Reverse Charge Mechanism (RCM) under GST: A Comprehensive Guide

Table of Contents

What is Reverse Charge Mechanism?
Legal Framework Governing RCM
When is Reverse Charge Applicable?
List of Goods & Services under RCM
RCM on Supplies from Unregistered Dealers
RCM on Import of Goods & Services
GST Registration Requirements under RCM
Time of Supply under RCM
How to Pay Tax under RCM
Input Tax Credit under RCM
Step-by-Step Compliance Process
Detailed RCM Case Analysis
Common Mistakes and How to Avoid Them
Penalties for Non-Compliance
Case Studies
FAQs
Conclusion

1. What is Reverse Charge Mechanism?

In the regular GST framework, the supplier is liable to collect and deposit the tax with the government. However, in certain notified cases, the liability to pay tax is shifted from the supplier to the recipient of goods or services. This mechanism is known as the Reverse Charge Mechanism (RCM).

RCM is applied to ensure that tax is collected efficiently from the recipient in cases where the supplier is either unregistered or located in a different jurisdiction (like imports). This helps bring more taxpayers within the net and ensures better tax compliance.

2. Legal Framework Governing RCM

RCM is provided under:

Section 9(3) of CGST Act: For notified categories of goods/services.
Section 9(4) of CGST Act: Supplies from unregistered persons (for specified classes of recipients).
Section 5(3) and 5(4) of IGST Act for inter-State transactions.

Key Notifications:

Notification No. 13/2017 – Central Tax (Rate): Notifies services under Section 9(3)
Notification No. 04/2017 – Integrated Tax (Rate): For IGST reverse charge cases
Notification No. 07/2019 – Central Tax (Rate): Specific to real estate RCM on unregistered supplies under Section 9(4)

Related Rules:

Rule 36(1)(b): Conditions for availing ITC
Rule 46(n): Mandatory self-invoicing under RCM
Rule 61: GSTR-3B disclosures

Taxpayers are required to cross-check applicable notifications before every filing period as the list of notified goods and services is frequently revised.

RCM is provided under:

Section 9(3) of CGST Act: For notified categories of goods/services.
Section 9(4) of CGST Act: Supplies from unregistered persons (for specified classes of recipients).
Section 5(3) and 5(4) of IGST Act for inter-State transactions.

The rules related to invoicing, ITC, and return filing are further prescribed under:

Rule 36(1)(b)
Rule 46(n)
Rule 61 of the CGST Rules

3. When is Reverse Charge Applicable?

RCM is applicable in the following circumstances:

Supply of notified goods or services as per Section 9(3).
Supplies from unregistered persons to notified registered persons under Section 9(4).
Import of services from a person located outside India.
Supplies made through e-commerce operators covered under Section 9(5).

3A. Forward Charge vs Reverse Charge – Key Differences

Basis	Forward Charge	Reverse Charge
Tax Payer	Supplier	Recipient
ITC Availability	Available subject to eligibility	Available if paid and used for business
Compliance Responsibility	Supplier (invoices, tax deposit, return)	Recipient (self-invoice, tax deposit)
Registration Requirement	Only if threshold crossed	Mandatory if RCM applicable

This comparison is vital for small businesses and service recipients to understand whether they must independently remit GST or rely on the supplier.

RCM is applicable in the following circumstances:

Supply of notified goods or services as per Section 9(3).
Supplies from unregistered persons to notified registered persons under Section 9(4).
Import of services.
Certain supplies made through e-commerce operators under Section 9(5).

4. List of Goods & Services under RCM

Notified Services under Section 9(3):

Legal Services by Advocates
Services of a Director to a Company
Security Services by Non-Body Corporate
Rent-a-Cab Services by Unincorporated Firms
Services of a Recovery Agent to Banks/NBFCs
Goods Transport Agency (GTA) Services
Sponsorship Services
Arbitral Tribunal Services

Notified Goods:

Cashew nuts (not shelled or peeled)
Bidi wrapper leaves
Raw cotton
Silk yarn

These are subject to change and businesses must refer to the latest notifications.

5. RCM on Supplies from Unregistered Dealers

Initially, Section 9(4) required tax under RCM for any supply from unregistered persons. However, post October 13, 2017, this provision was restricted to specific cases. Currently, it applies to notified recipients only, such as real estate developers when procuring certain goods/services from unregistered vendors.

Example: A builder buys cement from a local, unregistered supplier. He has to pay GST under RCM.

