All About Reverse Charge Mechanism (RCM) Under GST

The Reverse Charge Mechanism (RCM) under GST is a system where the responsibility to pay tax is shifted from the supplier to the recipient of goods or services. This mechanism is mainly used in situations where tax collection from suppliers is difficult, such as in unorganised sectors or specific notified transactions.

Key Takeaways

Under RCM, the tax liability is transferred from the supplier to the recipient in specified cases.
It applies to notified supplies, purchases from unregistered suppliers, and certain e-commerce transactions.
RCM helps improve tax monitoring and compliance, especially for high-risk goods and services.
Input Tax Credit (ITC) can be claimed by the recipient if the goods or services are used for business purposes.
RCM requires timely tax payment, correct reporting, and valid GST registration.

What Is Reverse Charge Mechanism?

Reverse Charge Mechanism (RCM) is a GST provision where the buyer of goods or services is liable to pay GST, instead of the seller. This approach helps the government bring under tax those transactions that are prone to evasion or are difficult to track. In such cases, the recipient may need to raise a self-invoice and deposit GST directly with the government.

When Is Reverse Charge Applicable?

RCM provisions are covered under the following sections of GST law:

Section 9(3) of the CGST Act & Section 5(3) of the IGST Act – Notified goods and services
Section 9(4) of the CGST Act & Section 5(4) of the IGST Act – Purchases from unregistered suppliers
Section 9(5) of the CGST Act & Section 5(5) of the IGST Act – E-commerce transactions

Below is a simplified explanation with examples.

1. Tax on Notified Supplies

For certain notified goods and services, GST must be paid by the recipient instead of the supplier. This usually applies where suppliers are scattered or belong to the unorganised sector, making tax collection challenging.

Example:
If a business avails freight services from a Goods Transport Agency (GTA), the recipient is required to pay GST under RCM.

List of Notified Goods Under Section 9(3)

S. No.	Description of Supply	Supplier of Goods	Recipient of Supply
1	Cashew nuts, not shelled or peeled	Agriculturist	Any registered person
2	Bidi wrapper leaves (tendu)	Agriculturist	Any registered person
3	Tobacco leaves	Agriculturist	Any registered person
4	Essential oils (peppermint, spearmint, water mint, horsemint, bergamot)	Any unregistered person	Any registered person
5	Silk yarn (made from raw silk or silk worm cocoons)	Manufacturer of silk yarn	Any registered person
6	Raw cotton	Agriculturist	Any registered person
7	Supply of lottery	State Government, UT, or local authority	Lottery distributor or selling agent
8	Used vehicles, seized or confiscated goods, old and used goods, waste or scrap	Central Government (excluding Indian Railways), State Government, UT, or local authority	Any registered person
9	Priority Sector Lending Certificate	Any registered person	Any registered person
10	Metal scrap	Any unregistered person	Any registered person

List of Notified Services Under Section 9(3) of GST

Below is the list of services where GST is payable under the Reverse Charge Mechanism (RCM) as per Section 9(3):

S. No.	Description of Service	Supplier of Service	Recipient of Service
1	Transportation of goods by road by a Goods Transport Agency (GTA) to specified persons	Goods Transport Agency	Factories, registered persons, body corporates, casual taxable persons
2	Legal services provided by an individual advocate, senior advocate, or firm of advocates	Advocate or Advocate Firm	Business entities in taxable territory
3	Services provided by an arbitral tribunal	Arbitral Tribunal	Business entities in taxable territory
4	Sponsorship services	Any person other than a body corporate	Body corporate or partnership firm
5	Services supplied by Central/State Government, UT, or local authority to business entities (excluding exempt services)	Government or Local Authority	Business entities
5A	Renting of immovable property by government entities	Government or Local Authority	Registered persons
5AA	Renting of residential dwelling to a registered person	Any person	Registered person
5AB	Renting of non-residential property by unregistered persons to registered persons (excluding composition dealers)	Unregistered person	Registered person
5B	Transfer of development rights or Floor Space Index (FSI)	Any person	Promoter
5C	Long-term lease of land (30 years or more) for construction	Any person	Promoter
6	Services provided by directors to a company or body corporate	Director	Company or body corporate
7	Services provided by insurance agents	Insurance agent	Insurance company
8	Services provided by recovery agents	Recovery agent	Banks, financial institutions, NBFCs
9	Transfer or permitting use of copyright by artists to music companies	Music composer, photographer, artist	Music company or producer
9A	Transfer or permitting use of copyright by author to publisher (with forward charge option)	Author	Publisher
10	Services by members of the RBI Overseeing Committee	Committee Members	Reserve Bank of India
11	Services provided by individual Direct Selling Agents (DSAs)	Individual DSA	Banks or NBFCs
12	Services provided by Business Facilitators	Business Facilitator	Banks
13	Services provided by agents of Business Correspondents	Agent of BC	Business Correspondents
14	Supply of security personnel services (with specified exclusions)	Any person other than body corporate	Registered person
15	Renting of motor vehicles where provider opts for 5% GST and is eligible for ITC	Any person other than body corporate	Body corporate
16	Lending of securities under SEBI-approved scheme	Lender	Borrower through approved intermediary

