many cases under GST, the supplier collects GST from the customer and deposits it to the Government. However, in some specified transactions, GST liability shifts from the supplier to the recipient. This is called the Reverse Charge Mechanism (RCM).

This blog explains the meaning, applicability, provisions, compliance requirements, and practical impact of RCM under GST in a clear and updated manner.

What is Reverse Charge Mechanism (RCM) Under GST?

The Reverse Charge Mechanism (RCM) means a system where the recipient of goods or services is liable to pay GST directly to the Government instead of the supplier.

In simple words:

·       Under normal GST → Supplier pays GST

·       Under RCM → Recipient pays GST

This concept is legally covered under:

  • Section 9(3) of CGST Act
  • Section 9(4) of CGST Act
  • Section 5(3) of IGST Act
  • Section 5(4) of IGST Act

RCM is applicable only in cases notified by the Government.

Why Reverse Charge is Introduced in GST?

The main purpose of introducing RCM is:

1. To Bring Unorganized Sector into Tax Net

Some suppliers are small and may not register under GST. But if their supplies are taxable, the Government still wants tax collection.

2. To Ensure Proper Tax Collection

In some sectors, the Government has identified high chances of tax evasion, so RCM ensures GST is collected from a registered recipient.

3. To Cover Import of Services

In import transactions, foreign suppliers cannot pay GST in India, so the recipient becomes responsible.

Types of Reverse Charge Under GST

RCM under GST is mainly divided into two categories:

1. RCM on Notified Goods and Services (Section 9(3))

The Government has notified certain goods and services where GST must be paid under RCM irrespective of whether the supplier is registered or not.

Common Services Covered Under RCM

Some widely applicable services include:

  • Services provided by Goods Transport Agency (GTA)
  • Legal services provided by an advocate or firm of advocates
  • Services supplied by Director to Company
  • Sponsorship services
  • Services supplied by Government or Local Authority to business entities (in specified cases)
  • Services of insurance agent
  • Services of recovery agent
  • Services provided by author, music composer, photographer etc. to publisher (as applicable)

The applicability depends on the category of supplier and recipient.

2. RCM on Supply from Unregistered Person (Section 9(4))

Earlier, GST under RCM was applicable on all purchases from unregistered suppliers, but this provision was later modified.

Currently, RCM under Section 9(4) is applicable only on notified categories of supplies received by registered persons.

A major example is:

Renting of Immovable Property by Unregistered Person

If a registered business takes commercial property on rent from an unregistered landlord, GST may become payable under RCM (as per notified provisions).

This has become a very important compliance point for businesses in recent years.

RCM on Import of Services

Another major case of RCM is import of services.

If a person in India receives services from a foreign supplier, GST is payable under reverse charge.

Example

  • Google Ads billing
  • Facebook advertising
  • Foreign consultancy services
  • Subscription of foreign software tools

In such cases, the Indian recipient must pay GST under IGST through RCM.

Important Compliance Rules Under Reverse Charge Mechanism

RCM is not just about payment of GST. It also involves specific documentation and return compliance.

1. RCM Tax Must Be Paid in Cash Only

A very important rule is:

·       ITC cannot be used to pay RCM liability

·       RCM must be paid through Electronic Cash Ledger

After payment, ITC can be claimed (if eligible).

2. Self-Invoice Under RCM

If the supplier does not issue a tax invoice (mainly in unregistered cases), the recipient must generate a self-invoice.

This is mandatory to record the transaction properly.

3. Payment Voucher

A registered recipient is required to issue a payment voucher at the time of making payment to the supplier under RCM.

4. Time of Supply Under RCM

Time of supply decides the month in which RCM tax becomes payable.

For Services

Time of supply is earlier of:

  • Date of payment, or
  • 60 days from invoice date

For Goods

Time of supply is earlier of:

  • Date of receipt of goods, or
  • Date of payment, or
  • 30 days from supplier invoice date

Recent Important Update – Rule 47A (Invoice Time Limit)

As per recent GST compliance tightening, the Government has introduced Rule 47A, which requires taxpayers to ensure that invoices under reverse charge are properly recorded within a prescribed time.

This is mainly aimed at strengthening documentation and reducing misuse of ITC claims.

Businesses should ensure timely entry of RCM invoices in their books to avoid penalties and ITC mismatch issues.

How to Show RCM in GST Returns?

RCM Reporting in GSTR-3B

RCM liability is shown in:

  • Table 3.1(d) (Inward supplies liable to reverse charge)

And ITC of RCM can be claimed in:

  • Table 4(A) (Eligible ITC)

RCM payments must also be properly reflected in books of accounts.

Input Tax Credit (ITC) on RCM – Can It Be Claimed?

Yes, ITC can be claimed on GST paid under reverse charge, but only if:

·       GST has been paid in cash

·       Goods/services are used for business purposes

·       ITC is not blocked under Section 17(5)

·       Proper documentation is maintained

Once tax is paid, ITC becomes available and can be utilized for future GST liabilities.

Practical Example of RCM

Example

A company takes legal consultation from an advocate for ₹50,000.

Legal services by advocate are covered under RCM.

So:

  • Advocate issues invoice without GST
  • Company pays GST under RCM
  • Company deposits GST through cash ledger
  • Company can claim ITC in the same month (if eligible)

RCM Impact on Business – Why It Matters?

RCM has a direct impact on:

1. Cash Flow

Since GST must be paid in cash first, it creates a cash burden for businesses.

2. Compliance Burden

Businesses must track RCM transactions carefully to avoid missing any liability.

3. Penalty Risk

If RCM is not paid on time, interest and penalties may apply.

Common Mistakes Businesses Make Under RCM

Here are some common errors seen in GST audits:

·       Not paying GST on director remuneration under RCM

·       Missing RCM on foreign services like software subscription

·       Not issuing self-invoice for unregistered supplier transactions

·       Claiming ITC without first paying RCM in cash

·       Wrong reporting in GSTR-3B

·       Not maintaining proper RCM ledger in accounting software

Avoiding these mistakes can save businesses from notices and unnecessary tax demands.

RCM Compliance Checklist (Quick Guide)

To ensure proper compliance, every business should follow this checklist:

·       Identify transactions covered under RCM

·       Maintain separate RCM register/ledger

·       Issue self-invoice (where applicable)

·       Pay GST through cash ledger

·       Claim ITC after payment

·       Report correctly in GSTR-3B

·       Maintain invoice and voucher documentation

Conclusion

The Reverse Charge Mechanism under GST is an important provision that shifts GST payment responsibility from supplier to recipient in notified cases. It is mainly applicable to specified services like legal services, GTA services, director services, sponsorship, and also import of services.

With increasing GST scrutiny and system validations, businesses must ensure that RCM transactions are properly identified, paid on time, and correctly reported in GST returns.

A well-maintained RCM compliance system not only avoids penalties but also ensures smooth ITC availability.

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