6. RCM on Import of Goods & Services

Import of Goods: IGST is levied under the Customs Act and must be paid at the time of customs clearance.
Import of Services: The recipient (in India) must pay IGST under RCM. This ensures parity between domestic and international service providers.

7. GST Registration Requirements under RCM

A person required to pay tax under RCM must mandatorily obtain GST registration, even if they are below the turnover threshold of Rs. 20/40 lakhs. This ensures tax compliance from all liable parties.

8. Time of Supply under RCM

For Goods:

Date of receipt of goods, or
Date of payment, or
30 days from date of supplier’s invoice (Whichever is earlier)

For Services:

Date of payment, or
60 days from date of supplier’s invoice (Whichever is earlier)

9. How to Pay Tax under RCM

RCM liability must be paid in cash using Electronic Cash Ledger.
It cannot be set off using Input Tax Credit.
The paid tax can later be claimed as ITC, if eligible.

The liability must be reported in Table 3.1(d) of GSTR-3B.

10. Input Tax Credit under RCM

The recipient paying tax under RCM can claim ITC on that amount if:

Goods/services are used in the course of business.
All conditions of Section 16 are met.

However, ITC is not available for inputs that are:

Blocked under Section 17(5) (motor vehicles, personal consumption, etc.)
Used for exempt or non-business activities

11. Step-by-Step Compliance Process

Identify transactions liable to reverse charge (Section 9(3), 9(4), or 9(5)).
Issue self-invoice under Rule 46(n) for purchases from unregistered persons.
Generate payment voucher if payment is being made to the unregistered supplier.
Determine tax liability based on the applicable rate.
Pay RCM using Electronic Cash Ledger only (ITC cannot be used).
Disclose liability in GSTR-3B Table 3.1(d).
Claim ITC in GSTR-3B Table 4A (if eligible).
Maintain records of all self-invoices, payment vouchers, and supporting contracts.

Note: Failure to issue a self-invoice can result in ITC disallowance and non-compliance under GST audit.

Identify transactions liable to RCM
Determine tax amount and pay through cash ledger
Issue self-invoice and payment voucher (where required)
Disclose liability in GSTR-3B
Claim ITC (if eligible)
Maintain records for audit and reference

12. Detailed RCM Case Analysis

Each of the reverse charge categories has been included based on certain policy objectives and revenue administration needs. Below, we detail each RCM category along with the objective behind its inclusion, followed by applicability, tax treatment, and examples.

12.1 Legal Services by Advocates

Objective: Legal professionals, especially individual advocates and small firms, are often outside the organized tax structure. Shifting the tax liability to the recipient ensures better tax compliance and simplifies administration.

Applicability: When an individual advocate or firm provides legal service to a business entity.

Recipient: Business entity must pay GST under RCM.

Example: A company takes legal opinion from a practicing advocate for a contract. The company is liable under RCM and must pay 18% GST.

Applicability: When an individual advocate or firm provides legal service to a business entity.
Recipient: Business entity must pay GST under RCM.
Example: A company takes legal opinion from a practicing advocate for a contract. The company is liable under RCM and must pay 18% GST.

12.2 Services by a Director to a Company

Objective: To tax services provided by directors that are not in the nature of employer-employee relationship, and to ensure that companies account for such payments in their tax compliance.

Applicability: Remuneration paid to a director not covered under employment (TDS under 194J).

Recipient: Company must pay GST under RCM.

Example: An independent director receives ₹2 lakh. Company pays 18% GST under RCM.

Applicability: Remuneration paid to a director not covered under employment (TDS under 194J).
Recipient: Company must pay GST under RCM.
Example: An independent director receives ₹2 lakh. Company pays 18% GST under RCM.

12.3 GTA Services

Objective: GTAs often operate informally and are small entities. By placing the burden on registered businesses, the government ensures that GST is still collected without requiring formal registration by every GTA.

Applicability: If GTA is not paying tax under forward charge.

Recipient: Factory, registered dealer, body corporate.

Example: A trader transports goods via a GTA. If GTA doesn’t charge GST, trader pays 5% under RCM.

Applicability: If GTA is not paying tax under forward charge.
Recipient: Factory, registered dealer, body corporate.
Example: A trader transports goods via a GTA. If GTA doesn’t charge GST, trader pays 5% under RCM.

12.4 Services through E-commerce Operator

Objective: To bring gig-economy and digital platform-based services into the tax net, particularly when service providers are unregistered.

Section 9(5): Applicable to services like passenger transport, housekeeping, hotel bookings.

Operator: Liable to pay GST on behalf of unregistered providers.

Example: UrbanClap provides cleaning services using unregistered workers. UrbanClap pays GST.