2. Purchases from Unregistered Suppliers

This provision applies when a registered person procures goods or services from an unregistered supplier, but only for specific notified items.

Example:
If a registered real estate promoter purchases cement from an unregistered supplier, GST must be paid under RCM at the applicable rate of 28%.

List of Supplies Covered Under Section 9(4):

Sl. No.	Category of Supply	Recipient
1	Goods or services (excluding development rights, long-term land lease, or FSI) forming shortfall from the mandatory 75% procurement limit	Promoter
2	Cement	Promoter
3	Capital goods	Promoter

3. E-Commerce Transactions

For certain services supplied through e-commerce platforms, the liability to pay GST is shifted to the electronic commerce operator (ECO) instead of the actual service provider.

Example:
For cab services booked through platforms like Ola or Uber, GST is paid by the platform operator under RCM, not by the driver.

Services Covered Under Section 9(5) Where ECO Pays GST:

S. No.	Description of Service	Supplier of Service	Person Liable to Pay GST
i	Passenger transportation by radio taxi, motorcab, maxicab, motorcycle, or similar vehicles (excluding omnibus)	Individual service provider	Electronic commerce operator
ia	Passenger transportation by omnibus	Any person except company	Electronic commerce operator
ii	Accommodation services in hotels, inns, guest houses, campsites, etc.	Any person except those liable for registration	Electronic commerce operator
iii	Housekeeping services such as plumbing or carpentry	Any person except those liable for registration	Electronic commerce operator
iv	Restaurant services (excluding restaurants in hotels with tariff above ₹7,500 per day)	Any person	Electronic commerce operator

Time of Supply Under RCM

The time of supply decides when the GST liability arises. Under the Reverse Charge Mechanism, the responsibility of timely tax payment lies with the recipient.

For Goods

The time of supply is the earliest of the following:

Date of receipt of goods, or
Date of payment, or
30 days from the date of the supplier’s invoice

If none of the above can be identified, the date of entry in the books of accounts of the recipient is treated as the time of supply.

For Services

The time of supply is the earliest of the following:

Date of payment, or
60 days from the date of the supplier’s invoice, or
Date of issue of invoice by the recipient, wherever applicable

If none of these dates can be determined, the date of book entry is considered as the time of supply.

Registration and Compliance Under RCM

Mandatory Registration: Any person liable to pay GST under RCM must obtain GST registration, even if their turnover is below the exemption limit.
Tax Payment: GST under RCM must be paid in cash only and cannot be adjusted against Input Tax Credit at the time of payment.
Self-Invoicing: When supplies are received from an unregistered supplier, the recipient must issue a self-invoice.
Payment Voucher: A payment voucher must be issued at the time of making payment to the supplier.

Input Tax Credit (ITC) Under RCM

A recipient paying GST under RCM is eligible to claim Input Tax Credit, provided that:

The goods or services have been received, and
They are used for business purposes.

ITC cannot be used to pay the RCM liability. The tax must first be paid in cash, after which the same amount can be claimed as ITC while filing GST returns.

What Is Self-Invoicing?

Self-invoicing refers to the issuance of an invoice by the recipient on behalf of the supplier. This is required mainly when the supplier is unregistered and cannot issue a GST-compliant invoice.

