Reverse Charge Mechanism (RCM) in Goods and Services Tax (GST)



The Goods and Services Tax (GST) has significantly simplified the indirect tax structure in India. However, one concept under GST that often confuses businesses is the Reverse Charge Mechanism (RCM). Unlike the usual tax payment system where the supplier collects and remits the tax, RCM flips the responsibility, making the recipient of goods or services liable to pay GST directly to the government.


In this blog, we'll explore what RCM is, when it applies, key provisions, compliance requirements, and practical examples to help you understand its real-world impact.


What is Reverse Charge Mechanism (RCM)?

Under the Reverse Charge Mechanism, the liability to pay tax shifts from the supplier to the recipient of goods or services. This mechanism is primarily designed to bring unregistered suppliers, imported services, and certain notified categories under the tax net.


Legal Provisions for RCM in GST

RCM is governed by the following sections of the CGST Act, 2017:


Section 9(3): Tax is payable on notified goods and services by the recipient.


Section 9(4): Tax is payable by a registered person on goods/services received from an unregistered supplier, subject to certain conditions and exemptions.


Section 5(3) and 5(4) of the IGST Act: These deal with inter-state supplies and mirror the provisions of Section 9 of the CGST Act.


Types of Reverse Charge in GST

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

The government, on the recommendation of the GST Council, has notified specific categories of goods and services where RCM is applicable. Some examples include:



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

This provision initially created a lot of compliance burden and was suspended for a while. Currently, RCM under Section 9(4) applies only in certain cases like:


Inward supplies received by promoters and builders for construction purposes.


Certain procurement by government entities or PSUs from unregistered suppliers.



Input Tax Credit (ITC) under RCM


Yes, the recipient who pays tax under RCM is eligible to claim Input Tax Credit (ITC), provided the goods/services are used for business purposes. However:


The ITC can only be claimed after the tax is paid.


Proper documentation (like self-invoice and payment proof) must be maintained.


Compliance Requirements under RCM

Self-Invoicing: If goods/services are received from an unregistered dealer, the recipient must issue an invoice on their behalf.


Payment Vouchers: A payment voucher must be issued at the time of making payment.


Monthly GST Returns (GSTR-3B): RCM liabilities must be disclosed and paid in cash (ITC cannot be used for this payment).


GSTR-1: Though not required for outward supplies under RCM, inward supplies under RCM should be maintained accurately.


Examples of Reverse Charge Mechanism

Example 1:

A company avails legal services from an individual advocate. Since the advocate is not liable to collect GST, the company must pay GST under RCM and then claim ITC.


Example 2:

A registered builder purchases cement from a local unregistered dealer. The builder must pay GST on this supply under Section 9(4) and can claim ITC if used for taxable output supplies.


Penalties for Non-Compliance with RCM

Failure to comply with RCM provisions can result in:


Interest on unpaid tax (currently 18% p.a.),


Penalties under Sections 73 or 74 of the CGST Act,


Potential loss of ITC for non-payment or incorrect reporting.


Latest Updates on RCM (As of 2025)

RCM continues to be an evolving area with frequent notifications.


Recent updates include changes in RCM applicability for e-commerce operators, expanded GTA rules, and clarifications for real estate sector.


For the most recent changes, refer to GST Portal or consult a tax professional.


Read More: Documents Checklist Required for GST Registration 


Conclusion

The Reverse Charge Mechanism under GST plays a crucial role in ensuring tax compliance, especially where suppliers are not registered or are located outside India. Though it adds a layer of responsibility for the recipient, understanding the rules, timelines, and documentation requirements can help businesses stay compliant and optimize their Input Tax Credit.


If you deal with any categories under RCM, it's essential to maintain proper records, stay updated on notifications, and ensure timely payment and reporting of tax.


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