Section 9(5): Applicable to services like passenger transport, housekeeping, hotel bookings.
Operator: Liable to pay GST on behalf of unregistered providers.
Example: UrbanClap provides cleaning services using unregistered workers. UrbanClap pays GST.

12.5 Security Services

Objective: Many security agencies operate as partnerships or proprietorships. Shifting tax liability to registered recipients ensures collection without mandatory registration of every provider.

Applicability: Services provided by non-body corporate to a registered business.

Recipient: Business must pay GST under RCM.

Example: A shop hires guards from a partnership firm. GST under RCM @18% is applicable.

Applicability: Services provided by non-body corporate to a registered business.
Recipient: Business must pay GST under RCM.
Example: A shop hires guards from a partnership firm. GST under RCM @18% is applicable.

12.6 Import of Services

Objective: To maintain tax neutrality between domestic and foreign service providers, and to ensure revenue collection from cross-border transactions.

Applicability: Supply of services from outside India for consideration.

Recipient: Indian business must pay IGST.

Example: Company receives software consulting from a US firm. IGST under RCM must be paid.

Applicability: Supply of services from outside India for consideration.
Recipient: Indian business must pay IGST.
Example: Company receives software consulting from a US firm. IGST under RCM must be paid.

12.7 Sponsorship Services

Objective: Sponsorship deals often involve high-value consideration and are difficult to track when provided to unregistered persons. Shifting tax burden to recipients ensures accountability.

Applicability: Sponsorship of events, teams, individuals by corporates.

Recipient: Corporate entity.

Example: XYZ Ltd sponsors a cricket match conducted by an NGO. XYZ Ltd pays 18% GST under RCM.

Applicability: Sponsorship of events, teams, individuals by corporates.
Recipient: Corporate entity.
Example: XYZ Ltd sponsors a cricket match conducted by an NGO. XYZ Ltd pays 18% GST under RCM.

12.8 Rent-a-Cab by Unincorporated Entity

Objective: To bring unregistered and informal transport providers under tax supervision without compelling them to register under GST.

Applicability: If not paying under forward charge.

Recipient: Registered business availing transport service.

Example: A consulting firm uses cabs from a sole proprietor. RCM liability applies at 5% or 12%.

Applicability: If not paying under forward charge.
Recipient: Registered business availing transport service.
Example: A consulting firm uses cabs from a sole proprietor. RCM liability applies at 5% or 12%.

12.9 Recovery Agent Services

Objective: These services are often outsourced to individuals or small firms, and shifting the burden ensures banks/NBFCs report and pay tax appropriately.

Applicability: Banks/NBFCs availing agent services.

Recipient: Bank/NBFC.

Example: HDFC Bank hires a recovery agent to collect dues. Bank pays GST under RCM.

Applicability: Banks/NBFCs availing agent services.
Recipient: Bank/NBFC.
Example: HDFC Bank hires a recovery agent to collect dues. Bank pays GST under RCM.

12.10 Arbitral Tribunal Services

Objective: Arbitration services are highly specialized, often rendered by individuals. To ensure tax collection, burden is placed on corporate recipients.

Applicability: Legal arbitration services.

Recipient: Business entity.

Example: A startup seeks resolution through arbitration. Company pays GST under RCM.

Applicability: Legal arbitration services.
Recipient: Business entity.
Example: A startup seeks resolution through arbitration. Company pays GST under RCM.

13. Common Mistakes and How to Avoid Them

Error	How to Avoid
Using ITC to pay RCM liability	Always use cash ledger
Not issuing self-invoice	Mandatory if supplier is unregistered
Missing RCM applicability	Conduct contract/vendor reviews regularly
Incorrect classification	Refer to latest notifications and circulars

14. Penalties for Non-Compliance

Interest @ 18% per annum under Section 50
General penalty under Section 125: Up to Rs. 25,000
Disallowance of ITC claimed without payment

15. Case Studies

Case 1: Legal Services (Section 9(3))
ABC Pvt Ltd receives legal advice from a lawyer. The lawyer raises no GST. ABC must self-invoice and pay 18% GST under RCM. Later, it claims ITC since the service is for business use.

Case 2: Security Services by Partnership Firm
XYZ Ltd hires guards from a non-body corporate security agency. GST @18% under RCM is paid monthly by XYZ Ltd via cash ledger.

Case 3: Import of Consulting Services (IGST Act)
DEF Ltd avails strategy consultancy from a UK-based firm. Under RCM, DEF must remit IGST under Section 5(3) and file GSTR-3B reflecting the payment.