Self-invoices must include all mandatory invoice details and should be properly recorded in the recipient’s books. This helps in maintaining correct documentation for RCM supplies and enables accurate GST payment and ITC claims.

Reporting of RCM Transactions

RCM transactions must be correctly disclosed in GST returns to ensure compliance and smooth ITC claims. The reporting requirements are explained below:

Role	Return Form	Table	Purpose
Recipient	GSTR-3B	Table 3.1(d)	Reporting GST liability payable under RCM
Recipient	GSTR-3B	Table 4(A)(3)	Claiming ITC on inward supplies covered under RCM
Supplier	GSTR-1	Table 4B (B2B RCM supplies)	Reporting outward supplies liable to RCM

Accurate disclosure of RCM transactions in GST returns, along with proper record-keeping, is essential to substantiate ITC claims and prevent compliance-related issues.

FAQs on Reverse Charge Mechanism (RCM) & Input Tax Credit (ITC)

Is Input Tax Credit (ITC) allowed under Reverse Charge Mechanism?

Yes. ITC is allowed on tax paid under RCM, provided the goods or services are used or intended to be used for business purposes. The recipient who pays GST under RCM can claim the ITC.

When can ITC of tax paid under RCM be claimed?

ITC can be claimed in the same month in which the RCM tax is paid, subject to fulfilment of ITC conditions.

Can an Input Service Distributor (ISD) receive supplies liable to RCM?

No. An ISD cannot directly procure supplies liable to RCM. If it wants to avail ITC of RCM tax, it must register separately as a regular GST taxpayer.

How is GST calculated under RCM?

GST under RCM is calculated at the same rate applicable to the goods or services supplied, as if the supplier were liable to pay tax.

Which supplies are covered under RCM?

RCM applies to:

Notified goods and services
Certain purchases from unregistered suppliers
Specified e-commerce services as notified under GST law

How does RCM apply to purchases from unregistered dealers?

If the transaction is notified under RCM, the registered buyer must:

Raise a self-invoice
Pay GST under RCM
Claim ITC after payment

What are the recent changes in RCM notifications?

16 January 2025 – Notification No. 07/2025-Central Tax (Rate):
Sponsorship services removed from RCM; GST is now payable by the supplier under forward charge.
11 February 2025 – Notification No. 09/2025-Central Tax:
Clarified ISD compliance—ISDs must separately register and properly distribute ITC related to RCM supplies.

What if the recipient liable to pay RCM is not registered under GST?

GST registration is mandatory for persons liable to pay tax under RCM. The basic exemption limit (₹20/40 lakh) does not apply in such cases.

What is the procedure to comply with RCM?

The RCM compliance process includes:

Identify RCM transactions
Raise a self-invoice
Issue a payment voucher
Pay GST through cash ledger
Report in GSTR-3B
Claim ITC after tax payment

Who is exempt from paying tax under RCM?

Certain organizations or transactions may be exempt as notified by CBIC. Taxpayers should always refer to the latest GST notifications.

What are the consequences of non-compliance under RCM?

Non-compliance can lead to:

Interest and late fees
Penalties
Denial of ITC until RCM tax is paid

How are RCM transactions reported in GST returns?

GSTR-3B:
- Tax liability: Table 3.1(d)
- ITC claim: Table 4
GSTR-1:
- Registered suppliers report RCM supplies in Table 4B

Can ITC on RCM be claimed without paying tax?

No. RCM tax must be paid first, and only then can ITC be claimed.

Is ITC under RCM allowed for personal expenses?

No. ITC is allowed only for business-related expenses.

Is RCM applicable under the Composition Scheme?

Yes, but composition taxpayers must pay RCM tax and cannot claim ITC on it.

Can RCM tax be paid using ITC balance?

No. RCM tax must be paid in cash only, not through ITC.

Is RCM applicable on imports?

Yes. Import of services and goods is subject to RCM, with IGST payable by the importer.

Does RCM apply to exempt supplies?

No. RCM does not apply if the underlying supply is exempt from GST.

Is self-invoice mandatory under RCM?

Yes. A self-invoice is mandatory when the supplier is unregistered or when required under RCM provisions.