Case 4: Sponsorship of a Sports Event
GHI Pvt Ltd sponsors a sports event organized by a trust. The sponsorship attracts 18% GST under RCM. GHI must pay and account for it.

Case 5: E-Commerce Housekeeping Booking (Section 9(5))
A customer books housekeeping through an app. The provider is unregistered. The platform (e.g., Urban Company) must discharge GST liability as the deemed supplier.

Case 1: Legal Services ABC Pvt Ltd receives legal advice from a lawyer. The company must pay 18% GST under RCM and can claim it as ITC.

Case 2: Security Services XYZ Ltd hires security services from a firm that is not a body corporate. XYZ is liable under RCM.

Case 3: Import of Consulting Services An Indian company avails online consultation from a UK-based expert. IGST is payable under RCM.

Case 4: Director Remuneration ABC Ltd pays ₹2 lakh to an independent director. GST under RCM is applicable and paid by ABC Ltd.

Case 5: Sponsorship Deal A private company sponsors a marathon. Since the organizer is not a body corporate, the sponsor pays GST under RCM.

16. FAQs

Q1. Can RCM be paid using ITC?
No, GST under reverse charge must be paid in cash using the Electronic Cash Ledger. It cannot be paid using Input Tax Credit.

Q2. Can ITC be claimed on tax paid under RCM?
Yes, the recipient can claim Input Tax Credit on tax paid under RCM if the supply is used for business purposes and all other eligibility conditions under Section 16 of the CGST Act are fulfilled.

Q3. Do I need to issue a self-invoice for every RCM transaction?
Yes, if the supplier is unregistered, the recipient is required to issue a self-invoice under Rule 46(n). This is a key documentation requirement for availing ITC.

Q4. What if I miss disclosing RCM liability in GSTR-3B?
If RCM liability is missed, it must be paid with interest. Also, ITC cannot be claimed unless the RCM tax is correctly disclosed and paid in GSTR-3B.

Q5. How is time of supply determined under RCM?
For goods: earlier of the receipt of goods, date of payment, or 30 days from invoice.
For services: earlier of the date of payment or 60 days from invoice. This determines when the liability arises.

Q6. Is RCM applicable to import of services from foreign vendors like Zoom, AWS, or freelancers?
Yes. These fall under the definition of import of services, and the Indian recipient must pay IGST under Section 5(3) of the IGST Act.

Q7. Can a composition dealer be liable under RCM?
Yes. Composition dealers must pay RCM if applicable, but they cannot claim ITC on the RCM paid.

Q8. Is RCM applicable on security services provided by a body corporate?
No. RCM is applicable only if the security provider is not a body corporate. If it is a company, then GST should be paid under forward charge by the supplier.

Q9. Are services provided by a director always covered under RCM?
Only when the remuneration is not in the nature of salary (i.e., TDS deducted under Section 194J), it is considered a service and RCM applies. If TDS is deducted under Section 192 (salary), it’s an employer-employee relationship and exempt.

Q10. Is RCM applicable on renting of motor vehicles?
Yes, but only in cases where the supplier is not a body corporate and the recipient is a registered body corporate entity. The rate may vary between 5% and 12% based on conditions.

Q11. Can I adjust excess RCM paid in future returns?
No. GST law does not permit automatic adjustments. Excess RCM payment must be carefully handled through refunds or correction in returns.

Q12. How is RCM applied in real estate projects?
Promoters must pay GST under RCM for procuring goods/services from unregistered suppliers exceeding 20% of total inputs (with exceptions like cement). Specific rules apply under Notification 07/2019 – Central Tax (Rate).

Q1. Can RCM be paid using ITC?
No, only cash payment is allowed.

Q2. Can ITC be claimed on RCM?
Yes, if conditions of Section 16 are fulfilled.

Q3. Are exempt supplies under RCM taxable?
No, RCM applies only to taxable supplies.

Q4. Is RCM applicable for personal purchases?
No, only for business-related procurements.

Q5. What if RCM is not paid on time?
Interest and penalties will apply.

17. Conclusion

Reverse Charge Mechanism is a powerful tool in the GST framework, helping to ensure tax compliance from hard-to-monitor sectors. While it does place an additional compliance burden on recipients, it also allows eligible taxpayers to claim input tax credit. Regular review of vendors and transaction types is essential for smooth RCM compliance. Businesses must stay updated with notifications to ensure timely tax payment and ITC availment. When implemented with diligence, RCM becomes a reliable compliance instrument and a path to efficient tax governance.